PAGE 1
Registration Nos.: 811-08203
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. ___ / /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 / X /
Amendment No. ___ / /
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
___________________________________________________
(Exact Name of Registrant as Specified in Charter)
100 East Pratt Street, Baltimore, Maryland 21202
__________________________________________ _________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 410-345-2000
____________
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
_______________________________________
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering June 27, 1997
__________________
It is proposed that this filing will become effective (check
appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
PAGE 2
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+
_________________________________________________________________
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate
Title of Securities Being Price Offering Amount of
Being Registered Registered Per Unit Price Registration
Fee
_________________________________________________________________
Capital Stock - Indefinite Varying prices Not
$.0001 par value Number calculated as set Required
per share forth in prospectus
_________________________________________________________________
The purpose of this Registration Statement is to register the
Registrant under the Investment Company Act of 1940, to register
the shares of the Registrant under the Securities Act of 1933 and
to declare pursuant to Section 24(f) of the Investment Company
Act of 1940 and Rule 24f-2 thereunder that an indefinite number
of its securities is being registered by this Registration
Statement.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states the Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to Section 8(a) may determine.
SUBJECT TO COMPLETION
Information contained herein is subject to completion or
amendment. A Registration Statement relating to these securities
has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be
accepted prior to the time the Registration Statement becomes
effective. This prospectus shall not constitute an offer to sell
PAGE 3
or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
PAGE 4
CROSS REFERENCE SHEET
N-1A Item No. Location
_____________ _________
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Transaction and Fund
Expenses
Item 3. Condensed Financial +
Information
Item 4. General Description of About the Fund; Fund,
Registrant Market, and Risk
Characteristics: What
to Expect;
Understanding Fund
Performance;
Investment Policies
and Practices
Item 5. Management of the Fund Transaction and Fund
Expenses; Organization
and Management
Item 6. Capital Stock and Other Useful Information on
Securities Distributions and
Taxes; Organization
and Management
Item 7. Purchase of Securities Pricing Shares and
Being Offered Receiving Sale
Proceeds; Transaction
Procedures and Special
Requirements; Account
Requirements and
Transaction
Information;
Shareholder Services
Item 8. Redemption or Repurchase Pricing Shares and
Receiving Sale
Proceeds; Transaction
Procedures and Special
Requirements;
Shareholder Services
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and +
History
Item 13. Investment Objectives and Investment Objectives
Policies and Policies; Risk
PAGE 5
Factors; Investment
Program; Investment
Restrictions;
Investment Performance
Item 14. Management of the Registrant Management of Fund
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
Item 16. Investment Advisory and Investment Management
Other Services Services; Custodian;
Independent
Accountants; Legal
Counsel
Item 17. Brokerage Allocation Portfolio
Transactions; Code of
Ethics
Item 18. Capital Stock and Other Dividends and
Securities Distributions; Capital
Stock
Item 19. Purchase, Redemption and Pricing of Securities;
Pricing of Securities Being Net Asset Value Per
Offered Share; Redemptions in
Kind; Federal
Registration of Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for the
Fund
Item 22. Calculation of Yield Quotations +
of Money Market Funds
Item 23. Financial Statements +
PART C
Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C to this Registration
Statement
___________________________________
+ Not applicable or negative answer
PAGE 6
<PAGE>
PROSPECTUS
June 30, 1997
Diversified Small-Cap Growth Fund
An aggressive fund seeking long-term appreciation through a widely diversified
portfolio of small-cap growth stocks.
<PAGE>
FACTS AT A GLANCE
Investment Goal
To provide long-term capital appreciation by investing in small-capitalization
growth stocks.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To use proprietary quantitative strategies to construct a broadly diversified
portfolio of small-cap growth stocks.
Risk/Reward
The potential for greater appreciation than a fund focusing on large companies
or emphasizing value stocks, but accompanied by greater risk of price declines.
The fund's share price may decline, causing a loss.
Investor Profile
Investors seeking an aggressive, long-term approach to building capital who can
accept the higher price fluctuations inherent in small-stock investing.
Appropriate for both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. Shares purchased and held for less than six months are subject to
a 1% redemption fee, paid to the fund. No fees or charges to buy shares or to
reinvest dividends; no 12b-1 marketing fees; free telephone exchange among T.
Rowe Price funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $103 billion for more
than five million individual and institutional investor accounts as of March
31, 1997.
<PAGE>
T. Rowe Price Diversified Small-Cap Growth Fund, Inc.
Prospectus
June 30, 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
T. ROWE PRICE 2
CONTENTS
1
ABOUT THE FUND
Transaction and Fund Expenses 4
Fund, Market, and Risk Characteristics 5
2
ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds 9
Distributions and Taxes 11
Transaction Procedures and Special Requirements 13
3
MORE ABOUT THE FUND
Organization and Management 16
Understanding Performance Information 18
Investment Policies and Practices 19
4
INVESTING WITH T. ROWE PRICE
Account Requirements and Transaction Information 24
Opening a New Account 24
Purchasing Additional Shares 26
Exchanging and Redeeming 26
Shareholder Services 28
Discount Brokerage 30
Investment Information 32
<PAGE>
INVESTING WITH T. ROWE PRICE 3
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated June 30, 1997, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
<PAGE>
ABOUT THE FUND
1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses shows how much it will cost
to operate the fund for a year, based on estimated 1997 fiscal year expenses.
These are costs you pay indirectly, because they are deducted from the fund's
total assets before the daily share price is calculated and before dividends
and other distributions are made. In other words, you will not see these
expenses on your account statement.
<TABLE>
Table 1
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Annual Fund Expenses (after Percentage of Average
Expenses reduction) Net Assets
Sales charge "load" on purchases None Management fee ____%/a/
Sales charge "load" on
reinvested distributions
None Marketing fees (12b-1) None
Redemption fees (for shares held Total other (shareholder
less than six months) 1% servicing, custodial, auditing, etc.) ____ %/a/
Exchange fees None Total fund expenses ____%/a/
- -------------------------------------------------------------------------------------------------------------
</TABLE>
/a/
In the interest of limiting the expenses of the fund during its initial period
of operations, T. Rowe Price has agreed to waive fees and bear any expenses
through December 31, 1998, which would cause the fund's ratio of expenses to
average net assets to exceed _____%. Fees waived or expenses paid or assumed
under this agreement are subject to reimbursement to T. Rowe Price by the fund
whenever the fund's expense ratio is below ____; however, no reimbursement
will be made after December 31, 2000, or if it would result in the expense
ratio exceeding ____%. Any amounts reimbursed will have the effect of
increasing fees otherwise paid by the fund. Without this expense limitation,
it is estimated that the fund's management fee, other expenses, and total
expense ratio would be ____%, ____%, and ____%, respectively. Organizational
expenses will be charged to the fund over a period not to exvrrf 60 months.
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
<PAGE>
ABOUT THE FUND 5
o A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.33% as of March 31, 1997,
and an individual fund fee of ____%.
o "Other" administrative expenses Primarily the servicing of shareholder
accounts, such as providing statements and reports, disbursing dividends, and
providing custodial services.
o Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
o Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2
<CAPTION>
<S> <C> <C> <C>
Hypothetical Fund Expenses
1 year 3 years
$____ $____
- --------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks long-term growth of capital by investing primarily in common
stocks of small growth companies.
What is the fund's investment program?
The fund will invest at least 80% of total assets in small growth companies.
The portfolio will be more broadly diversified than the typical stock fund;
the top 10 or 25 holdings will not compose a significant portion of fund
assets. Stock selection is based on a variety of quantitative models designed
by T. Rowe Price
<PAGE>
T. ROWE PRICE 6
to identify the key characteristics of small-cap growth stocks. The fund will
typically hold minimum cash reserves in order to maximize exposure to this
market area. To help the fund manage cash flows efficiently and maintain
consistent market exposure, the fund may also buy and sell stock index
futures.
What is meant by a "small growth company"?
These companies are still in the process of developing and are expected by T.
Rowe Price to achieve long-term earnings growth that reaches new highs over
time. For purposes of this fund, a small company is defined as one whose
market capitalization is smaller than 90% of the companies in the Standard &
Poor's 500 Stock Index. As of June 30, 1997, this included companies with
market caps under approximately $1.5 billion, but the upper size limit will
vary with market fluctuations. (A company's capitalization is found by
multiplying its shares outstanding by its stock price.)
o Growth investors look for companies with above-average earnings gains.
Does the fund only invest in small growth stocks?
Most of the stocks purchased by the fund will be in the size range described
above. However, the fund may on occasion purchase a stock whose market cap
exceeds the range, and it will not automatically sell a stock just because
the company's market cap has grown beyond the upper end of the range.
How is the fund's portfolio constructed?
Managers use a number of proprietary quantitative models to identify and
measure the major, often unique, characteristics of stocks in the small-cap
growth sector. Based on these models, stocks are selected in a "top down"
manner so that the portfolio as a whole reflects the specific characteristics
that the manager considers important, such as valuations (e.g.,
price/earnings or price/book value ratios) and projected earnings growth. The
fund's resulting high degree of diversification is likely to minimize the
effects of individual security selection on fund performance.
How does the fund benefit from T. Rowe Price's expertise in small-company
investing?
Our extensive experience in all aspects of small-company investing-research,
trading, portfolio strategy-provides the foundation for the decisions and
judgment needed to develop the fund's quantitative investment strategies. In
essence, the fund manager leverages this fundamental expertise through
computer technology to build the relevant investment models, to assess how
well the models capture important small-cap growth stock attributes, and to
adjust them as needed over time. Thus, both qualitative and quantitative
expertise is harnessed in attempting to optimize long-term performance.
<PAGE>
ABOUT THE FUND 7
What are some potential advantages of this type of approach?
The fund's program offers several benefits for investors who want to
diversify their equity portfolios by adding exposure to the small-cap growth
investment sector. First, small companies may offer greater opportunity for
capital appreciation than larger, more established companies. Second, the
fund's broad diversification may make it less volatile than small-cap growth
funds that have more concentrated portfolios. Third, portfolio turnover
should be lower than in the average small-cap fund, which may reduce the
investor's potential capital gains tax exposure.
What are some of the fund's potential risks?
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger company
securities. Small companies often have limited product lines, markets, or
financial resources, and their managements may lack depth and experience.
Since the fund will typically be fully invested in this market sector,
investors are fully exposed to its volatility. In addition, the stocks
selected by the manager's quantitative strategies may not appreciate over
time.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years, as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
<PAGE>
T. ROWE PRICE 8
How can I decide if the fund is appropriate for me?
Review your own financial objectives, time horizon, and risk tolerance to
choose the fund suitable for your particular needs. This fund is expected to
be appropriate for investors seeking long-term capital growth who can accept
the higher price fluctuations inherent in small-stock investing.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase, as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at the
end of this prospectus and on the New Account Form. These procedures may
differ for institutional and employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from and receiving
payments in your financial institution account. ACH is a payment system
supported by over 20,000 banks, savings banks, and credit unions, which
electronically exchanges the transactions primarily through the Federal
Reserve Banks. Proceeds sent by bank wire should be credited to your account
the next business day.
o Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after
<PAGE>
T. ROWE PRICE 10
receiving your sale or exchange request. If you were exchanging into a bond
or money fund, your new investment would not begin to earn dividends until
the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
Contingent Redemption Fee
The fund is designed for long-term investors willing to accept the risks
associated with an investment in common stocks of small companies that are
not widely held by institutional investors. Such securities tend to be less
liquid than larger company stocks. The fund is not designed for short-term
traders, whose frequent purchases, redemptions, and exchanges can
unnecessarily disrupt the fund's investment program and drive up the fund's
transaction costs. For these reasons, the fund assesses a 1% fee on
redemptions (including exchanges) of shares held for less than six months.
Redemption fees will be paid to the fund to help offset transaction costs.
The fund will use the "first-in, first-out" (FIFO) method to determine the
one-year holding period. Under this method, the date of the redemption or
exchange will be compared to the earliest purchase date of shares held in the
account. If this holding period is less than six months, the redemption fee
will be assessed.
The fee does not apply to any shares purchased through reinvested
distributions (dividends and capital gains) or to shares held in retirement
plans such as 401(k), 403(b), 457, Keogh, profit sharing, SIMPLE IRA,
SEP-IRA, and money purchase pension accounts. These exceptions may not apply
to shares held in broker omnibus accounts. The fee does apply to shares held
in IRA accounts and to shares purchased through automatic investment plans
(described under Shareholder Services).
In determining "six months," the fund will use the anniversary date of a
transaction. Thus, shares purchased on July 1, 1997, for example, will be
subject to the fee if they are redeemed on or prior to December 31, 1998. If
they are redeemed on or after February 1, 1998, they will not be subject to
the fee.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
<PAGE>
ABOUT YOUR ACCOUNT 11
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund.
Income dividends
o The fund declares and pays dividends (if any) annually.
o All or part of the fund's dividends will be eligible for the 70% deduction
for dividends received by corporations.
Capital gains
o A capital gain or loss is the difference between the purchase and sale price
of a security.
o If the fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month. If a second
distribution is necessary, it is usually declared and paid during the first
quarter of the following year.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
o You sell fund shares, including an exchange from one fund to another.
o The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For accounts opened new or by exchange in 1983
or later, we will provide you with the gain or loss of the shares you sold
during the year, based on the "average cost" method. This information is not
reported to the IRS, and you do not have to use it. You may calculate the
cost basis using other methods acceptable to the IRS, such as "specific
identification."
<PAGE>
T. ROWE PRICE 12
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distribution made to you. This information will
also be reported to the IRS. All distributions made by the funds are taxable
to you for the year in which they were paid. The only exception is that
distributions declared during the last three months of a calendar year and
paid in January are taxed as though they were paid by December 31. You will
be sent any additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
Short-term capital gain distributions are taxable as ordinary income and
long-term gain distributions are taxable at the applicable long-term gain
rate. The gain is long- or short-term depending on how long the fund held the
securities, not how long you held shares in the fund. If you realize a loss
on the sale or exchange of fund shares held six months or less, your
short-term loss recognized is reclassified to long-term to the extent of any
long-term capital gain distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease the fund's ordinary income dividend. Net foreign currency losses
may result in the fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends, but will still be included in
your taxable income. However, you may be able to claim an offsetting credit
or deduction on your tax return for your portion of foreign taxes paid by the
fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution.
If you buy shares shortly before or on the "record date"- the date that
establishes you as the person to receive the upcoming distribution-you will
receive, in the form of a taxable distribution, a portion of the money you
just invested. Therefore, you may also wish to find out the fund's record
date before invest-
<PAGE>
ABOUT YOUR ACCOUNT 13
ing. Of course, the fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation. When these
amounts are eventually distributed, they are taxable.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. (The 10-day hold
does not apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
These exchange and redemption services are established automatically when you
sign the New Account Form unless you check the box which states that you do
not want these services. The fund uses reasonable procedures (including
shareholder identity verification) to confirm that instructions given by
telephone are genuine and is not liable for acting on these instructions. If
these procedures are not followed, it is the opinion of certain regulatory
agencies that the fund may be liable for any losses that may result from
acting on the instructions given. A confirmation is sent promptly after the
telephone transaction. All conversations are recorded.
<PAGE>
T. ROWE PRICE 14
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of the fund's net assets,
the fund has the right to delay sending your proceeds for up to five business
days after receiving your request, or to pay the difference between the
redemption amount and the lesser of the two previously mentioned figures with
securities from the fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. We define "excessive trading" as
exceeding one purchase and sale involving the same fund within any 120-day
period.
For example, you are in fund A. You can move substantial assets from fund A
to fund B and, within the next 120 days, sell your shares in fund B to return
to fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see Shareholder
Services).
Keeping Your Account Open
Due to the relatively high cost to the fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000
<PAGE>
ABOUT YOUR ACCOUNT 15
or more. Accounts employing automatic investing (e.g., payroll deduction,
automatic purchase from a bank account, etc.) are also exempt from the
charge. The fee will not apply to IRAs and other retirement plan accounts. (A
separate custodial fee may apply to IRAs and other retirement plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price funds
from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
o Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any person, address, or bank account not on
record.
o Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
o Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1997 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 60 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
o Receive a proportional interest in the fund's income and capital gain
distributions.
o Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, in order to avoid
unnecessary costs to fund shareholders, do not intend to do so except when
certain matters, such as a change in a fund's fundamental policies, are to be
decided. In addition, shareholders representing at least 10% of all eligible
votes may call a special meeting, if they wish, for the purpose of voting on
the removal of any fund director or trustee. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the fund will send
you proxy materials that explain the issues to be decided and include a
voting card for you to mail back.
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members will be independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price-specifically by the fund's portfolio managers.
<PAGE>
ABOUT YOUR ACCOUNT 17
Portfolio Management
The fund has an Investment Advisory Committee composed of the following
members: Richard T. Whitney, Chairman, _________________, and _______
____________. The committee chairman has day-to-day responsibility for
managing the portfolio and works with the committee in developing and
executing the fund's investment program. Mr. Whitney is chairman of the
fund's committee. Mr. Whitney joined T. Rowe Price in 1985 and has been
managing investments since 1986.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal period ending December 31, 1997, the fund is expected to pay
the following: $__________ to T. Rowe Price Services, Inc., for transfer and
dividend disbursing functions and shareholder services; and $____________ to
T. Rowe Price for accounting services.
The Management Fee
This fee has two parts- an "individual fund fee" (discussed under Transaction
and Fund Expenses), which reflects a fund's particular investment management
costs, and a "group fee." The group fee, which is designed to reflect the
benefits of the shared resources of the T. Rowe Price investment management
complex, is calculated daily based on the combined net assets of all T. Rowe
Price funds (except Equity Index and the Spectrum Funds and any institutional
or private
<PAGE>
T. ROWE PRICE 18
label mutual funds). The group fee schedule (shown below) is graduated,
declining as the asset total rises, so shareholders benefit from the overall
growth in mutual fund assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
--------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
----------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
----------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the Price funds described
previously. Based on combined T. Rowe Price funds' assets of approximately
$63 billion at March 31, 1997, the group fee was 0.33%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us, in our newsletter, The Price Report, in Insights articles, in T.
Rowe Price advertisements, and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
<PAGE>
ABOUT YOUR ACCOUNT 19
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced
the actual cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.
Shareholder approval is required to substantively change the fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating
policies," which can be changed without shareholder approval. However,
significant changes are discussed with shareholders in fund reports. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth herein. For instance, this
fund is not permitted to invest more than 10% of total assets in hybrid
instruments. While these restrictions provide a useful level of detail about
the fund's investment program, investors should not view them as an accurate
gauge of the potential risk of such investments. For example, in a given
period, a 5% investment in hybrid instruments could have significantly more
of an impact on the fund's share price than its weighting in the portfolio.
The net effect of a particular investment depends on its volatility and the
size of its overall return in relation to the performance of all the fund's
other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help the fund achieve its objective.
<PAGE>
T. ROWE PRICE 20
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
Fundamental policy The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or if more than 10% of the
voting securities of the issuer would be held by the fund.
Common and Preferred Stocks
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in
its claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate
in company profits on a pro-rata basis; profits may be paid out in dividends
or reinvested in the company to help it grow. Increases and decreases in
earnings are usually reflected in a company's stock price, so common stocks
generally have the greatest appreciation and depreciation potential of all
corporate securities. While most preferred stocks pay a dividend, the fund
may purchase preferred stock where the issuer has omitted, or is in danger of
omitting, payment of its dividend. Such investments would be made primarily
for their capital appreciation potential.
Convertible Securities and Warrants
The fund may invest in debt or preferred equity securities convertible into
or exchangeable for equity securities. Traditionally, convertible securities
have paid dividends or interest at rates higher than common stocks but lower
than nonconvertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure to
potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and
<PAGE>
MORE ABOUT THE FUND 21
higher volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 10% of its total assets (excluding
reserves) in foreign securities.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities index.
Such securities may bear interest or pay dividends at below market (or even
relatively nominal) rates. Under certain conditions, the redemption value of
such an investment could be zero.
o Hybrids can have volatile prices and limited liquidity, and their use by the
fund may not be successful.
Operating policy The fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy The fund will not invest more than 15% of its net assets in
illiquid securities.
Types of Management Practices
Cash Position
The fund will hold a certain portion of its assets in U.S. and foreign
dollar-denominated money market securities, including repurchase agreements,
in the two highest rating categories, maturing in one year or less. For
temporary, defensive purposes, the fund may invest without limitation in such
securities. This reserve position provides flexibility in meeting
redemptions, expenses, and the timing of new investments and serves as a
short-term defense during periods of unusual market volatility.
<PAGE>
T. ROWE PRICE 22
Borrowing Money and Transferring Assets
The fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with the fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
Operating policies The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. The fund may not purchase additional securities when
borrowings exceed 5% of total assets.
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
or hedge risk, because they enable the investor to buy or sell an asset in
the future at an agreed upon price. Options (another type of potentially
high-risk derivative) give the investor the right, but not the obligation, to
buy or sell an asset at a predetermined price in the future. The fund may buy
and sell futures and options contracts for any number of reasons, including:
to manage its exposure to changes in securities prices and foreign
currencies; as an efficient means of adjusting its overall exposure to
certain markets; in an effort to enhance income; and to protect the value of
portfolio securities. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges; their
prices can be highly volatile. Using them could lower the fund's total
return, and the potential loss from the use of futures can exceed the fund's
initial exposure to such contracts.
Operating policies Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written call or put options may not exceed 25% of
its total assets. The fund will not commit more than 5% of its total assets
to premiums when purchasing call or put options.
Managing Foreign Currency Risk
Investors in foreign securities may "hedge" their exposure to potentially
unfavorable currency changes by purchasing a contract to exchange one
currency for another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for the currency
in which the investment is denominated, a strategy known as "proxy hedging."
Although foreign currency transactions will be used primarily to protect the
fund's foreign
<PAGE>
MORE ABOUT THE FUND 23
securities from adverse currency movements relative to the dollar, they
involve the risk that anticipated currency movements will not occur and the
fund's total return could be reduced.
Lending of Portfolio Securities
Like other mutual funds, the fund may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In
this event, the fund could experience delays in recovering its securities and
possibly capital losses.
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
Portfolio Turnover
The fund will not generally trade in securities for short-term profits, but,
when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rate for its initial period of operations is not expected
to exceed 150%.
<PAGE>
INVESTING WITH T. ROWE PRICE
4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check together with the New Account Form to the address
on the next page. We do not accept third party checks to open new accounts,
except for IRA Rollover checks that are properly endorsed.
<PAGE>
MORE ABOUT THE FUND 25
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 account name and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed above.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Shareholder Services). The new account will have the
same registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
T. ROWE PRICE 26
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access, your personal computer, or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the address shown below with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements
- -Excessive Trading.
<PAGE>
INVESTING WITH T. ROWE PRICE 27
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers -By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements-Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see addresses / /under
Opening a New Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
Rights Reserved by the Fund
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, if an account
has been restricted due to excessive trading or fraud) upon notice to the
shareholder within five business days of
<PAGE>
T. ROWE PRICE 28
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide with
our Welcome Kit.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call Investor
Services. For information on all other retirement plans, including our no-load
variable annuity, please call our Trust Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into
<PAGE>
INVESTING WITH T. ROWE PRICE 29
a state tax-free fund are limited to investors living in states where the funds
are registered.) Some of the T. Rowe Price funds may impose a redemption fee of
0.5% to 2% on shares held for less than six months or one year, as specified in
the prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access, but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
T. ROWE PRICE 30
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
This additional service gives you the opportunity to easily consolidate all of
your investments with one company. Through our discount brokerage, you can buy
and sell individual securities - stocks, bonds, options, and others - at
considerable commission savings over full-service brokers. We also provide a
wide range of services, including:
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
Automated telephone and on-line 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.
Note: Discount applies to our current commission schedule, subject to our $35
minimum commission.
<PAGE>
INVESTING WITH T. ROWE PRICE 31
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month Newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this
service-free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment / /Services,
Inc., Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A 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, Personal Strategy Planner, Retirees
Financial Guide, Retirement Planning Kit, Tax Considerations for Investors, and
Diversifying Overseas: A T. Rowe Price Guide to International Investing.
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To help you achieve your financial goals, T. Rowe Price offers a wide range
of stock, bond, and money market investments, as well as convenient services
and timely, informative reports.
To Open a Mutual Fund Account
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F120-040 5/1/97
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INVESTING WITH T. ROWE PRICE 33
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T. ROWE PRICE 34
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INVESTING WITH T. ROWE PRICE 35
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T. ROWE PRICE 36
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INVESTING WITH T. ROWE PRICE 37
PAGE 7
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE MID-CAP VALUE FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. ROWE PRICE VALUE FUND, INC.
and
INSTITUTIONAL EQUITY FUNDS, INC.
MID-CAP EQUITY GROWTH FUND
(collectively the "Funds" and individually the "Fund")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the appropriate
Fund prospectus dated May 1, 1997, or June 30, 1997, for the
Diversified Small-Cap Growth Fund, which may be obtained from
T. Rowe Price Investment Services, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you are
not a shareholder, please call 1-800-638-5660. A prospectus with
more complete information, including management fees and expenses
will be sent to you. Please read it carefully.
The date of this Statement of Additional Information is May
1, 1997, revised to June 30, 1997, for the Diversified Small-Cap
Growth Fund.
SAI-EQU 6-30-97
PAGE 8
TABLE OF CONTENTS
Page Page
Asset-Backed Securities . . Legal Counsel . . . . . .
Capital Stock . . . . . . . Lending of Portfolio
Custodian . . . . . . . . . Securities . . . . . . .
Code of Ethics . . . . . . Management of Funds . . .
Distributor for Fund . . . Mortgage-Related
Dividends and Securities . . . . . . .
Distributions . . . . . . Net Asset Value Per Share
Federal Registration . . . Options . . . . . . . . .
of Shares . . . . . . . . Organization of the Fund
Foreign Currency Portfolio Management
Transactions . . . . . . . Practices . . . . . . .
Foreign Futures and Portfolio Transactions .
Options . . . . . . . . . Pricing of Securities . .
Foreign Securities . . . . Principal Holders of . .
Futures Contracts . . . . . Securities . . . . . . .
Hybrid Instruments . . . . Ratings of Corporate Debt
Independent Accountants . . Securities . . . . . . .
Illiquid or Restricted Repurchase Agreements . .
Securities . . . . . . . . Risk Factors . . . . . .
Investment Management Tax Status . . . . . . .
Services . . . . . . . . . Taxation of Foreign
Investment Objectives and Shareholders . . . . . .
Policies . . . . . . . . . Warrants . . . . . . . .
Investment Performance . . When-Issued Securities and
Investment Program . . . . and Forward Commitment
Investment Restrictions . . Contracts . . . . . . .
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objectives and policies discussed in each
Fund's prospectus. The Funds will not make a material change in
their investment objectives without obtaining shareholder
approval. Unless otherwise specified, the investment programs
and restrictions of the Funds are not fundamental policies. Each
Fund's operating policies are subject to change by each Board of
Directors/Trustees without shareholder approval. However,
shareholders will be notified of a material change in an
operating policy. Each Fund's fundamental policies may not be
changed without the approval of at least a majority of the
outstanding shares of the Fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.
Throughout this Statement of Additional Information, "the
PAGE 9
Fund" is intended to refer to each Fund listed on the cover page,
unless otherwise indicated.
RISK FACTORS
General
Because of its investment policy, the Fund may or may not be
suitable or appropriate for all investors. The Fund is not a
money market fund and is not an appropriate investment for those
whose primary objective is principal stability. The Fund will
normally have substantially all (for the Balanced Fund 50-70% and
for the Capital Appreciation Fund at least 50%) of its assets in
equity securities (e.g., common stocks). This portion of the
Fund's assets will be subject to all of the risks of investing in
the stock market. There is risk in all investment. The value of
the portfolio securities of the Fund will fluctuate based upon
market conditions. Although the Fund seeks to reduce risk by
investing in a diversified portfolio, such diversification does
not eliminate all risk. There can, of course, be no assurance
that the Fund will achieve its investment objective. Reference
is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks
associated with the investments and practices described therein
as they apply to the Fund.
Foreign Securities (All Funds other than Equity Index Fund)
The Fund may invest in U.S. dollar-denominated and non-U.S.
dollar-denominated securities of foreign issuers.
Risk Factors of Foreign Investing
There are special risks in foreign investing. Many of the
risks are more pronounced for investments in developing or
emerging countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe and the Middle East.
Although there is no universally accepted definition, a
developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a
per capita gross national product of less than $8,000.
Political and Economic Factors. Individual foreign
economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are
not as stable as in the United States. For example, in 1991, the
PAGE 10
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached. In
addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim
sovereignty of one another and there is a demilitarized border
between North and South Korea.
Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.
Currency Fluctuations. The Fund may invest in securities
denominated in various currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Funds'
assets denominated in that currency. Such changes will also
affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of
the Fund's securities denominated in that currency will rise.
When a given currency depreciates against the dollar (the dollar
strengthens) the value of the Funds' securities denominated in
that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
PAGE 11
Market Characteristics. It is contemplated that most
foreign securities, will be purchased in over-the-counter markets
or on stock exchanges located in the countries in which the
respective principal offices of the issuers of the various
securities are located, if that is the best available market.
Investments in certain markets may be made through ADRs traded in
the United States. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets and the Funds'
portfolio securities may be less liquid and subject to more rapid
and erratic price movements than securities of comparable U.S.
companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and
such levels may not be sustainable. Fixed commissions on foreign
stock exchanges are generally higher than negotiated commissions
on United States exchanges, although the Funds will endeavor to
achieve the most favorable net results on their portfolio
transactions. There is generally less government supervision and
regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement
practices for transactions in foreign markets may differ from
those in United States markets. Such differences may include
delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.
Investment Funds. The Fund may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in securities
of companies listed and traded on the stock exchanges in these
respective countries. If the Fund invest in such investment
funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including
operating expenses and the fees of the investment manager), but
also will bear indirectly similar expenses of the underlying
investment funds. In addition, the securities of these
investment funds may trade at a premium over their net asset
value.
Information and Supervision. There is generally less
publicly available information about foreign companies comparable
to reports and ratings that are published about companies in the
United States. Foreign companies are also generally not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those
applicable to United States companies. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.
PAGE 12
Taxes. The dividends and interest payable on certain of the
Fund's foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders.
Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the possibility
of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of the Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia
are considered illiquid, each Fund will be required to include
such securities within its 15% restriction on investing in
illiquid securities.
Latin America
PAGE 13
Inflation. Most Latin American countries have experienced,
at one time or another, severe and persistent levels of
inflation, including, in some cases, hyperinflation. This has,
in turn, led to high interest rates, extreme measures by
governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in
many countries has lessened, there is no guarantee it will remain
at lower levels.
Political Instability. The political history of certain
Latin American countries has been characterized by political
uncertainty, intervention by the military in civilian and
economic spheres, and political corruption. Such developments,
if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade
barriers and result in significant disruption in securities
markets.
Foreign Currency. Certain Latin American countries may have
managed currencies which are maintained at artificial levels to
the U.S. dollar rather than at levels determined by the market.
This type of system can lead to sudden and large adjustments in
the currency which, in turn, can have a disruptive and negative
effect on foreign investors. For example, in late 1994 the value
of the Mexican peso lost more than one-third of its value
relative to the dollar. Certain Latin American countries also
may restrict the free conversion of their currency into foreign
currencies, including the U.S. dollar. There is no significant
foreign exchange market for certain currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency
transactions designed to protect the value of the Fund's
interests in securities denominated in such currencies.
Sovereign Debt. A number of Latin American countries are
among the largest debtors of developing countries. There have
been moratoria on, and reschedulings of, repayment with respect
to these debts. Such events can restrict the flexibility of
these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
INVESTMENT PROGRAM
Types of Securities
Set forth below is additional information about certain of
the investments described in the Fund's prospectus.
Illiquid or Restricted Securities
PAGE 14
Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to
which a registration statement is in effect under the Securities
Act of 1933 (the "1933 Act"). Where registration is required,
the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to
sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair
value as determined in accordance with procedures prescribed by
the Fund's Board of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid
securities, the Fund should be in a position where more than 15%
of the value of its net assets is invested in illiquid assets,
including restricted securities, the Fund will take appropriate
steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities
which, while privately placed, are eligible for purchase and sale
under Rule 144A under the 1933 Act. This rule permits certain
qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not
registered under the 1933 Act. T. Rowe Price under the
supervision of the Fund's Board of Directors/Trustees, will
consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Fund's restriction of investing
no more than 15% of its net assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, T. Rowe Price
will consider the trading markets for the specific security
taking into account the unregistered nature of a Rule 144A
security. In addition, T. Rowe Price could consider the (1)
frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market,
and (4) the nature of the security and of marketplace trades
(e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity
of Rule 144A securities would be monitored, and if as a result of
changed conditions it is determined that a Rule 144A security is
no longer liquid, the Fund's holdings of illiquid securities
would be reviewed to determine what, if any, steps are required
to assure that the Fund does not invest more than 15% of its net
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Hybrid Instruments
PAGE 15
Hybrid Instruments (a type of potentially high-risk
derivative) have been developed and combine the elements of
futures contracts or options with those of debt, preferred equity
or a depository instrument (hereinafter "Hybrid Instruments").
Generally, a Hybrid Instrument will be a debt security, preferred
stock, depository share, trust certificate, certificate of
deposit or other evidence of indebtedness on which a portion of
or all interest payments, and/or the principal or stated amount
payable at maturity, redemption or retirement, is determined by
reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles
or commodities (collectively "Underlying Assets") or by another
objective index, economic factor or other measure, such as
interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid
Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments
or redemption terms determined by reference to the value of a
currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference
to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating
exposure to a particular market, or segment of a market, with the
objective of enhancing total return. For example, a Fund may
wish to take advantage of expected declines in interest rates in
several European countries, but avoid the transactions costs
associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar-
denominated Hybrid Instrument whose redemption price is linked to
the average three year interest rate in a designated group of
countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was
lower than a specified level, and payoffs of less than par if
rates were above the specified level. Furthermore, the Fund
could limit the downside risk of the security by establishing a
minimum redemption price so that the principal paid at maturity
could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this
arrangement, known as a structured security with an embedded put
option, would be to give the Fund the desired European bond
exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Fund could
lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the
Hybrid.
The risks of investing in Hybrid Instruments reflect a
PAGE 16
combination of the risks of investing in securities, options,
futures and currencies. Thus, an investment in a Hybrid
Instrument may entail significant risks that are not associated
with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars or
bears interest either at a fixed rate or a floating rate
determined by reference to a common, nationally published
Benchmark. The risks of a particular Hybrid Instrument will, of
course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the
instrument is linked. Such risks generally depend upon factors
which are unrelated to the operations or credit quality of the
issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events,
the supply and demand for the Underlying Assets and interest rate
movements. In recent years, various Benchmarks and prices for
Underlying Assets have been highly volatile, and such volatility
may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for
a discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry
greater market risks than traditional debt instruments.
Depending on the structure of the particular Hybrid Instrument,
changes in a Benchmark may be magnified by the terms of the
Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices
of the Hybrid Instrument and the Benchmark or Underlying Asset
may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred
dividends at below market (or even relatively nominal) rates.
Alternatively, Hybrid Instruments may bear interest at above
market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used to
structure the Hybrid Instrument. Leverage risk occurs when the
Hybrid Instrument is structured so that a given change in a
Benchmark or Underlying Asset is multiplied to produce a greater
value change in the Hybrid Instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs of
a particular investor, and therefore, the number of investors
that are willing and able to buy such instruments in the
secondary market may be smaller than that for more traditional
debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market
without the guarantee of a central clearing organization or in a
PAGE 17
transaction between the Fund and the issuer of the Hybrid
Instrument, the creditworthiness of the counter party or issuer
of the Hybrid Instrument would be an additional risk factor which
the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which
regulates the offer and sale of securities by and to U.S.
persons, or any other governmental regulatory authority.
The various risks discussed above, particularly the market
risk of such instruments, may in turn cause significant
fluctuations in the net asset value of the Fund. Accordingly,
the Fund will limit its investments in Hybrid Instruments to 10%
of total assets. However, because of their volatility, it is
possible that the Fund's investment in Hybrid Instruments will
account for more than 10% of the Fund's return (positive or
negative).
Warrants
The Fund may acquire warrants. Warrants are pure
speculation in that they have no voting rights, pay no dividends
and have no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but
only the right to buy them. Warrants differ from call options in
that warrants are issued by the issuer of the security which may
be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying
securities.
Debt Securities
Balanced, Blue Chip Growth, Capital Appreciation, Capital
Opportunity, Dividend Growth, Equity Income, Financial Services,
Growth & Income, Mid-Cap Value, New Era, Small-Cap Stock, Small-
Cap Value, and Value Funds
Debt Obligations
Although a majority of the Fund's assets are invested in
common stocks, the Fund may invest in convertible securities,
corporate debt securities and preferred stocks which hold the
prospect of contributing to the achievement of the Fund's
objectives. Yields on short, intermediate, and long-term
securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a
PAGE 18
particular offering, the maturity of the obligation, and the
credit quality and rating of the issue. Debt securities with
longer maturities tend to have higher yields and are generally
subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower
yields. The market prices of debt securities usually vary,
depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a
decline in interest rates will generally increase the value of
portfolio investments. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability
of the issuers of the debt securities in which the Fund invests
to meet their obligations for the payment of interest and
principal when due. The Fund's investment program permits it to
purchase below investment grade securities. Since investors
generally perceive that there are greater risks associated with
investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality
securities. However, the principal value of lower-rated
securities generally will fluctuate more widely than higher
quality securities. Lower quality investments entail a higher
risk of default-that is, the nonpayment of interest and principal
by the issuer than higher quality investments. Such securities
are also subject to special risks, discussed below. Although the
Fund seeks to reduce risk by portfolio diversification, credit
analysis, and attention to trends in the economy, industries and
financial markets, such efforts will not eliminate all risk.
There can, of course, be no assurance that the Fund will achieve
its investment objective.
After purchase by the Fund, a debt security may cease to be
rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require a sale of such
security by the Fund. However, T. Rowe Price will consider such
event in its determination of whether the Fund should continue to
hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance
with the investment policies contained in the prospectus.
Special Risks of High Yield Investing
The Fund may invest in low quality bonds commonly referred
to as "junk bonds." Junk bonds are regarded as predominantly
speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low
and lower-medium quality bonds involves greater investment risk,
to the extent the Fund invests in such bonds, achievement of its
investment objective will be more dependent on T. Rowe Price's
PAGE 19
credit analysis than would be the case if the Fund was investing
in higher quality bonds. High yield bonds may be more
susceptible to real or perceived adverse economic conditions than
investment grade bonds. A projection of an economic downturn, or
higher interest rates, for example, could cause a decline in high
yield bond prices because the advent of such events could lessen
the ability of highly leveraged issuers to make principal and
interest payments on their debt securities. In addition, the
secondary trading market for high yield bonds may be less liquid
than the market for higher grade bonds, which can adversely
affect the ability of a Fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be
more difficult to value inasmuch as objective pricing data may be
less available and judgment may play a greater role in the
valuation process.
Fixed income securities in which the Fund may invest
include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in the
length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by
U.S. Government sponsored enterprises and federal agencies.
These include securities issued by the Federal National Mortgage
Association, Government National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration,
Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; the remainder are supported only by the credit of
the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates
of deposit are short-term obligations of commercial banks. A
bankers' acceptance is a time draft drawn on a commercial bank by
a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of
U.S. banks, U.S. branches of foreign banks, and foreign branches
of foreign banks.
Short-Term Corporate Debt Securities. Outstanding
nonconvertible corporate debt securities (e.g., bonds and
debentures) which have one year or less remaining to maturity.
PAGE 20
Corporate notes may have fixed, variable, or floating rates.
Commercial Paper. Short-term promissory notes issued by
corporations primarily to finance short-term credit needs.
Certain notes may have floating or variable rates.
Foreign Government Securities. Issued or guaranteed by a
foreign government, province, instrumentality, political
subdivision or similar unit thereof.
Savings and Loan Obligations. Negotiable certificates of
deposit and other short-term debt obligations of savings and loan
associations.
Supranational Agencies. Securities of certain supranational
entities, such as the International Development Bank.
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or
delayed delivery basis ("When-Issueds") and may purchase
securities on a forward commitment basis ("Forwards"). Any or
all of the Fund's investments in debt securities may be in the
form of When-Issueds and Forwards. The price of such securities,
which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs
within 90 days of the purchase for When-Issueds, but may be
substantially longer for Forwards. During the period between
purchase and settlement, no payment is made by the Fund to the
issuer and no interest accrues to the Fund. The purchase of
these securities will result in a loss if their value declines
prior to the settlement date. This could occur, for example, if
interest rates increase prior to settlement. The longer the
period between purchase and settlement, the greater the risks
are. At the time the Fund makes the commitment to purchase these
securities, it will record the transaction and reflect the value
of the security in determining its net asset value. The Fund
will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value
to commitments for them during the time between the purchase and
the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not
available to the Fund (to the extent of the securities used for
cover). Such securities either will mature or, if necessary, be
sold on or before the settlement date.
To the extent the Fund remains fully or almost fully
invested (in securities with a remaining maturity or more than
one year) at the same time it purchases these securities, there
PAGE 21
will be greater fluctuations in the Fund's net asset value than
if the Fund did not purchase them.
Balanced Fund
Mortgage-Related Securities
Mortgage-related securities in which the Fund may invest
include, but are not limited to, those described below.
Mortgage-Backed Securities. Mortgage-backed securities are
securities representing an interest in a pool of mortgages. The
mortgages may be of a variety of types, including adjustable
rate, conventional 30-year fixed rate, graduated payment, and 15-
year. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the Fund. This
is in contrast to traditional bonds where principal is normally
paid back at maturity in a lump sum. Unscheduled prepayments of
principal shorten the securities' weighted average life and may
lower their total return. (When a mortgage in the underlying
mortgage pool is prepaid, an unscheduled principal prepayment is
passed through to the Fund. This principal is returned to the
Fund at par. As a result, if a mortgage security were trading at
a premium, its total return would be lowered by prepayments, and
if a mortgage security were trading at a discount, its total
return would be increased by prepayments.) The value of these
securities also may change because of changes in the market's
perception of the creditworthiness of the federal agency that
issued them. In addition, the mortgage securities market in
general may be adversely affected by changes in governmental
regulation or tax policies.
U.S. Government Agency Mortgage-Backed Securities. These
are obligations issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("Ginnie Mae" or
"GNMA"), the Federal National Mortgage Association ("Fannie Mae"
or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"), and the Federal Agricultural Mortgage
Corporation ("Farmer Mac" or "FAMC"). FNMA, FHLMC, and FAMC
obligations are not backed by the full faith and credit of the
U.S. government as GNMA certificates are, but they are supported
by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates
provide for the pass-through to investors of their pro-rata share
of monthly payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any
fees paid to the guarantor of such securities and the servicer of
the underlying mortgage loans. Each of GNMA, FNMA, FHLMC, and
PAGE 22
FAMC guarantees timely distributions of interest to certificate
holders. GNMA and FNMA guarantee timely distributions of
scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan;
however, FHLMC now issues Mortgage-Backed Securities (FHLMC Gold
PCs) which also guarantee timely payment of monthly principal
reductions.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned
corporate instrumentality of the United States within the
Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes
Ginnie Mae to guarantee the timely payment of the principal of
and interest on certificates that are based on and backed by a
pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing
Act of 1949 ("FHA Loans"), or guaranteed by the Department of
Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit
of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In
order to meet its obligations under such guaranty, Ginnie Mae is
authorized to borrow from the United States Treasury with no
limitations as to amount.
Fannie Mae Certificates. Fannie Mae is a federally
chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act of
1938. FNMA Certificates represent a pro-rata interest in a group
of mortgage loans purchased by Fannie Mae. FNMA guarantees the
timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith
and credit of the U.S. government.
Freddie Mac Certificates. Freddie Mac is a corporate
instrumentality of the United States created pursuant to the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act").
Freddie Mac Certificates represent a pro-rata interest in a group
of mortgage loans (a "Freddie Mac Certificate group") purchased
by Freddie Mac. Freddie Mac guarantees timely payment of
interest and principal on certain securities it issues and timely
payment of interest and eventual payment of principal on other
securities it issues. The obligations of Freddie Mac are
obligations solely of Freddie Mac and are not backed by the full
faith and credit of the U.S. government.
Farmer Mac Certificates. The Federal Agricultural Mortgage
Corporation ("Farmer Mac") is a federally chartered
instrumentality of the United States established by Title VIII of
PAGE 23
the Farm Credit Act of 1971, as amended ("Charter Act"). Farmer
Mac was chartered primarily to attract new capital for financing
of agricultural real estate by making a secondary market in
certain qualified agricultural real estate loans. Farmer Mac
provides guarantees of timely payment of principal and interest
on securities representing interests in, or obligations backed
by, pools of mortgages secured by first liens on agricultural
real estate ("Farmer Mac Certificates"). Similar to Fannie Mae
and Freddie Mac, Farmer Mac's Certificates are not supported by
the full faith and credit of the U.S. Government; rather, Farmer
Mac may borrow up from the U.S. Treasury to meet its guaranty
obligations.
As discussed above, prepayments on the underlying mortgages
and their effect upon the rate of return of a Mortgage-Backed
Security, is the principal investment risk for a purchaser of
such securities, like the Fund. Over time, any pool of mortgages
will experience prepayments due to a variety of factors,
including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and
(3) increased amortization by the mortgagee. These factors, in
turn, depend upon general economic factors, such as level of
interest rates and economic growth. Thus, investors normally
expect prepayment rates to increase during periods of strong
economic growth or declining interest rates, and to decrease in
recessions and rising interest rate environments. Accordingly,
the life of the Mortgage-Backed Security is likely to be
substantially shorter than the stated maturity of the mortgages
in the underlying pool. Because of such variation in prepayment
rates, it is not possible to predict the life of a particular
Mortgage-Backed Security, but FHA statistics indicate that 25- to
30-year single family dwelling mortgages have an average life of
approximately 12 years. The majority of Ginnie Mae Certificates
are backed by mortgages of this type, and, accordingly, the
generally accepted practice treats Ginnie Mae Certificates as 30-
year securities which prepay full in the 12th year. FNMA and
Freddie Mac Certificates may have differing prepayment
characteristics.
Fixed Rate Mortgage-Backed Securities bear a stated "coupon
rate," which represents the effective mortgage rate at the time
of issuance, less certain fees to GNMA, FNMA and FHLMC for
providing the guarantee, and the issuer for assembling the pool
and for passing through monthly payments of interest and
principal.
Payments to holders of Mortgage-Backed Securities consist of
the monthly distributions of interest and principal less the
applicable fees. The actual yield to be earned by a holder of
Mortgage-Backed Securities is calculated by dividing interest
PAGE 24
payments by the purchase price paid for the Mortgage-Backed
Securities (which may be at a premium or a discount from the face
value of the certificate).
Monthly distributions of interest, as contrasted to semi-
annual distributions which are common for other fixed interest
investments, have the effect of compounding and thereby raising
the effective annual yield earned on Mortgage-Backed Securities.
Because of the variation in the life of the pools of mortgages
which back various Mortgage-Backed Securities, and because it is
impossible to anticipate the rate of interest at which future
principal payments may be reinvested, the actual yield earned
from a portfolio of Mortgage-Backed Securities will differ
significantly from the yield estimated by using an assumption of
a certain life for each Mortgage-Backed Security included in such
a portfolio as described above.
U.S. Government Agency Multiclass Pass-Through Securities.
Unlike CMOs, U.S. Government Agency Multiclass Pass-Through
Securities, which include FNMA Guaranteed REMIC Pass-Through
Certificates and FHLMC Multi-Class Mortgage Participation
Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities.
Multi-Class Residential Mortgage Securities. Such
securities represent interests in pools of mortgage loans to
residential home buyers made by commercial banks, savings and
loan associations or other financial institutions. Unlike GNMA,
FNMA and FHLMC securities, the payment of principal and interest
on Multi-Class Residential Mortgage Securities is not guaranteed
by the U.S. government or any of its agencies. Accordingly,
yields on Multi-Class Residential Mortgage Securities have been
historically higher than the yields on U.S. government mortgage
securities. However, the risk of loss due to default on such
instruments is higher since they are not guaranteed by the U.S.
Government or its agencies. Additionally, pools of such
securities may be divided into senior or subordinated segments.
Although subordinated mortgage securities may have a higher yield
than senior mortgage securities, the risk of loss of principal is
greater because losses on the underlying mortgage loans must be
borne by persons holding subordinated securities before those
holding senior mortgage securities.
Privately-Issued Mortgage-Backed Certificates. These are
pass-through certificates issued by non-governmental issuers.
Pools of conventional residential mortgage loans created by such
issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or
indirect government guarantees of payment. Timely payment of
PAGE 25
interest and principal of these pools is, however, generally
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance
and guarantees are issued by government entities, private
insurance or the mortgage poolers. Such insurance and guarantees
and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security
meets the Fund's quality standards. The Fund may buy mortgage-
related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers,
the investment manager determines that the securities meet the
Fund's quality standards.
Collateralized Mortgage Obligations (CMOs)
CMOs are bonds that are collateralized by whole loan
mortgages or mortgage pass-through securities. The bonds issued
in a CMO deal are divided into groups, and each group of bonds is
referred to as a "tranche." Under the traditional CMO structure,
the cash flows generated by the mortgages or mortgage pass-
through securities in the collateral pool are used to first pay
interest and then pay principal to the CMO bondholders. The
bonds issued under a CMO structure are retired sequentially as
opposed to the pro rata return of principal found in traditional
pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying
collateral (to the extent it exceeds the amount required to pay
the stated interest) is used to retire the bonds. Under the CMO
structure, the repayment of principal among the different
tranches is prioritized in accordance with the terms of the
particular CMO issuance. The "fastest-pay" tranche of bonds, as
specified in the prospectus for the issuance, would initially
receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as
specified in the prospectus, receive all of the principal
payments until they are retired. The sequential retirement of
bond groups continues until the last tranche, or group of bonds,
is retired. Accordingly, the CMO structure allows the issuer to
use cash flows of long maturity, monthly-pay collateral to
formulate securities with short, intermediate and long final
maturities and expected average lives.
In recent years, new types of CMO structures have evolved.
These include floating rate CMOs, planned amortization classes,
accrual bonds and CMO residuals. These newer structures affect
the amount and timing of principal and interest received by each
tranche from the underlying collateral. Under certain of these
new structures, given classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the Fund
PAGE 26
invests, the investment may be subject to a greater or lesser
risk of prepayment than other types of mortgage-related
securities.
The primary risk of any mortgage security is the uncertainty
of the timing of cash flows. For CMOs, the primary risk results
from the rate of prepayments on the underlying mortgages serving
as collateral. An increase or decrease in prepayment rates
(resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs.
The prices of certain CMOs, depending on their structure and the
rate of prepayments, can be volatile. Some CMOs may also not be
as liquid as other securities.
Stripped Agency Mortgage-Backed Securities
Stripped Agency Mortgage-Backed securities represent
interests in a pool of mortgages, the cash flow of which has been
separated into its interest and principal components. "IOs"
(interest only securities) receive the interest portion of the
cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities
may be issued by U.S. Government Agencies or by private issuers
similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates
rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other
mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared
to interest rates. Under the Internal Revenue Code of 1986, as
amended (the "Code"), POs may generate taxable income from the
current accrual of original issue discount, without a
corresponding distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For
example, a rapid or slow rate of principal payments may have a
material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor
may fail to fully recoup its initial investment in an IO class of
a stripped mortgage-backed security, even if the IO class is
rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments of principal, the
price on a PO class will be affected more severely than would be
the case with a traditional mortgage-backed security.
The staff of the Securities and Exchange Commission has
PAGE 27
advised the Fund that it believes the Fund should treat IOs and
POs, other than government-issued IOs or POs backed by fixed rate
mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. Under the staff's
position, the determination of whether a particular
government-issued IO and PO backed by fixed rate mortgages may be
made on a case by case basis under guidelines and standards
established by the Fund's Board of Directors/Trustees. The
Fund's Board of Directors/Trustees has delegated to T. Rowe Price
the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of
collateral, including age and prepayment characteristics; rate of
interest on coupon relative to current market rates and the
effect of the rate on the potential for prepayments; complexity
of the issue's structure, including the number of tranches; size
of the issue and the number of dealers who make a market in the
IO or PO. The Fund will treat non-government-issued IOs and POs
not backed by fixed or adjustable rate mortgages as illiquid
unless and until the Securities and Exchange Commission modifies
its position.
Asset-Backed Securities
The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated
from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of
principal payments received on the underlying assets which in
turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be
more or less than the anticipated yield to maturity. Asset-
backed securities may be classified as pass-through certificates
or collateralized obligations.
Pass-through certificates are asset-backed securities which
represent an undivided fractional ownership interest in an
underlying pool of assets. Pass-through certificates usually
provide for payments of principal and interest received to be
passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest
in the underlying assets, the holders thereof bear directly the
risk of any defaults by the obligors on the underlying assets not
covered by any credit support. See "Types of Credit Support".
PAGE 28
Asset-backed securities issued in the form of debt
instruments, also known as collateralized obligations, are
generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card
or automobile receivables. The assets collateralizing such
asset-backed securities are pledged to a trustee or custodian for
the benefit of the holders thereof. Such issuers generally hold
no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments
on such asset-backed securities are obligations of the issuers,
in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing
entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
PORTFOLIO MANAGEMENT PRACTICES
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional
investors or other persons, pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash,
U.S. government securities, letters of credit or such other
collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to
receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment
of the collateral or a fee from the borrower. The Fund has a
right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading
on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and
sales of such securities in such foreign markets. The Fund will
not have the right to vote on securities while they are being
lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms
deemed by T. Rowe Price to be of good standing and will not be
made unless, in the judgment of T. Rowe Price, the consideration
to be earned from such loans would justify the risk.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange
PAGE 29
Commission and certain state regulatory agencies, the Fund may
make loans to, or borrow funds from, other mutual funds sponsored
or advised by T. Rowe Price or Rowe Price-Fleming International,
Inc. ("Price-Fleming"), (collectively, "Price Funds"). The Fund
has no current intention of engaging in these practices at this
time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which
an investor (such as the Fund) purchases a security (known as the
"underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Any
such dealer or bank will be on T. Rowe Price's approved list and
have a credit rating with respect to its short-term debt of at
least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe
Price. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus
specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. Repurchase
agreements which do not provide for payment within seven days
will be treated as illiquid securities. The Fund will only enter
into repurchase agreements where (i) the underlying securities
are of the type (excluding maturity limitations) which the Fund's
investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest
accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-
entry transfer to the account of the custodian or a bank acting
as agent. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of
enforcing its rights.
Reverse Repurchase Agreements
Although the Fund has no current intention, in the
foreseeable future, of engaging in reverse repurchase agreements,
the Fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Fund is
the seller of, rather than the investor in, securities, and
agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of the securities because it avoids
PAGE 30
certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund,
subject to Investment Restriction (1). (See "Investment
Restrictions," page __.)
All Funds, Except Equity Index Fund
Options
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The Fund may write (sell) American or European style
"covered" call options and purchase options to close out options
previously written by a Fund. In writing covered call options,
the Fund expects to generate additional premium income which
should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved
in the option. Covered call options will generally be written on
securities or currencies which, in T. Rowe Price's opinion, are
not expected to have any major price increases or moves in the
near future but which, over the long term, are deemed to be
attractive investments for the Fund.
A call option gives the holder (buyer) the "right to
purchase" a security or currency at a specified price (the
exercise price) at expiration of the option (European style) or
at any time until a certain date (the expiration date) (American
style). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to
deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the
case of a call option, a writer is required to deposit in escrow
the underlying security or currency or other assets in accordance
with the rules of a clearing corporation.
The Fund will write only covered call options. This means
that the Fund will own the security or currency subject to the
option or an option to purchase the same underlying security or
currency, having an exercise price equal to or less than the
exercise price of the "covered" option, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to the
PAGE 31
fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objective.
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast
to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When
writing a covered call option, a Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the
underlying security or currency above the exercise price, but
conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or
currencies not subject to an option, the Fund has no control over
when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any
time prior to the expiration of its obligation as a writer. If a
call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call
option is exercised, the Fund will realize a gain or loss from
the sale of the underlying security or currency. The Fund does
not consider a security or currency covered by a call to be
"pledged" as that term is used in the Fund's policy which limits
the pledging or mortgaging of its assets.
The premium received is the market value of an option. The
premium the Fund will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made,
T. Rowe Price, in determining whether a particular call option
should be written on a particular security or currency, will
consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those
options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This
liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which
the net asset value per share of the Fund is computed (close of
the New York Stock Exchange), or, in the absence of such sale,
the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or
currency upon the exercise of the option.
PAGE 32
Closing transactions will be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of
the underlying security or currency. Furthermore, effecting a
closing transaction will permit the Fund to write another call
option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund
desires to sell a particular security or currency from its
portfolio on which it has written a call option, or purchased a
put option, it will seek to effect a closing transaction prior
to, or concurrently with, the sale of the security or currency.
There is, of course, no assurance that the Fund will be able to
effect such closing transactions at favorable prices. If the
Fund cannot enter into such a transaction, it may be required to
hold a security or currency that it might otherwise have sold.
When the Fund writes a covered call option, it runs the risk of
not being able to participate in the appreciation of the
underlying securities or currencies above the exercise price, as
well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may
be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the
Fund.
The Fund will not write a covered call option if, as a
result, the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market
value of the Fund's net assets. In calculating the 25% limit, the
PAGE 33
Fund will offset, against the value of assets covering written
calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options
The Fund may write American or European style covered put
options and purchase options to close out options previously
written by the Fund. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the
obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at
the expiration of the option (European style). So long as the
obligation of the writer continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was
sold, requiring him to make payment of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including their related risks
and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis,
which means that the Fund would maintain in a segregated account
cash, U.S. government securities or other liquid high-grade debt
obligations in an amount not less than the exercise price or the
Fund will own an option to sell the underlying security or
currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all
times while the put option is outstanding. (The rules of a
clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in
circumstances where T. Rowe Price wishes to purchase the
underlying security or currency for the Fund's portfolio at a
price lower than the current market price of the security or
currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the
Fund would also receive interest on debt securities or currencies
maintained to cover the exercise price of the option, this
technique could be used to enhance current return during periods
of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency
would decline below the exercise price less the premiums
received. Such a decline could be substantial and result in a
significant loss to the Fund. In addition, the Fund, because it
does not own the specific securities or currencies which it may
be required to purchase in exercise of the put, cannot benefit
from appreciation, if any, with respect to such specific
securities or currencies.
PAGE 34
The Fund will not write a covered put option if, as a
result, the aggregate market value of all portfolio securities or
currencies covering put or call options exceeds 25% of the market
value of the Fund's net assets. In calculating the 25% limit, the
Fund will offset, against the value of assets covering written
puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The Fund may purchase American or European style put
options. As the holder of a put option, the Fund has the right
to sell the underlying security or currency at the exercise price
at any time during the option period (American style) or at the
expiration of the option (European style). The Fund may enter
into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase
put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies.
An example of such use of put options is provided below.
The Fund may purchase a put option on an underlying security
or currency (a "protective put") owned by the Fund as a defensive
technique in order to protect against an anticipated decline in
the value of the security or currency. Such hedge protection is
provided only during the life of the put option when the Fund, as
the holder of the put option, is able to sell the underlying
security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's
exchange value. For example, a put option may be purchased in
order to protect unrealized appreciation of a security or
currency where T. Rowe Price deems it desirable to continue to
hold the security or currency because of tax considerations. The
premium paid for the put option and any transaction costs would
reduce any capital gain otherwise available for distribution when
the security or currency is eventually sold.
The Fund may also purchase put options at a time when the
Fund does not own the underlying security or currency. By
purchasing put options on a security or currency it does not own,
the Fund seeks to benefit from a decline in the market price of
the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than
the exercise price during the life of the put option, the Fund
will lose its entire investment in the put option. In order for
the purchase of a put option to be profitable, the market price
of the underlying security or currency must decline sufficiently
below the exercise price to cover the premium and transaction
PAGE 35
costs, unless the put option is sold in a closing sale
transaction.
The Fund will not commit more than 5% of its assets to
premiums when purchasing put and call options. The premium paid
by the Fund when purchasing a put option will be recorded as an
asset of the Fund. This asset will be adjusted daily to the
option's current market value, which will be the latest sale
price at the time at which the net asset value per share of the
Fund is computed (close of New York Stock Exchange), or, in the
absence of such sale, the latest bid price. This asset will be
terminated upon expiration of the option, the selling (writing)
of an identical option in a closing transaction, or the delivery
of the underlying security or currency upon the exercise of the
option.
Purchasing Call Options
The Fund may purchase American or European style call
options. As the holder of a call option, the Fund has the right
to purchase the underlying security or currency at the exercise
price at any time during the option period (American style) or at
the expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may
purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its
current return. The Fund may also purchase call options in order
to acquire the underlying securities or currencies. Examples of
such uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of
acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call
options enables the Fund to acquire the securities or currencies
at the exercise price of the call option plus the premium paid.
At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities
or currencies directly. This technique may also be useful to the
Fund in purchasing a large block of securities or currencies that
would be more difficult to acquire by direct market purchases.
So long as it holds such a call option rather than the underlying
security or currency itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying
security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the
premium paid for the option.
The Fund will not commit more than 5% of its assets to
PAGE 36
premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it
owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for
this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While
the Fund would look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer
option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by
the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid
market while dealer options have none. Consequently, the Fund
will generally be able to realize the value of a dealer option it
has purchased only by exercising it or reselling it to the dealer
who issued it. Similarly, when the Fund writes a dealer option,
it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option.
While the Fund will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of
entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a
closing purchase transaction, it will not be able to liquidate
securities (or other assets) or currencies used as cover until
the option expires or is exercised. In the event of insolvency
of the contra party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in
material losses to the Fund. For example, since the Fund must
maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the
option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased
dealer options and the assets used to secure the written dealer
PAGE 37
options are illiquid securities. The Fund may treat the cover
used for written OTC options as liquid if the dealer agrees that
the Fund may repurchase the OTC option it has written for a
maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds
the intrinsic value of the option. Accordingly, the Fund will
treat dealer options as subject to the Fund's limitation on
illiquid securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its treatment
of such instrument accordingly.
Equity Index Fund
The only option activity the Fund currently may engage in is
the purchase of S&P 500 call options. Such activity is subject
to the same risks described above under "Purchasing Call
Options". The Fund reserves the right to engage in other options
activity, however.
All Funds
Futures Contracts
Futures contracts are a type of potentially high-risk
derivative.
Transactions in Futures
The Fund may enter into futures contracts including stock
index, interest rate and currency futures ("futures or futures
contracts"). The New Era Fund may also enter into futures on
commodities related to the types of companies in which it
invests, such as oil and gold futures. The Equity Index Fund may
only enter into stock index futures, such as the S&P 500 stock
index, to provide an efficient means of maintaining liquidity
while being invested in the market, to facilitate trading or to
reduce transaction costs. It will not use futures for hedging
purposes. Otherwise the nature of such futures and the
regulatory limitations and risks to which they are subject are
the same as those described below.
Stock index futures contracts may be used to provide a hedge
for a portion of the Fund's portfolio, as a cash management tool,
or as an efficient way for T. Rowe Price to implement either an
increase or decrease in portfolio market exposure in response to
changing market conditions. The Fund may purchase or sell
futures contracts with respect to any stock index. Nevertheless,
to hedge the Fund's portfolio successfully, the Fund must sell
PAGE 38
futures contacts with respect to indices or subindices whose
movements will have a significant correlation with movements in
the prices of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a
hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the
effective return on securities or currencies held or intended to
be acquired by the Fund. In this regard, the Fund could sell
interest rate or currency futures as an offset against the effect
of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect
of expected declines in interest rates or currency exchange
rates.
The Fund will enter into futures contracts which are traded
on national or foreign futures exchanges, and are standardized as
to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the CFTC. Futures are traded in
London, at the London International Financial Futures Exchange,
in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase
of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low
cost means of implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC.
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy,
options on futures contracts and foreign currency options traded
on a commodities exchange will be considered "related options".
This policy may be modified by the Board of Directors/Trustees
without a shareholder vote and does not limit the percentage of
the Fund's assets at risk to 5%.
PAGE 39
The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the
position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover or held in an
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a stock index) for a
specified price, date, time and place designated at the time the
contract is made. Brokerage fees are incurred when a futures
contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred
to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or sale
of a futures contract. Upon entering into a futures contract,
and to maintain the Fund's open positions in futures contracts,
the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of
cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as
"initial margin." The margin required for a particular futures
contract is set by the exchange on which the contract is traded,
and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are
customarily purchased and sold on margins that may range upward
from less than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by
PAGE 40
increase in the case of a sale or by decrease in the case of a
purchase) so that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of
favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the broker will pay
the excess to the Fund.
These subsequent payments, called "variation margin," to and
from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short
positions in the futures contract more or less valuable, a
process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require
actual future delivery of and payment for the underlying
instruments, in practice most futures contracts are usually
closed out before the delivery date. Closing out an open futures
contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for
the same aggregate amount of the identical securities and the
same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is
composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of
those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500
Index were $150, one contract would be worth $75,000 (500 units x
$150). The stock index futures contract specifies that no
delivery of the actual stock making up the index will take place.
Instead, settlement in cash occurs. Over the life of the
contract, the gain or loss realized by the Fund will equal the
difference between the purchase (or sale) price of the contract
and the price at which the contract is terminated. For example,
PAGE 41
if the Fund enters into a futures contract to buy 500 units of
the S&P 500 Index at a specified future date at a contract price
of $150 and the S&P 500 Index is at $154 on that future date, the
Fund will gain $2,000 (500 units x gain of $4). If the Fund
enters into a futures contract to sell 500 units of the stock
index at a specified future date at a contract price of $150 and
the S&P 500 Index is at $152 on that future date, the Fund will
lose $1,000 (500 units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts
are volatile and are influenced, among other things, by actual
and anticipated changes in the market and interest rates, which
in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a futures contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
PAGE 42
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
positions or short futures positions. The Fund may close its
positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional
cash would be required to be paid by or released to the Fund, and
the Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts
only on exchanges or boards of trade where there appears to be an
active market, there is no assurance that a liquid market on an
exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible
to close a futures contract, and in the event of adverse price
movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures
contracts have been used to hedge the underlying instruments, the
Fund would continue to hold the underlying instruments subject to
the hedge until the futures contracts could be terminated. In
such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of unexpected market
behavior, market or interest rate trends. There are several
risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures
contracts and movements in the prices of the underlying
instruments which are the subject of the hedge. T. Rowe Price
will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the
Fund's underlying instruments sought to be hedged.
PAGE 43
Successful use of futures contracts by the Fund for hedging
purposes is also subject to T. Rowe Price's ability to correctly
predict movements in the direction of the market. It is possible
that, when the Fund has sold futures to hedge its portfolio
against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the
futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a
certain degree, T. Rowe Price believes that over time the value
of the Fund's portfolio will tend to move in the same direction
as the market indices used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions, which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by T.
Rowe Price might not result in a successful hedging transaction
PAGE 44
over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of
futures in which it may invest.
Options (another type of potentially high-risk derivative)
on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in
return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell
the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option,
the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by the delivery
of the accumulated balance in the writer's futures margin account
which represents the amount by which the market price of the
futures contract, at exercise, exceeds (in the case of a call) or
is less than (in the case of a put) the exercise price of the
option on the futures contract. Purchasers of options who fail
to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to writing or purchasing call and put
options on stock index futures, the Fund may write or purchase
call and put options on stock indices. Such options would be
used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of
the Fund and other T. Rowe Price Funds. Such aggregated orders
would be allocated among the Funds and the other T. Rowe Price
Funds in a fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
PAGE 45
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in
futures or options transactions other than those described above,
it reserves the right to do so. Such futures and options trading
might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the
National Futures Association nor any domestic exchange regulates
activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of
trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a
position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or
foreign options transaction occurs. For these reasons, when the
Fund trades foreign futures or foreign options contracts, it may
not be afforded certain of the protective measures provided by
the Commodity Exchange Act, the CFTC's regulations and the rules
of the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In
PAGE 46
particular, funds received from the Fund for foreign futures or
foreign options transactions may not be provided the same
protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time the Fund's order is
placed and the time it is liquidated, offset or exercised.
All Funds, Except Equity Index Fund
Foreign Currency Transactions
A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the
interbank market conducted directly between currency traders
(usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions
are charged at any stage for trades.
The Fund may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:
First, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency
involved in the underlying security transactions, the Fund will
be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
Second, when T. Rowe Price believes that one currency may
experience a substantial movement against another currency,
including the U.S. dollar, it may enter into a forward contract
to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an
PAGE 47
effective proxy for other currencies. In such a case, the Fund
may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in the Fund.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered
into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly
uncertain. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the
longer term investment decisions made with regard to overall
diversification strategies. However, T. Rowe Price believes that
it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of
the Fund will be served.
The Fund may enter into forward contacts for any other
purpose consistent with the Fund's investment objective and
program. However, the Fund will not enter into a forward
contract, or maintain exposure to any such contract(s), if the
amount of foreign currency required to be delivered thereunder
would exceed the Fund's holdings of liquid, high-grade debt
securities, and currency available for cover of the forward
contract(s) or other suitable cover. In determining the amount
to be delivered under a contract, the Fund may net offsetting
positions.
At the maturity of a forward contract, the Fund may sell the
portfolio security and make delivery of the foreign currency, or
it may retain the security and either extend the maturity of the
forward contract (by "rolling" that contract forward) or may
initiate a new forward contract.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in
forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices
decline during the period between the Fund's entering into a
forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of
PAGE 48
the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent of the price
of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange
contracts will generally be limited to the transactions described
above. However, the Fund reserves the right to enter into
forward foreign currency contracts for different purposes and
under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless
deemed appropriate by T. Rowe Price. It also should be realized
that this method of hedging against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange at a
future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any
potential gain which might result from an increase in the value
of that currency.
Although the Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts
The Fund may enter into certain option, futures, and forward
foreign exchange contracts, including options and futures on
currencies, which will be treated as Section 1256 contracts or
straddles.
Transactions which are considered Section 1256 contracts
will be considered to have been closed at the end of the Fund's
fiscal year and any gains or losses will be recognized for tax
purposes at that time. Such gains or losses from the normal
closing or settlement of such transactions will be characterized
as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument.
The Fund will be required to distribute net gains on such
PAGE 49
transactions to shareholders even though it may not have closed
the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts,
including options and futures on currencies, which offset a
foreign dollar denominated bond or currency position may be
considered straddles for tax purposes, in which case a loss on
any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding
period of the securities or currencies comprising the straddle
will be deemed not to begin until the straddle is terminated.
For securities offsetting a purchased put, this adjustment of the
holding period may increase the gain from sales of securities
held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an
equity security will not include the period of time the option is
outstanding.
Losses on written covered calls and purchased puts on
securities, excluding certain "qualified covered call" options on
equity securities, may be long-term capital losses, if the
security covering the option was held for more than twelve months
prior to the writing of the option.
In order for the Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward
exchange contracts on currencies is qualifying income for
purposes of the 90% requirement. In addition, gains realized on
the sale or other disposition of securities, including option,
futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, the Fund
may be required to defer the closing out of option, futures or
foreign forward exchange contracts) beyond the time when it would
otherwise be advantageous to do so. It is anticipated that
unrealized gains on Section 1256 option, futures and foreign
forward exchange contracts, which have been open for less than
three months as of the end of the Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.
INVESTMENT RESTRICTIONS
PAGE 50
Fundamental policies may not be changed without the approval
of the lesser of (1) 67% of the Fund's shares present at a
meeting of shareholders if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (2) more
than 50% of the Fund's outstanding shares. Other restrictions in
the form of operating policies are subject to change by the
Fund's Board of Directors/Trustees without shareholder approval.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated
unless an excess over the percentage occurs immediately after,
and is caused by, an acquisition of securities or assets of, or
borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may
(i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse
repurchase agreements and make other investments
or engage in other transactions, which may involve
a borrowing, in a manner consistent with the
Fund's investment objective and program, provided
that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) less
liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in
accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other
persons to the extent permitted by applicable law;
(2) Commodities. Purchase or sell physical
commodities; except that it may enter into futures
contracts and options thereon;
(3) (a) Industry Concentration (All Funds, except
Health Sciences and Financial Services
Funds). Purchase the securities of any
issuer if, as a result, more than 25% of the
value of the Fund's total assets would be
invested in the securities of issuers having
their principal business activities in the
same industry;
PAGE 51
(b) Industry Concentration (Health Sciences and
Financial Services Funds). Purchase the
securities of any issuer if, as a result,
more than 25% of the value of the Fund's
total assets would be invested in the
securities of issuers having their principal
business activities in the same industry;
provided, however, that (i) the Health
Sciences Fund will invest more than 25% of
its total assets in the health sciences
industry as defined in the Fund's prospectus;
and (ii) the Financial Services Fund will
invest more than 25% of its total assets in
the financial services industry as defined in
the Fund's prospectus.
(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an
interfund lending program with other Price Funds
provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed
33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt
securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer
Purchase a security if, as a result, with respect
to 75% of the value of its total assets, more than
5% of the value of the Fund's total assets would
be invested in the securities of a single issuer,
except securities issued or guaranteed by the U.S.
Government or any of its agencies or
instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer
(All Funds, except Capital Opportunity). Purchase
a security if, as a result, with respect to 75% of
the value of the Fund's total assets, more than
10% of the outstanding voting securities of any
issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities);
(7) Real Estate. Purchase or sell real estate
including limited partnership interests therein,
unless acquired as a result of ownership of
securities or other instruments (but this shall
not prevent the Fund from investing in securities
PAGE 52
or other instruments backed by real estate or in
securities of companies engaged in the real estate
business);
(8) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940; or
(9) Underwriting. Underwrite securities issued by
other persons, except to the extent that the Fund
may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in
connection with the purchase and sale of its
portfolio securities in the ordinary course of
pursuing its investment program.
NOTES
The following notes should be read in connection with
the above-described fundamental policies. The notes are
not fundamental policies.
With respect to investment restrictions (1) and (4), the
Fund will not borrow from or lend to any other Price
Fund unless each Fund applies for and receives an
exemptive order from the SEC or the SEC issues rules
permitting such transactions. The Fund has no current
intention of engaging in any such activity and there is
no assurance the SEC would grant any order requested by
the Fund or promulgate any rules allowing the
transactions.
With respect to investment restriction (2), the Fund
does not consider currency contracts or hybrid
investments to be commodities.
For purposes of investment restriction (3), U.S., state
or local governments, or related agencies or
instrumentalities, are not considered an industry.
Industries are determined by reference to the
classifications of industries set forth in the Fund's
semi-annual and annual reports.
For purposes of investment restriction (4), the Fund
will consider the acquisition of a debt security to
include the execution of a note or other evidence of an
extension of credit with a term of more than nine
months.
PAGE 53
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase
additional securities when money borrowed
exceeds 5% of its total assets;
(2) Control of Portfolio Companies. Invest in
companies for the purpose of exercising
management or control;
(3) Futures Contracts. Purchase a futures contract
or an option thereon if, with respect to
positions in futures or options on futures which
do not represent bona fide hedging, the
aggregate initial margin and premiums on such
options would exceed 5% of the Fund's net asset
value;
(4) Illiquid Securities. Purchase illiquid
securities if, as a result, more than 15% of its
net assets would be invested in such
securities;
(5) Investment Companies. Purchase securities of
open-end or closed-end investment companies
except in compliance with the Investment Company
Act of 1940;
(6) Margin. Purchase securities on margin, except
(i) for use of short-term credit necessary for
clearance of purchases of portfolio securities
and (ii) it may make margin deposits in
connection with futures contracts or other
permissible investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or,
in any manner, transfer any security owned by
the Fund as security for indebtedness except as
may be necessary in connection with permissible
borrowings or investments and then such
mortgaging, pledging or hypothecating may not
exceed 33 1/3% of the Fund's total assets at the
time of borrowing or investment;
(8) Oil and Gas Programs. Purchase participations
or other direct interests in, or enter into
leases with respect to, oil, gas, or other
mineral exploration or development programs if,
PAGE 54
as a result thereof, more than 5% of the value
of the total assets of the Fund would be
invested in such programs;
(9) Options, Etc. Invest in puts, calls, straddles,
spreads, or any combination thereof, except to
the extent permitted by the prospectus and
Statement of Additional Information;
(10) Short Sales. Effect short sales of securities;
(11) Warrants. Invest in warrants if, as a result
thereof, more than 10% of the value of the net
assets of the Fund would be invested in
warrants;
Blue Chip Growth, Capital Opportunity, Diversified Small-Cap
Growth, Financial Services, Health Sciences, Mid-Cap Value, and
Value Funds
Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, the Fund may invest all
of its assets in a single investment company or a series thereof
in connection with a "master-feeder" arrangement. Such an
investment would be made where the Fund (a "Feeder"), and one or
more other Funds with the same investment objective and program
as the Fund, sought to accomplish its investment objective and
program by investing all of its assets in the shares of another
investment company (the "Master"). The Master would, in turn,
have the same investment objective and program as the Fund. The
Fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of
Feeder funds. In the event that the Fund exercises its right to
convert to a Master Fund/Feeder Fund structure, it will do so in
compliance with the Guidelines for Registration of a Master
Fund/Feeder Fund as established by the North American Securities
Administrators Association, Inc. ("NASAA").
MANAGEMENT OF FUNDS
The officers and directors of the Fund are listed below.
Unless otherwise noted, the address of each is 100 East Pratt
Street, Baltimore, Maryland 21202. Except as indicated, each has
PAGE 55
been an employee of T. Rowe Price for more than five years. In
the list below, the Fund's directors who are considered
"interested persons" of T. Rowe Price as defined under
Section 2(a)(19) of the Investment Company Act of 1940 are noted
with an asterisk (*). These directors are referred to as inside
directors by virtue of their officership, directorship, and/or
employment with T. Rowe Price.
All Funds
Independent Directors/Trustees
DONALD W. DICK, JR., Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm; formerly (5/89-6/95)
Principal, Overseas Partners, Inc., a financial investment firm;
formerly (6/65-3/89) Director and Vice President-Consumer
Products Division, McCormick & Company, Inc., international food
processors; Director, Waverly, Inc., Baltimore, Maryland;
Address: P.O. Box 491, Chilmark, MA 02535-0491
DAVID K. FAGIN, Chairman, Chief Executive Officer and Director,
Golden Star Resources, Ltd.; formerly (1986-7/91) President,
Chief Operating Officer and Director, Homestake Mining Company;
Address: One Norwest Center, 1700 Lincoln Street, Suite 1950,
Denver, Colorado 80203
HANNE M. MERRIMAN, Retail business consultant; formerly President
and Chief Operating Officer (1991-92), Nan Duskin, Inc., a
women's specialty store, Director (1984-1990) and
Chairman (1989-90) Federal Reserve Bank of Richmond, and
President and Chief Executive Officer (1988-89), Honeybee, Inc.,
a division of Spiegel, Inc.; Director, Central Illinois Public
Service Company, CIPSCO Incorporated, The Rouse Company, State
Farm Mutual Automobile Insurance Company and USAir Group, Inc.;
Address: 3201 New Mexico Avenue, N.W., Suite 350, Washington,
D.C. 20016
HUBERT D. VOS, President, Stonington Capital Corporation, a
private investment company; Address: 1114 State Street, Suite
247, P.O. Box 90409, Santa Barbara, California 93190-0409
PAUL M. WYTHES, Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership, providing equity capital to
young high technology companies throughout the United States;
Director, Teltone Corporation, Interventional Technologies Inc.
and Stuart Medical, Inc.; Address: 755 Page Mill Road, Suite
A200, Palo Alto, California 94304-1005
Officers
HENRY H. HOPKINS, Vice President--Director and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Trust Company; Vice President, Rowe Price-Fleming
PAGE 56
International, Inc. and T. Rowe Price Retirement Plan Services,
Inc.
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
J. JEFFREY LANG, Assistant Vice President--Assistant Vice
President, T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
Balanced Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
RICHARD T. WHITNEY, President--Vice President of T. Rowe Price
and T. Rowe Price Trust Company; Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President--Managing Director, T. Rowe
Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
JAMES A. C. KENNEDY III, Vice President and Director--Managing
Director of T. Rowe Price; Chartered Financial Analyst
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price;
Vice President of Rowe Price-Fleming International, Inc. and T.
Rowe Price Trust Company
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
Blue Chip Growth Fund
LARRY J. PUGLIA, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
*THOMAS H. BROADUS, JR., Executive Vice President--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
PAGE 57
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
JAMES A. C. KENNEDY III, Director--Managing Director of T. Rowe
Price; Chartered Financial Analyst
BRIAN W. H. BERGHUIS, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
STEPHANIE C. CLANCY, Vice President--Assistant Vice President, T.
Rowe Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President--Assistant Vice President, T.
Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc.; Boston, Massachusetts
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
Capital Appreciation Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*GEORGE A. ROCHE, Trustee--President, Chief Executive Officer,
Chairman of the Board, and Managing Director, T. Rowe Price; Vice
President and Director, Rowe Price-Fleming International, Inc.
*M. DAVID TESTA, Vice President and Trustee--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
RICHARD P. HOWARD, President--Vice President of T. Rowe Price;
Chartered Financial Analyst
ARTHUR B. CECIL III, Vice President--Vice President of T. Rowe
Price; Chartered Financial Analyst
CHARLES A. MORRIS, Vice President--Vice President of T. Rowe
PAGE 58
Price; Chartered Financial Analyst
CHARLES M. OBER, Vice President--Vice President, T. Rowe Price,
Chartered Financial Analyst
Capital Opportunity Fund
*JOHN H. LAPORTE, JR., President and Director--Managing Director,
T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board, T. Rowe Price; Chairman of the Board, T. Rowe Price
Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and
T. Rowe Price Investment Services, Inc; President and Trust
Officer, T. Rowe Price Trust Company; Director, Rowe Price-
Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
JOHN F. WAKEMAN, Executive Vice President--Vice President, T.
Rowe Price
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
BRIAN W. H. BERGHUIS, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
STEPHANIE C. CLANCY, Vice President--Assistant Vice President, T.
Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
Diversified Small-Cap Growth Fund
*JOHN H. LAPORTE, JR., Vice President and Director--Managing
Director, T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Vice Chairman of
the Board, T. Rowe Price; Chairman of the Board, T. Rowe Price
Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and
T. Rowe Price Investment Services, Inc; President and Trust
Officer, T. Rowe Price Trust Company; Director, Rowe Price-
Fleming International, Inc. and Rhone-Poul
RICHARD T. WHITNEY, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
KRISTEN F. CULP, Vice President--Assistant Vice President, T.
Rowe Price
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
PAGE 59
Dividend Growth Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board, T. Rowe Price; Chairman of the Board, T. Rowe Price
Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and
T. Rowe Price Investment Services, Inc; President and Trust
Officer, T. Rowe Price Trust Company; Director, Rowe Price-
Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst;
Chartered Investment Counselor
JAMES A. C. KENNEDY III, Director--Managing Director of T. Rowe
Price; Chartered Financial Analyst
WILLIAM J. STROMBERG, President--Vice President, T. Rowe Price
BRIAN C. ROGERS, Executive Vice President--Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
ARTHUR B. CECIL III, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
STEPHANIE C. CLANCY, Vice President--Assistant Vice President, T.
Rowe Price
MICHAEL W. HOLTON, Vice President--Employee, T. Rowe Price,
formerly Research Analyst at Bowles, Hollowell, Conner and
Company
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price
Equity Income Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board, T. Rowe Price; Chairman of the Board, T. Rowe Price
Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and
T. Rowe Price Investment Services, Inc; President and Trust
Officer, T. Rowe Price Trust Company; Director, Rowe Price-
Fleming International, Inc. and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Trustee--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst;
Chartered Investment Counselor
BRIAN C. ROGERS, President--Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
JAMES A. C. KENNEDY III, Trustee--Managing Director of T. Rowe
PAGE 60
Price; Chartered Financial Analyst
*THOMAS H. BROADUS, JR., Vice President--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
Equity Index Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
JAMES A. C. KENNEDY III, Director--Managing Director of T. Rowe
Price; Chartered Financial Analyst
RICHARD T. WHITNEY, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
KRISTEN F. CULP, Executive Vice President--Assistant Vice
President, T. Rowe Price
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
WENDY R. DIFFENBAUGH, Assistant Vice President--Assistant Vice
President, T. Rowe Price
Financial Services Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
PAGE 61
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
JAMES A. C. KENNEDY III, Director--Managing Director of T. Rowe
Price; Chartered Financial Analyst
DANIEL M. THERIAULT, President--Vice President, T. Rowe Price,
Chartered Financial Analyst; formerly Securities Analyst, John A.
Levin & Co.
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe Price
ROBERT J. MARCOTTE, Vice President--Vice President, T. Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
ANNA DOPKIN, Assistant Vice President--Employee, T. Rowe Price
SUSAN J. KLEIN, Assistant Vice President--Employee, T. Rowe Price
Growth & Income Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
*STEPHEN W. BOESEL, President and Director--Vice President, T.
Rowe Price
JAMES A. C. KENNEDY III, Director--Managing Director of T. Rowe
Price; Chartered Financial Analyst
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
ARTHUR B. CECIL III, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
DAVID M. LEE, Vice President--Assistant Vice President, T. Rowe
Price, formerly Marketing Representative at IBM
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price
Growth Stock Fund
PAGE 62
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
JAMES A. C. KENNEDY III, Vice President and Director--Managing
Director, T. Rowe Price; Chartered Financial Analyst
ROBERT W. SMITH, President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc.; Boston, Massachusetts
BRIAN W. H. BERGHUIS, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe
Price;Chartered Financial Analyst
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
JAMES D. PREY III, Vice President--Vice President, T. Rowe Price
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
CAROL G. BARTHA, Assistant Vice President--Employee, T. Rowe
Price
Health Sciences Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
*JOHN H. LAPORTE, JR., Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst
PAGE 63
JOSEPH KLEIN III, Executive Vice President--Vice President, T.
Rowe Price; Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES PEPIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly (1990-1992) Corporate Finance Analyst, Piper
Jaffray Inc.
JAMES D. PREY III, Vice President--Vice President, T. Rowe Price
DARRELL M. RILEY, Vice President--Employee, T. Rowe Price
MICHAEL F. SOLA, Vice President--Employee, T. Rowe Price,
formerly Systems Analyst/Programmer at SRA
Corporation
ANDREW BHAK, Assistant Vice President--Employee, T. Rowe Price;
formerly (1990-1995) Senior Healthcare Analyst, United States
General Accounting Office
Mid-Cap Equity Growth Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*JAMES A. C. KENNEDY III, Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst
*JOHN H. LAPORTE JR., Director--Managing Director, T. Rowe Price;
Chartered Financial Analyst
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
BRIAN W.H. BERGHUIS, Executive Vice President--Vice President, T.
Rowe Price; Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President--Assistant Vice President, T.
Rowe Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, Vice President--Vice President, T. Rowe Price
CHARLES A. MORRIS, Vice President--Vice President of T. Rowe
Price; Chartered Financial Analyst
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
PAGE 64
Mid-Cap Growth Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*JAMES A. C. KENNEDY III, Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst
*JOHN H. LAPORTE, JR., Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst
BRIAN W. H. BERGHUIS, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
THOMAS J. HUBER, Vice President--Assistant Vice President, T.
Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, Vice President--Vice President, T. Rowe Price
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
Mid-Cap Value Fund
**M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
GREGORY A. McCRICKARD, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
PRESTON G. ATHEY, Vice President--Vice President of T. Rowe
Price; Chartered Financial Analyst
HUGH M. EVANS III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. FISHER, Vice President--Vice President, T. Rowe Price
JAMES A. C. KENNEDY III, Vice President--Managing Director, T.
PAGE 65
Rowe Price; Chartered Financial Analyst
BRIAN C. ROGERS, Vice President--Director and Managing Director,
T. Rowe Price; Chartered Financial Analyst
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price
New America Growth Fund
*JOHN H. LAPORTE, JR., President and Trustee--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Trustee--Chairman of the Board, Price-Fleming;
Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
BRIAN W. H. BERGHUIS, Executive Vice President--Vice President,
T. Rowe Price; Chartered Financial Analyst
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President----Assistant Vice President, T.
Rowe Price
KARA M. CHESEBY, Vice President--Vice President, T. Rowe Price,
formerly Vice President, Legg Mason Wood Walker
CHARLES PEPIN, Vice President--Employee, T. Rowe Price
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
New Era Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*GEORGE A. ROCHE, Vice President--Chief Executive Officer,
President, Chairman of the Board, and Managing Director, T. Rowe
Price; Vice President and Director, Rowe Price-Fleming
PAGE 66
International, Inc.
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
JAMES A. C. KENNEDY III, Vice President and Director--Managing
Director, T. Rowe Price; Chartered Financial Analyst
CHARLES M. OBER, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
DAVID J. WALLACK, Executive Vice President--Vice President, T.
Rowe Price
HUGH M. EVANS III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
DAVID M. LEE, Vice President--Assistant Vice President, T.
Rowe Price
ROBERT J. MARCOTTE, Vice President--Vice President, T. Rowe Price
New Horizons Fund
*JOHN H. LAPORTE, President and Director--Managing Director of T.
Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
PRESTON G. ATHEY, Vice President--Vice President of T. Rowe
Price; Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
BRIAN W. H. BERGHUIS, Vice President--Vice President of T. Rowe
Price; Chartered Financial Analyst
LISE J. BUYER, Vice President--Vice President, T. Rowe Price;
formerly (4/91-4/92) PC Analyst, Cowen & Co.; Chartered Financial
Analyst
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Vice President, T. Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
PAGE 67
THOMAS J. HUBER, Vice President--Assistant Vice President, T.
Rowe Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES PEPIN, Vice President--Assistant Vice President, T. Rowe
Price
DARRELL M. RILEY, Vice President--Employee, T .Rowe Price
STEVEN B. ROORDA, Vice President--Vice President, T. Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
FRANCIES W. HAWKS, Assistant Vice President--Assistant Vice
President of T. Rowe Price
Small-Cap Stock Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
GREGORY A. McCRICKARD, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
LISE J. BUYER, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
HUGH M. EVANS III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. FISHER, Vice President--Assistant Vice President, T.
Rowe Price
JAMES A. C. KENNEDY III, Vice President--Managing Director of T.
Rowe Price; Chartered Financial Analyst
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
Science & Technology Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director,
PAGE 68
T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
CHARLES A. MORRIS, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
MARC L. BAYLIN, Vice President--Assistant Vice President, T. Rowe
Price; formerly financial analyst, Rausher Pierce Refsnes
LISE J. BUYER, Vice President--Vice President, T. Rowe Price;
formerly (4/91-4/92) PC Analyst, Cowen & Co.; Chartered Financial
Analyst
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Vice President, T. Rowe Price
ROBERT N. GENSLER, Vice President--Vice President, T. Rowe Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
JOSEPH KLEIN III, Vice President--Vice President, T. Rowe
Price;Chartered Financial Analyst
JAMES D. PREY III, Vice President--Vice President, T. Rowe Price
MICHAEL F. SOLA, Vice President--Employee, T. Rowe Price,
formerly Systems Analyst/Programmer at SRA Corporation
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
Small-Cap Value Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director
of T. Rowe Price; Chartered Financial Analyst
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Chairman of the Board, Price-Fleming;
Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
JAMES A. C. KENNEDY III, Vice President--Managing Director, T.
Rowe Price; Chartered Financial Analyst
PAGE 69
PRESTON G. ATHEY, President--Vice President, T. Rowe Price;
Chartered Financial Analyst
HUGH M. EVANS III, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, Vice President--Employee, T. Rowe Price
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
LAUREN A. ROMEO, Vice President--Employee, T. Rowe Price,
Chartered Financial Analyst
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
FRANCIES W. HAWKS, Assistant Vice President--Assistant Vice
President of T. Rowe Price
Value Fund
*JAMES S. RIEPE, Chairman of the Board--Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the
Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Investment Services, Inc;
President and Trust Officer, T. Rowe Price Trust Company;
Director, Rowe Price-Fleming International, Inc. and Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Chairman of the
Board, Price-Fleming; Vice Chairman of the Board, Chief
Investment Officer, and Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Trust Company; Chartered
Financial Analyst; Chartered Investment Counselor
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
STEPHANIE C. CLANCY, Vice President--Assistant Vice President, T.
Rowe Price
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
Kara M. Cheseby, Vice President--Vice President, T. Rowe Price,
formerly Vice President, Legg Mason Wood Walker
NATHANIEL S. LEVY, Vice President--Vice President, T. Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc., Boston, Massachusetts
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly Securities Analyst,
John A. Levin & Co.
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price
COMPENSATION TABLE
PAGE 70
The Funds do not pay pension or retirement benefits to their
officers or directors/trustees. Also, any director/trustee of a
Fund who is an officer or employee of T. Rowe Price does not
receive any remuneration from the Fund.
_________________________________________________________________
Total Compensation
Aggregate from Fund and
Name of Compensation Fund Complex
Person, from Paid to
Position Fund(a) Directors(b)
_________________________________________________________________
Balanced Fund
Leo C. Bailey(c) $ 512 $42,083
Director
Donald W. Dick, Jr., 1,563 72,917
Director
David K. Fagin, 2,331 59,167
Director
Addison Lanier(c) 512 42,083
Director
John K. Major(c) 883 34,167
Director
Hanne M. Merriman, 2,331 59,167
Director
Hubert D. Vos, 2,331 59,167
Director
Paul M. Wythes, 1,772 69,667
Director
_________________________________________________________________
Blue Chip Growth Fund
Leo C. Bailey(c) $ 281 $42,083
Director
Donald W. Dick, Jr., 1,140 72,917
Director
David K. Fagin, 1,280 59,167
Director
Addision Lanier(c) 281 42,083
Director
PAGE 71
John K. Major(c) 370 34,167
Director
Hanne M. Merriman, 1,280 59,167
Director
Hubert D. Vos, 1,280 59,167
Director
Paul M. Wythes, 1,188 69,667
Director
_________________________________________________________________
Capital Appreciation Fund
Leo C. Bailey(c) $ 599 $42,083
Director
Donald W. Dick, Jr., 1,693 72,917
Director
David K. Fagin, 2,646 59,167
Director
Addision Lanier(c) 599 42,083
Director
John K. Major(c) 1,078 34,167
Director
Hanne M. Merriman, 2,646 59,167
Director
Hubert D. Vos, 2,646 59,167
Director
Paul M. Wythes, 1,971 69,667
Director
_________________________________________________________________
Capital Opportunity Fund
Leo C. Bailey(c) $ 241 $42,083
Director
Donald W. Dick, Jr., 1,026 72,917
Director
David K. Fagin, 1,024 59,167
Director
Addision Lanier(c) 241 42,083
PAGE 72
Director
John K. Major(c) 280 34,167
Director
Hanne M. Merriman, 1,024 59,167
Director
Hubert D. Vos, 1,024 59,167
Director
Paul M. Wythes, 1,046 69,667
Director
_________________________________________________________________
Dividend Growth Fund
Leo C. Bailey(c) $ 248 $42,083
Director
Donald W. Dick, Jr., 1,041 72,917
Director
David K. Fagin, 1,043 59,167
Director
Addision Lanier(c) 248 42,083
Director
John K. Major(c) 297 34,167
Director
Hanne M. Merriman, 1,043 59,167
Director
Hubert D. Vos, 1,043 59,167
Director
Paul M. Wythes, 1,068 69,667
Director
_________________________________________________________________
Equity Income Fund
Leo C. Bailey(c) $1,876 $42,083
Trustee
Donald W. Dick, Jr., 4,805 72,917
Trustee
David K. Fagin, 7,418 59,167
Trustee
PAGE 73
Addision Lanier(c) 1,876 42,083
Trustee
John K. Major(c) 1,876 34,167
Trustee
Hanne M. Merriman, 7,418 59,167
Trustee
Hubert D. Vos, 7,418 59,167
Trustee
Paul M. Wythes, 4,805 69,667
Trustee
_________________________________________________________________
Equity Index Fund
Leo C. Bailey(c) $ 430 $42,083
Director
Donald W. Dick, Jr., 1,437 72,917
Director
David K. Fagin, 2,029 59,167
Director
Addision Lanier(c) 430 42,083
Director
John K. Major(c) 701 34,167
Director
Hanne M. Merriman, 2,029 59,167
Director
Hubert D. Vos, 2,029 59,167
Director
Paul M. Wythes, 1,587 69,667
Director
_________________________________________________________________
Financial Services Fund
Donald W. Dick, Jr., $249 $72,917
Director
David K. Fagin, 249 59,167
Director
Hanne M. Merriman, 249 59,167
PAGE 74
Director
Hubert D. Vos, 249 59,167
Director
Paul M. Wythes, 249 69,667
Director
_________________________________________________________________
Growth & Income Fund
Leo C. Bailey(c) $1,020 $42,083
Director
Donald W. Dick, Jr., 2,581 72,917
Director
David K. Fagin, 4,686 59,167
Director
Addision Lanier(c) 1,020 42,083
Director
John K. Major(c) 1,876 34,167
Director
Hanne M. Merriman, 4,686 59,167
Director
Hubert D. Vos, 4,686 59,167
Director
Paul M. Wythes, 3,052 69,667
Director
_________________________________________________________________
Growth Stock Fund
Leo C. Bailey(c) $1,476 $42,083
Director
Donald W. Dick, Jr., 3,417 72,917
Director
David K. Fagin, 5,441 59,167
Director
Addision Lanier(c) 1,476 42,083
Director
John K. Major(c) 1,876 34,167
Director
PAGE 75
Hanne M. Merriman, 5,441 59,167
Director
Hubert D. Vos, 5,441 59,167
Director
Paul M. Wythes, 3,681 69,667
Director
_________________________________________________________________
Mid-Cap Equity Growth Fund
Donald W. Dick, Jr., $416 72,917
Director
David K. Fagin, 417 59,167
Director
Hanne M. Merriman, 417 59,167
Director
Hubert D. Vos, 417 59,167
Director
Paul M. Wythes, 416 69,667
Director
_________________________________________________________________
Mid-Cap Growth Fund
Leo C. Bailey(c) $ 354 $42,083
Director
Donald W. Dick, Jr., 1,366 72,917
Director
David K. Fagin, 1,858 59,167
Director
Addision Lanier(c) 354 42,083
Director
John K. Major(c) 529 34,167
Director
Hanne M. Merriman, 1,858 59,167
Director
Hubert D. Vos, 1,858 59,167
Director
Paul M. Wythes, 1,454 69,667
PAGE 76
Director
_________________________________________________________________
Mid-Cap Value Fund
Donald W. Dick, Jr., $421 72,917
Director
David K. Fagin, 427 59,167
Director
Hanne M. Merriman, 427 59,167
Director
Hubert D. Vos, 427 59,167
Director
Paul M. Wythes, 422 69,667
Director
_________________________________________________________________
New America Growth Fund
Leo C. Bailey(c) $ 685 $42,083
Trustee
Donald W. Dick, Jr., 1,929 72,917
Trustee
David K. Fagin, 3,250 59,167
Trustee
Addision Lanier(c) 685 42,083
Trustee
John K. Major(c) 1,268 34,167
Trustee
Hanne M. Merriman, 3,250 59,167
Trustee
Hubert D. Vos, 3,250 59,167
Trustee
Paul M. Wythes, 2,256 69,667
Trustee
_________________________________________________________________
New Era Fund
Leo C. Bailey(c) $ 721 $42,083
Director
PAGE 77
Donald W. Dick, Jr., 1,974 72,917
Director
David K. Fagin, 3,314 59,167
Director
Addision Lanier(c) 721 42,083
Director
John K. Major(c) 1,317 34,167
Director
Hanne M. Merriman, 3,314 59,167
Director
Hubert D. Vos, 3,314 59,167
Director
Paul M. Wythes, 2,297 69,667
Director
_________________________________________________________________
New Horizons Fund
Leo C. Bailey(c) $1,560 $42,083
Director
Donald W. Dick, Jr., 3,787 72,917
Director
David K. Fagin, 6,146 59,167
Director
Addision Lanier(c) 1,560 42,083
Director
John K. Major(c) 1,876 34,167
Director
Hanne M. Merriman, 6,146 59,167
Director
Hubert D. Vos, 6,146 59,167
Director
Paul M. Wythes, 4,035 69,667
Director
_________________________________________________________________
Small-Cap Stock Fund
Leo C. Bailey(c) $ 333 $42,083
PAGE 78
Director
Donald W. Dick, Jr., 1,204 72,917
Director
David K. Fagin, 1,457 59,167
Director
Addision Lanier(c) 333 42,083
Director
John K. Major(c) 486 34,167
Director
Hanne M. Merriman, 1,457 59,167
Director
Hubert D. Vos, 1,457 59,167
Director
Paul M. Wythes, 1,293 69,667
Director
_________________________________________________________________
Science & Technology Fund
Leo C. Bailey(c) $1,309 $42,083
Director
Donald W. Dick, Jr., 3,191 72,917
Director
David K. Fagin, 5,381 59,167
Director
Addision Lanier(c) 1,309 42,083
Director
John K. Major(c) 1,876 34,167
Director
Hanne M. Merriman, 5,381 59,167
Director
Hubert D. Vos, 5,381 59,167
Director
Paul M. Wythes, 3,545 69,667
Director
_________________________________________________________________
Small-Cap Value Fund
PAGE 79
Leo C. Bailey(c) $ 658 $42,083
Director
Donald W. Dick, Jr., 1,871 72,917
Director
David K. Fagin, 3,108 59,167
Director
Addision Lanier(c) 658 42,083
Director
John K. Major(c) 1,205 34,167
Director
Hanne M. Merriman, 3,108 59,167
Director
Hubert D. Vos, 3,108 59,167
Director
Paul M. Wythes, 2,178 69,667
Director
_________________________________________________________________
Value Fund
Leo C. Bailey(c) $ 235 $42,083
Director
Donald W. Dick, Jr., 1,011 72,917
Director
David K. Fagin, 987 59,167
Director
Addision Lanier(c) 235 42,083
Director
John K. Major(c) 267 34,167
Director
Hanne M. Merriman, 987 59,167
Director
Hubert D. Vos, 987 59,167
Director
Paul M. Wythes, 1,027 69,667
Director
PAGE 80
(a) Amounts in this Column are based on accrued compensation for
calendar year 1996.
(b) Amounts in this column are based on compensation received
from January 1, 1996 to December 31, 1996. The T. Rowe
Price complex included 76 funds as of December 31, 1996.
(c) Messrs. Bailey, Lanier, and Major retired from their
positions with the Funds in April 1996.
All Funds
The Fund's Executive Committee, consisting of the Fund's
interested directors/trustees, has been authorized by its
respective Board of Directors/Trustees to exercise all powers of
the Board to manage the Funds in the intervals between meetings
of the Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors
of the Fund, as a group, owned less than 1% of the outstanding
shares of the Fund.
As of March 31, 1997, the following shareholders
beneficially owned more than 5% of the outstanding shares of the
Growth Stock, New Era, New Horizons and Growth & Income Funds:
Pirateline & Co., FBO Spectrum Growth Fund Acct., Attn.: Mark
White, State Street Bank & Trust Co., 1776 Heritage Drive - 4W,
North Quincy, Massachusetts 02171-2197; Blue Chip Growth, Capital
Appreciation, Dividend Growth, Mid-Cap Growth, New Era, Small-Cap
Value and Science & Technology Funds: Charles Schwab & Co. Inc.,
Reinvest. Account, Attn.: Mutual Fund Dept., 101 Montgomery
Street, San Francisco, California 94104-4122; Small-Cap Stock
Fund: Sigler & Co. of Smithsonian Inst., Wellington Trust Co.,
RD7 9866-77, Attn.: Jasmine Felix, 4 New York Plaza, 4th Floor,
New York, New York 10004-2413; Mid-Cap Equity Growth Fund:
Mercantile Bank of St. Louis, Attn.: Trust Securities Unit 17-1,
P.O. Box 387, St. Louis, Missouri 63166-0387; Atlantic Trust
Company NA, Attn.: Nominee Account, 100 Federal Street, 37th
Floor, Boston, Massachusetts 02110-1802; Conref & Company, c/o
Mercantile Bank of St. Louis, Attn.: Trust Securities Unit 17-1,
P.O. Box 387, St. Louis, Missouri 63166-0387; Wentworth-Douglass
Hospital, Attn.: Rayna Feldman, 789 Central Avenue, Dover, New
Hampshire 03820-2589.
INVESTMENT MANAGEMENT SERVICES
Services
PAGE 81
Under the Management Agreement, T. Rowe Price provides the
Fund with discretionary investment services. Specifically, T.
Rowe Price is responsible for supervising and directing the
investments of the Fund in accordance with the Fund's investment
objectives, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. T. Rowe
Price is also responsible for effecting all security transactions
on behalf of the Fund, including the negotiation of commissions
and the allocation of principal business and portfolio brokerage.
In addition to these services, T. Rowe Price provides the Fund
with certain corporate administrative services, including:
maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal laws;
monitoring the financial, accounting, and administrative
functions of the Fund; maintaining liaison with the agents
employed by the Fund such as the Fund's custodian and transfer
agent; assisting the Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as
officers, directors, and committee members of the Fund without
cost to the Fund.
The Management Agreement also provides that T. Rowe Price,
its directors, officers, employees, and certain other persons
performing specific functions for the Fund will only be liable to
the Fund for losses resulting from willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty.
All Funds, Except Equity Index and Mid-Cap Equity Growth Funds
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of
two components: a Group Management Fee ("Group Fee") and an
Individual Fund Fee ("Fund Fee"). The Fee is paid monthly to T.
Rowe Price on the first business day of the next succeeding
calendar month and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of
the daily Group Fee accruals ("Daily Group Fee Accruals") for
each month. The Daily Group Fee Accrual for any particular day
is computed by multiplying the Price Funds' group fee accrual as
determined below ("Daily Price Funds' Group Fee Accrual") by the
ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:
PAGE 82
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Next $16 billion
0.305% Next $30 billion
0.300% Thereafter
For the purpose of calculating the Group Fee, the Price
Funds include all the mutual funds distributed by T. Rowe Price
Investment Services, Inc., (excluding T. Rowe Price Equity Index
Fund and T. Rowe Price Spectrum Fund, Inc. and any institutional
or private label mutual funds). For the purpose of calculating
the Daily Price Funds' Group Fee Accrual for any particular day,
the net assets of each Price Fund are determined in accordance
with the Fund's prospectus as of the close of business on the
previous business day on which the Fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the
daily Fund Fee accruals ("Daily Fund Fee Accruals") for each
month. The Daily Fund Fee Accrual for any particular day is
computed by multiplying the fraction of one (1) over the number
of calendar days in the year by the individual Fund Fee Rate and
multiplying this product by the net assets of the Fund for that
day, as determined in accordance with the Fund's prospectus as of
the close of business on the previous business day on which the
Fund was open for business. The individual fund fees for each
Fund are listed in the chart below:
Individual Fund Fees
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%*
Capital Opportunity Fund 0.45%
Diversified Small-Cap Growth Fund _.__%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
Equity Index Fund 0.20%
Financial Services Fund 0.35%
PAGE 83
Growth & Income Fund 0.25%
Growth Stock Fund 0.25%
Health Sciences Fund 0.35%
Mid-Cap Growth Fund 0.35%
Mid-Cap Value Fund 0.35%
New America Growth Fund 0.35%
New Era Fund 0.25%
New Horizons Fund 0.35%
Small-Cap Stock Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
Value Fund 0.35%
*Subject to Performance Adjustment (please see page __).
The following chart sets forth the total management fees, if
any, paid to T. Rowe Price by each Fund, during the last three
years:
Fund 1996 1995 1994
Balanced $3,765,000 $2,778,000 $1,969,227
Blue Chip Growth 1,924,000 534,000 76,000
Capital Appreciation 4,218,000 4,940,000 4,161,612
Capital Opportunity 890,000 134,000 **
Dividend Growth 754,000 357,000 107,000
Equity Income 37,762,000 24,358,000 17,847,000
Equity Index 925,000 498,000 156,349
Financial Services ** * *
Growth & Income 12,048,000 8,195,000 5,984,000
Growth Stock 17,848,000 14,222,000 11,981,872
Health Sciences 750,000 * *
Mid-Cap Equity Growth ** * *
Mid-Cap Growth 4,390,000 1,234,000 545,000
Mid-Cap Value 22,000 * *
New America Growth 8,648,000 5,554,000 4,395,000
New Era 7,559,000 6,218,000 5,272,000
New Horizons 25,875,000 15,035,000 11,402,554
Small-Cap Stock 2,619,000 1,897,000 1,534,235
Science & Technology 19,792,000 11,393,000 4,467,208
Small-Cap Value 8,187,000 4,262,000 3,047,508
Value 748,000 19,000 **
* Prior to commencement of operations.
** Due to each Fund's expense limitation in effect at that time,
no management fees were paid by the Funds to T. Rowe Price.
PAGE 85
The Management Agreement between the Fund and T. Rowe Price
provides that the Fund will bear all expenses of its operations
not specifically assumed by T. Rowe Price.
Balanced, Blue Chip Growth, Capital Opportunity, Diversified
Small-Cap Growth, Dividend Growth, Equity Index, Financial
Services, Health Sciences, Mid-Cap Equity Growth, Mid-Cap Growth,
Mid-Cap Value, and Value Funds
The following chart sets forth expense ratio limitations and
the periods for which they are effective. For each, T. Rowe
Price has agreed to bear any Fund expenses which would cause the
Fund's ratio of expenses to average net assets to exceed the
indicated percentage limitations. The expenses borne by T. Rowe
Price are subject to reimbursement by the Fund through the
indicated reimbursement date, provided no reimbursement will be
made if it would result in the Fund's expense ratio exceeding its
applicable limitation.
Expense
Limitation Ratio Reimbursement
Fund Period Limitation Date
_______ ____________ ___________ _____________
Blue Chip
Growth(a) January 1, 1995- 1.25% December 31, 1998
December 31, 1996
Capital
Opportunity November 30, 1994- 1.35% December 31, 1998
December 31, 1996
Diversifed
Small-Cap
Growth June 30, 1997-
December 31, 1998 ____% December 31, 2000
Dividend
Growth(b) January 1, 1995- 1.10% December 31, 1998
December 31, 1996
Equity Index(c) January 1, 1996- 0.40% December 31, 1999
December 31, 1997
Financial
Services September 30, 1996- 1.25% December 31, 2000
December 31, 1998
Health Sciences December 29, 1995- 1.35% December 31, 1999
December 31, 1997
Mid-Cap Equity
Growth July 31, 1996- 0.85% December 31, 1999
December 31, 1997
PAGE 85
Mid-Cap Growth January 1, 1994- 1.25% December 31, 1997
December 31, 1995
Mid-Cap Value June 28, 1996- 1.25% December 31, 1999
December 31, 1997
Value September 30,1994- 1.10% December 31, 1998
December 31, 1996
(a) The Blue Chip Growth Fund previously operated under a 1.25%
limitation that expired December 31, 1994. The reimbursement
period for this limitation extends through December 31, 1996.
(b) The Dividend Growth Fund previously operated under a 1.00%
limitation that expired December 31, 1994. The reimbursement
period for this limitation extends through December 31, 1996.
(c) The Equity Index Fund previously operated under a 0.45%
limitation that expired December 31, 1995. The reimbursement
period for this limitation extends through December 31, 1997.
Each of the above-referenced Fund's Management Agreement also
provides that one or more additional expense limitation periods
(of the same or different time periods) may be implemented after
the expiration of the current expense limitation, and that with
respect to any such additional limitation period, the Fund may
reimburse T. Rowe Price, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional
expense limitation.
Pursuant to the Health Sciences Fund's current expense
limitation, $101,000 of management fees were not accrued by the
Fund for the year ended December 31, 1996.
Pursuant to the Blue Chip Growth Fund's current and previous
expense limitation, $214,000 of unaccrued fees and expenses were
repaid during the year ended December 31, 1996.
Pursuant to the Dividend Growth Fund's previous expense
limitation, $174,000 of unaccrued 1993-94 fees and expenses were
repaid by the Fund for the year ended December 31, 1996.
Additionally, $5,000 of unaccrued management fees related to the
current expense limitation are subject to reimbursement through
December 31, 1998.
Pursuant to the Equity Index Fund's current expense
limitation, $370,000 of management fees were not accrued by the
fund for the year ended December 31, 1996. Additionally,
$445,000 of unaccrued management fees related to a previous
expense limitation are subject to reimbursement through December
31, 1997.
Pursuant to Capital Opportunity Fund's expense limitation
that expired on December 31, 1996, $1,000 of management fees were
PAGE 86
not accrued by the fund for the year ended December 31, 1996.
Additionally, $156,000 of unaccrued 1994-95 fees and expenses are
subject to reimbursement through December 31, 1998.
Pursuant to the Value Fund's current expense limitation,
$35,000 of management fees were not accrued by the fund for the
year ended December 31, 1996. Additionally, $202,000 of unaccrued
1994-95 fees and expenses are subject to reimbursement through
December 31, 1998.
Pursuant to the Mid-Cap Growth Fund's previous expense
limitation, $58,000 of unaccrued management fees were repaid
during the year ended December 31, 1996.
Pursuant to the Mid-Cap Equity Growth Fund's current expense
limitation, $14,000 of management fees and $34,000 of expenses
were not accrued by the fund for the year ended December 31, 1996
and are subject to reimbursement through December 31, 1999.
Pursuant to the Mid-Cap Value Fund's current expense
limitation, $78,000 of management fees were not accrued by the
fund for the year ended December 31, 1996 and are subject to
reimbursement through December 31, 1999.
Pursuant to the Financial Services Fund's current expense
limitation, $24,000 of management fees were not accrued by the
fund for the year ended December 31, 1996 and $2,000 of other
expenses were borne by the manager.
Capital Appreciation Fund
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of
three components: a Group Management Fee ("Group Fee"), an
Individual Fund Fee ("Fund Fee") and a performance fee adjustment
("Performance Fee Adjustment") based on the performance of the
Fund relative to the Standard & Poor's 500 Stock Index (the
"Index"). The Fee is paid monthly to T. Rowe Price on the first
business day of the next succeeding calendar month and is
calculated as described below. The performance adjustment for
the year ended December 31, 1996, decreased management fees by
$1,530,000.
The Monthly Group Fee and Monthly Fund Fee are combined (the
"Combined Fee") and are subject to a downward Performance Fee
Adjustment until October 31, 1998, depending on the total return
investment performance of the Fund relative to the total return
performance of the Standard & Poor's 500 Stock Composite Index
(the "Index") during the previous thirty-six (36) months.
PAGE 87
Effective November 1, 1998, there will be no Performance Fee
Adjustment. The Performance Fee adjustment is computed as of the
end of each month and if any adjustment results, is subtracted
from the Combined Fee. No Performance Fee Adjustment is made to
the Combined Fee unless the investment performance ("Investment
Performance") of the Fund (stated as a percent) is exceeded by
the investment record ("Investment Record") of the Index (stated
as a percent) by at least one full point. (The difference
between the Investment Performance and Investment Record will be
referred to as the Investment Performance Differential.) The
Performance Fee Adjustment for any month is calculated by
multiplying the rate of the Performance Fee Adjustment
("Performance Fee Adjustment") (as determined below) achieved for
the 36-month period, times the average daily net assets of the
Fund for such 36-month period and dividing the product by 12.
The Performance Fee Adjustment Rate is calculated by multiplying
the Investment Performance Differential (rounded downward to the
nearest full point) times a factor of .02%. Regardless of the
Investment Performance Differential, the Performance Fee
Adjustment Rate shall not exceed (.30)%. the same period.
Example
For example, if the Investment Performance Differential
was (11.6), it would be rounded to (11). The
Investment Performance Differential of (11) would be
multiplied by .02% to arrive at the Performance Fee
Adjustment Rate of (.22)%. The (.22)% Performance Fee
Adjustment Rate would be multiplied by the fraction of 1/12
and that product would be multiplied by the Fund's average
daily net assets for the 36-month period to arrive at the
Performance Fee Adjustment.
The computation of the Investment Performance of the Fund
and the Investment Record of the Index will be made in accordance
with Rule 205-1 under the Investment Advisers Act of 1940 or any
other applicable rule as, from time to time, may be adopted or
amended. These terms are currently defined as follows:
The Investment Performance of the Fund is the sum of: (i)
the change in the Fund's net asset value per share during the
period; (ii) the value of the Fund's cash distributions per share
having an exdividend date occurring within the period; and (iii)
the per share amount of any capital gains taxes paid or accrued
during such period by the Fund for undistributed, realized long-
term capital gains.
The Investment Record of the Index is the sum of: (i) the
change in the level of the Index during the period; and (ii) the
PAGE 88
value, computed consistently with the Index, of cash
distributions having an exdividend date occurring within the
period made by companies whose securities comprise the Index.
Management Fee
Equity Index Fund
The Fund pays T. Rowe Price an annual investment management
fee in monthly installments of 0.20% of the average daily net
asset value of the Fund.
Mid-Cap Equity Growth Fund
The Fund pays T. Rowe Price an annual investment management
fee in monthly installments of 0.60% of the average daily net
asset value of the Fund.
Equity Income, Growth & Income, Growth Stock, New Era, and New
Horizons Funds
T. Rowe Price Spectrum Fund, Inc. The Funds listed above are a
party to a Special Servicing Agreement ("Agreement") between and
among T. Rowe Price Spectrum Fund, Inc. ("Spectrum Fund"), T.
Rowe Price, T. Rowe Price Services, Inc. and various other T.
Rowe Price funds which, along with the Fund, are funds in which
Spectrum Fund invests (collectively all such funds "Underlying
Price Funds").
The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund determines that
such Underlying Fund's share of the aggregate expenses of
Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the
Underlying Price Fund will bear those expenses in proportion to
the average daily value of its shares owned by Spectrum Fund,
provided further that no Underlying Price Fund will bear such
expenses in excess of the estimated savings to it. Such savings
are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been
invested directly in the Underlying Price Funds and the resulting
reduction in shareholder servicing costs. Although such cost
savings are not certain, the estimated savings to the Underlying
Price Funds generated by the operation of Spectrum Fund are
expected to be sufficient to offset most, if not all, of the
expenses incurred by Spectrum Fund.
All Funds
PAGE 89
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the Fund's
distributor. Investment Services is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. The
offering of the Fund's shares is continuous.
Investment Services is located at the same address as the
Fund and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.
Investment Services serves as distributor to the Fund
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that the Fund will pay all fees and expenses in
connection with: necessary state filings; preparing, setting in
type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services
will pay all fees and expenses in connection with: printing and
distributing prospectuses and reports for use in offering and
selling Fund shares; preparing, setting in type, printing, and
mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and
offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services'
expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in
connection with the sale of its shares in the various states in
which Investment Services is qualified as a broker-dealer. Under
the Underwriting Agreement, Investment Services accepts orders
for Fund shares at net asset value. No sales charges are paid by
investors or the Fund.
All Funds
CUSTODIAN
State Street Bank and Trust Company is the custodian for the
Fund's securities and cash, but it does not participate in the
Fund's investment decisions. Portfolio securities purchased in
the U.S. are maintained in the custody of the Bank and may be
entered into the Federal Reserve Book Entry System, or the
security depository system of the Depository Trust Corporation.
The Fund (other than Equity Index Fund) has entered into a
PAGE 90
Custodian Agreement with The Chase Manhattan Bank, N.A., London,
pursuant to which portfolio securities which are purchased
outside the United States are maintained in the custody of
various foreign branches of The Chase Manhattan Bank and such
other custodians, including foreign banks and foreign securities
depositories as are approved by the Fund's Board of
Directors/Trustees in accordance with regulations under the
Investment Company Act of 1940. State Street Bank's main office
is at 225 Franklin Street, Boston, Massachusetts 02110. The
address for The Chase Manhattan Bank, N.A., London is Woolgate
House, Coleman Street, London, EC2P 2HD, England.
SHAREHOLDER SERVICES
The Fund from time to time may enter into agreements with
outside parties through which shareholders hold Fund shares. The
shares would be held by such parties in omnibus accounts. The
agreements would provide for payments by the Fund to the outside
party for shareholder services provided to shareholders in the
omnibus accounts.
CODE OF ETHICS
The Fund's investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in personal securities transactions.
Transactions must be executed within three business days of their
clearance. In addition, all employees must report their personal
securities transactions within ten days of their execution.
Employees will not be permitted to effect transactions in a
security: If there are pending client orders in the security; the
security has been purchased or sold by a client within seven
calendar days; the security is being considered for purchase for
a client; a change has occurred in T. Rowe Price's rating of the
security within seven calendar days prior to the date of the
proposed transaction; or the security is subject to internal
trading restrictions. In addition, employees are prohibited from
profiting from short-term trading (e.g., purchases and sales
involving the same security within 60 days). Any material
violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of
Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
PAGE 91
Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund are made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities,
it is T. Rowe Price's policy to obtain quality execution at the
most favorable prices through responsible brokers and dealers
and, in the case of agency transactions, at competitive
commission rates. However, under certain conditions, the Fund may
pay higher brokerage commissions in return for brokerage and
research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among
market-makers, T. Rowe Price generally seeks to select those it
believes to be actively and effectively trading the security
being purchased or sold. In selecting broker-dealers to execute
the Fund's portfolio transactions, consideration is given to such
factors as the price of the security, the rate of the commission,
the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and brokerage and
research services provided by them. It is not the policy of T.
Rowe Price to seek the lowest available commission rate where it
is believed that a broker or dealer charging a higher commission
rate would offer greater reliability or provide better price or
execution.
Fixed Income Securities
Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe
Price may effect principal transactions on behalf of the Fund
with a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances, or otherwise deal
with any such broker or dealer in connection with the acquisition
of securities in underwritings. T. Rowe Price may receive
PAGE 92
research services in connection with brokerage transactions,
including designations in fixed price offerings.
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
transactions executed on behalf of the Fund. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services
from brokers and dealers. These services include information on
the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law
interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement
analysis, performance analysis and analysis of corporate
responsibility issues. These services provide both domestic and
international perspective. Research services are received
primarily in the form of written reports, computer generated
services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form
of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some
cases, research services are generated by third parties but are
provided to T. Rowe Price by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays
cash for certain research services received from external
PAGE 93
sources. T. Rowe Price also allocates brokerage for research
services which are available for cash. While receipt of research
services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could
be materially increased if it attempted to generate such
additional information through its own staff. To the extent that
research services of value are provided by brokers or dealers, T.
Rowe Price may be relieved of expenses which it might otherwise
bear.
T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage
and execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, T.
Rowe Price has adopted a brokerage allocation policy embodying
the concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause an account to
pay commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates or net prices charged by broker-dealers reflect
the value of their research services, T. Rowe Price would expect
to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular
broker. T. Rowe Price may receive research, as defined in
Section 28(e), in connection with selling concessions and
designations in fixed price offerings in which the Funds
participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
PAGE 94
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage business where
special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet
the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers or dealers,
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers or dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any
firm may be less than the suggested allocations but can, and
often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above.
In no case is a broker or dealer excluded from receiving business
from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers or dealers through which T. Rowe
Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe
Price. Conversely, research services received from brokers or
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.
From time to time, orders for clients may be placed through
a computerized transaction network.
The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.
Some of T. Rowe Price's other clients have investment
PAGE 95
objectives and programs similar to those of the Fund. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
Trade Allocation Policies
T. Rowe Price has developed written trade allocation
guidelines for its Equity, Municipal, and Taxable Fixed Income
Trading Desks. Generally, when the amount of securities
available in a public offering or the secondary market is
insufficient to satisfy the volume or price requirements for the
participating client portfolios, the guidelines require a pro
rata allocation based upon the amounts initially requested by
each portfolio manager. In allocating trades made on combined
basis, the Trading Desks seek to achieve the same net unit price
of the securities for each participating client. Because a pro
rata allocation may not always adequately accommodate all facts
and circumstances, the guidelines provide for exceptions to
allocate trades on an adjusted, pro rata basis. Examples of
where adjustments may be made include: (i) reallocations to
recognize the efforts of a portfolio manager in negotiating a
transaction or a private placement; (ii) reallocations to
eliminate deminimis positions; (iii) priority for accounts with
specialized investment policies and objectives; and (iv)
reallocations in light of a participating portfolio's
characteristics (e.g., industry or issuer concentration,
duration, and credit exposure).
To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
At the present time, T. Rowe Price does not recapture commissions
PAGE 96
or underwriting discounts or selling group concessions in
connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
elimination of all or a portion of the selling-group concession
or underwriting discount when purchasing tax-exempt municipal
securities on behalf of its clients in underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between
the Fund and T. Rowe Price, T. Rowe Price is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that T. Rowe Price may place orders for the Fund's
portfolio transactions with broker-dealers through the same
trading desk T. Rowe Price uses for portfolio transactions in
domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities
are located. These brokers and dealers may include certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"), persons
indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary,
owns 25% of the common stock of Rowe Price-Fleming International,
Inc. ("RPFI"), an investment adviser registered under the
Investment Advisers Act of 1940. Fifty percent of the common
stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is
50% owned by Robert Fleming Holdings and 50% owned by Jardine
Matheson Holdings Limited. Orders for the Fund's portfolio
transactions placed with affiliates of Robert Fleming Holdings
and JFG will result in commissions being received by such
affiliates.
The Board of Directors/Trustees of the Fund has authorized
T. Rowe Price to utilize certain affiliates of Robert Fleming and
JFG in the capacity of broker in connection with the execution of
the Fund's portfolio transactions. Other affiliates of Robert
Fleming Holding and JFG also may be used. Although it does not
believe that the Fund's use of these brokers would be subject to
Section 17(e) of the Investment Company Act of 1940, the Board of
Directors/Trustees of the Fund has agreed that the procedures set
forth in Rule 17e-1 under that Act will be followed when using
such brokers.
Other
PAGE 97
For the years 1996, 1995, and 1994, the total brokerage
commissions paid by each Fund, including the discounts received
by securities dealers in connection with underwritings, and the
percentage of these commissions paid to firms which provided
research, statistical, or other services to T. Rowe Price in
connection with the management of each Fund, or, in some cases,
to each Fund, was as shown below.
1996 1995 1994
Fund Commissions % Commissions % Commissions %
Balanced 292,325 13.0% $392,293.25 14.8% $258,006 18.1%
Blue Chip
Growth 748,661 34.6% 420,930.75 10.3% 219,539 11.9%
Capital
Apprec-
iation 886,009 46.6% 1,922,697.14 32.4% 828,822 67.4%
Capital
Oppor-
tunity 764,518 38.7% 528,726.58 24.6% 7,857 7.2%
Dividend
Growth 478,131 28.6% 373,297.65 9.6% 294,479 15.9%
Equity
Income 6,912,071 59.2% 4,193,326.16 43.2% 4,511,187 48.4%
Growth &
Income 1,874,214 42.7% 1,431,193.83 44.7% 2,550,364 23.7%
Growth
Stock1,396,425,035 0.2% 4,769,565.10 42.6% 4,002,616 51.6%
Equity
Index 37,146 0.0% 98,198.06 0.1% 21,198 3.27%
Financial
Services 60,862 10.5% * * * *
Health
Sciences 1,488,623 20.4% * * * *
Mid-Cap
Equity
Growth 24,079 12.0% * * * *
Mid-Cap
Growth 3,149,050 27.9% 924,702.44 16.5% 349,991 30.8%
Mid-Cap
Value 92,359 17.0% * * * *
New America
Growth 1,344,080 31.6% 3,605,674.73 16.1% 1,646,550 23.7%
New Era 2,500,868 45.2% 1,259,196.48 42.7% 1,863,739 35.8%
New
Horizons15,900,960 6.5% 8,729,848.09 9.1% 5,246,463 10.0%
Small-Cap
Stock 1,044,665 5.5% 873,954.17 7.5% 584,525 4.6%
Science &
PAGE 98
Tech-
nology 5,713,825 39.1% 4,766,170.90 18.5% 1,272,479 45.4%
Small-Cap
Value 1,289,012 31.8% 1,321,168.10 14.4% 512,452 26.28%
Value 780,033 57.4% 270,118.81 32.3% 30,478 14.9%
* Prior to commencement of operations.
On December 31, 1996, the Equity Index Fund held common
stock of the following regular brokers or dealers of the Fund:
Bankers Trust New York, Citicorp, Merrill Lynch, J.P. Morgan,
Chemical Bank, and Household International respectively, with a
value of $1,002,000, $6,837,000, $1,896,000, $2,569,000, and
1,262,000 respectively. In 1996, Bankers Trust New York,
Citicorp, Merrill Lynch, J.P. Morgan, Chemical Bank,
and Household International were among the Fund's regular brokers
or dealers as defined in Rule 10b-1 under the Investment Company
Act of 1940.
On December 31, 1996, the Growth & Income Fund held common
stocks of the following regular broker dealers of the Fund: Bear
Stearns and Household International, respectively, with a value
of $16,336,000, and $30,504,000 respectively. The Fund also held
medium-term notes of Morgan Stanley with a value of $10,003,000.
In 1996, Bear Stearns, Household International, and Morgan
Stanley were among the Fund's regular brokers or dealers as
defined in Rule 10b-1 under the Investment Company Act of 1940.
On December 31, 1996, the Small-Cap Value Fund held
commercial paper of Morgan Stanley Group with a value of
$7,002,000. In 1996, the Morgan Stanley Group was among the
Fund's regular brokers or dealers as defined in Rule 10b-1 under
the Investment Company Act of 1940.
On December 31, 1996, the Dividend Growth Fund held medium-
term notes of Morgan Stanley Group with a value of $1,000,000.
In 1996, the Morgan Stanley Group was among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the Investment
Company Act of 1940.
On December 31, 1996, the Capital Appreciation Fund held
commercial paper of Morgan Stanley Group with a value of
$10,003,000. In 1996, the Morgan Stanley Group was among the
Fund's regular brokers or dealers as defined in Rule 10b-1 under
the Investment Company Act of 1940.
On December 31, 1996, the Small-Cap Stock Fund held
commercial paper of Morgan Stanley Group with a value of
$2,001,000. In 1996, the Morgan Stanley Group was among the
Fund's regular brokers or dealers as defined in Rule 10b-1 under
PAGE 99
the Investment Company Act of 1940.
On December 31, 1996, the Equity Income Fund held common
stock of the following regular broker dealers of the Fund:
Bankers Trust, Chemical Bank, and J.P. Morgan, respectively, with
a value of $41,331,000, $0, and $82,981,000, respectively. The
Fund also held medium-term notes of GMAC and the Morgan Stanley
Group, with a value of $19,979,000 and $31,455,000, respectively.
In 1996, Bankers Trust, Chemical Bank, J.P. Morgan, GMAC, and
Morgan Stanley Group were among the Fund's regular brokers or
dealers as defined in Rule 10b-1 under the Investment Company Act
of 1940.
On December 31, 1996, the Balanced Fund held common stock of
J.P. Morgan with a value of $1,953,000. The Fund also held a
bond of Lehman Brothers Holding with a value of $1,615,000. The
Fund also held commercial paper of Morgan Stanley Group with a
value of $5,006,000. In 1996, J.P. Morgan, Lehman Brothers
Holding, and the Morgan Stanley Group were among the Fund's
regular brokers or dealers as defined in Rule 10b-1 under the
Investment Company Act of 1940.
The portfolio turnover rate for each Fund for the years
ended 1996, 1995, and 1994, was as follows:
Fund 1996 1995 1994
Balanced 22.3% 12.6% 33.3%
Blue Chip Growth 26.3% 38.1% 75.0%
Capital Appreciation 44.2% 47.0% 43.6%
Capital Opportunity 107.3% 136.9% 134.5%
Dividend Growth 43.1% 56.1% 71.4%
Equity Income 25.0% 21.4% 36.3%
Equity Index 1.3% 1.3% 1.3%
Financial Services 5.6%* ** **
Growth & Income 13.5% 26.2% 25.6%
Growth Stock 49.0% 42.5% 54.0%
Health Sciences 133.1% ** **
Mid-Cap Equity Growth 31.3%* ** **
Mid-Cap Growth 38.1% 57.5% 48.7%
Mid-Cap Value 3.9%* ** **
New America Growth 36.7% 56.2% 31.0%
New Era 28.6% 22.7% 24.7%
New Horizons 41.4% 55.9% 44.3%
Small-Cap Stock 31.1% 57.8% 41.9%
Science & Technology 125.6% 130.3% 113.3%
Small-Cap Value 15.2% 18.1% 21.4%
Value 68.0% 89.7% 30.8%
* Annualized.
PAGE 100
** Prior to commencement of operations.
All Funds
PRICING OF SECURITIES
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 Directors/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 in local currency which, when
combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per
share, the U.S. dollar value of all assets and liabilities
initially expressed in foreign currencies is determined by using
the mean of the bid and offer prices of such currencies against
U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value as determined in good faith by or
under the supervision of the officers of the Fund, as authorized
by the Board of Directors/Trustees.
All Funds
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is
equal to the Fund's net asset value per share or share price.
The Fund determines its net asset value per share by subtracting
the Fund's liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of the Fund is normally calculated as of the close of
PAGE 101
trading on the New York Stock Exchange ("NYSE") every day the
NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale
redemption and repurchase of shares) for the Fund may be
suspended at times (a) during which the NYSE is closed, other
than customary weekend and holiday closings, (b) during which
trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net
assets, or (d) during which a governmental body having
jurisdiction over the Fund may by order permit such a suspension
for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange
Commission (or any succeeding governmental authority) shall
govern as to whether the conditions prescribed in (b), (c), or
(d) exist.
DIVIDENDS AND DISTRIBUTIONS
Unless you elect otherwise, the Fund's annual dividend and
capital gain distribution, if any, and final quarterly dividend
(Balanced, Dividend Growth, Equity Income, Equity Index, Growth &
Income, Mid-Cap Value, and Value Funds) will be reinvested on the
reinvestment date using the NAV per share of that date. The
reinvestment date normally precedes the payment date by about 10
days although the exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
A portion of the dividends paid by the Fund may be eligible
for the dividends-received deduction for corporate shareholders.
For tax purposes, it does not make any difference whether
dividends and capital gain distributions are paid in cash or in
additional shares. The Fund must declare dividends by December
31 of each year equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to
avoid a federal excise tax and distribute within 12 months 100%
of ordinary income and capital gains as of December 31 to avoid
federal income tax.
PAGE 102
At the time of your purchase, the Fund's net asset value may
reflect undistributed capital gains or net unrealized
appreciation of securities held by the Fund. A subsequent
distribution to you of such amounts, although constituting a
return of your investment, would be taxable. For federal income
tax purposes, the Fund is permitted to carry forward its net
realized capital losses, if any, for eight years and realize net
capital gains up to the amount of such losses without being
required to pay taxes on, or distribute such gains. On December
31, 1996, the books of each Fund indicated that each Fund's
aggregate net assets included undistributed net income, net
realized capital gains or losses, and unrealized appreciation or
depreciation which are listed below.
Net Realized
Undistributed Capital Gain Unrealized
Fund Net Income (Losses) Appreciation
Balanced $ 479,605 $ 988,176 $ 165,264,889
Blue Chip Growth -0- 1,809,910 85,179,920
Capital Appreciation 363,581 19,106,692 149,382,190
Capital Opportunity -0- 1,017,759 14,827,525
Dividend Growth -0- 3,203,747 34,752,830
Equity Income 1,983,703 151,781,728 1,627,204,000
Equity Index -0- 4,023,968 204,489,336
Financial Services -0- -0- 1,184,982
Growth & Income 1,197,947 4,825,908 745,309,119
Growth Stock 161,050 30,164,090 1,324,077,291
Health Sciences -0- 408,636 5,004,666
Mid-Cap Equity -0- 57,907 532,169
Mid-Cap Growth -0- 6,341,881 148,411,029
Mid-Cap Value 19,634 (14,294) 5,043,874
New America Growth -0- 29,107,180 430,949,361
New Era -0- 15,417,132 464,688,120
New Horizons -0- (17,232,407) 1,266,666,244
Small-Cap Stock 23,101 9,648,365 94,813,776
Science & Technology -0- 14,105,432 555,199,263
Small-Cap Value 40,475 19,156,306 342,576,379
Value -0- 2,817,864 17,037,654
If, in any taxable year, the Fund should not qualify as a
regulated investment company under the Code: (i) the Fund would
be taxed at normal corporate rates on the entire amount of its
taxable income, if any, without deduction for dividends or other
distributions to shareholders; and (ii) the Fund's distributions
to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been
considered capital gain dividends).
PAGE 103
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be
subject to U.S. tax. For shareholders who are not engaged in a
business in the U.S., this tax would be imposed at the rate of
30% upon the gross amount of the dividends in the absence of a
Tax Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized
by the Fund are not subject to tax unless the foreign shareholder
is a nonresident alien individual who was physically present in
the U.S. during the tax year for more than 182 days.
All Funds, Except Equity Index Fund
To the extent the Fund invests in foreign securities, the
following would apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. Capital gains on the sale of such holdings will be
deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition to bearing their proportionate
share of the funds expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses
of such funds. In addition, the Fund may be subject to corporate
income tax and an interest charge on certain dividends and
capital gains earned from these investments, regardless of
whether such income and gains were distributed to shareholders.
In accordance with tax regulations, the Fund intends to
treat these securities as sold on the last day of the Fund's
fiscal year and recognize any gains for tax purposes at that
time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received
cash to pay such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations, are taxable as ordinary
income. If the net effect of these transactions is a gain, the
ordinary income dividend paid by the Fund will be increased. If
the result is a loss, the income dividend paid by the Fund will
be decreased, or to the extent such dividend has already been
paid, it may be classified as a return of capital. Adjustments
to reflect these gains and losses will be made at the end of the
PAGE 104
Fund's taxable year.
All Funds
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes
the reinvestment of all capital gain distributions and income
dividends for the period or periods indicated, without regard to
tax consequences to a shareholder in the Fund. Total return is
calculated as the percentage change between the beginning value
of a static account in the Fund and the ending value of that
account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of the Fund.
Each average annual compound rate of return is derived from the
cumulative performance of the Fund over the time period
specified. The annual compound rate of return for the Fund over
any other period of time will vary from the average.
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/96 12/31/96 12/31/96 12/31/96
S & P 500 22.96 103.05 314.28
Dow Jones
Industrial Average 28.88 132.65 366.13
CPI 3.65 15.37 43.98
Balanced Fund 14.57 71.09 184.22 28,585.93
(12/31/39)
Blue Chip Growth Fund 27.75 N/A N/A 103.02
(6/30/93)
Capital Appreciation Fund 16.82 87.99 251.25 281.11
(6/30/86)
PAGE 105
Capital Opportunity Fund 16.76 N/A N/A 78.41
(11/30/94)
Dividend Growth Fund 25.36 N/A N/A 101.47
(12/31/92)
Equity Income Fund 20.40 119.97 286.01 438.33
(10/31/85)
Equity Index Fund 22.65 99.32 N/A 158.34
(3/30/90)
Growth & Income Fund 25.64 113.97 257.36 544.47
(12/21/82)
Growth Stock Fund 21.70 96.96 247.90 16,900.01
(4/11/50)
Mid-Cap Growth Fund 24.84 N/A N/A 177.44
(6/30/92)
New America Growth Fund 20.01 106.90 336.86 492.08
(9/30/85)
New Era Fund 24.25 85.78 214.24 1,699.77
(1/20/69)
New Horizons Fund 17.03 146.18 352.34 6,628.27
(6/3/60)
Small-Cap Stock Fund 21.05 118.70 219.48 23,328.87
(6/1/56)
Science & Technology Fund 14.23 203.52 N/A 516.07
PAGE 106
(9/30/87)
Small-Cap Value Fund 24.61 136.78 N/A 220.15
(6/30/88)
Value Fund 28.51 N/A N/A 85.29
(9/30/94)
Health Sciences Fund 26.75 N/A N/A 26.75
(12/29/95)
Financial Services Fund N/A N/A N/A 13.40
(9/30/96)
Mid-Cap Value Fund N/A N/A N/A 16.30
(6/28/96)
Mid-Cap Equity
Growth Fund N/A N/A N/A 16.10
(7/31/96)
* Since 12/31/82
PAGE 107
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/96 12/31/96 12/31/96 12/31/96
S&P 500 22.96% 15.22% 15.27%
Dow Jones
Industrial Avg. 28.88 18.40 16.64
CPI 3.65 2.90 3.71
Balanced Fund 14.57 11.34 11.01 10.44
(12/31/39)
Blue Chip Growth Fund 27.75 N/A N/A 22.41
(6/30/93)
Capital Appreciation
Fund 16.82 13.46 13.39 13.59
(6/30/86)
Capital Opportunity
Fund 16.76 N/A N/A 32.01
(11/30/94)
Dividend Growth Fund 25.36 N/A N/A 19.14
(12/30/92)
Equity Income Fund 20.40 17.08 14.46 16.27
(10/31/85)
Equity Index Fund 22.65 14.79 N/A 15.08
(3/30/90)
Growth & Income Fund 25.64 16.43 13.58 14.21
(12/21/82)
Growth Stock Fund 21.70 14.52 13.28 11.62
(4/11/50)
Mid-Cap Growth Fund 24.84 N/A N/A 25.44
(6/30/92)
PAGE 108
New America Growth Fund 20.01 15.65 15.89 17.12
(9/30/85)
New Era Fund 24.25 13.19 12.13 10.90
(1/20/69)
New Horizons Fund 17.03 19.74 16.29 12.19
(6/3/60)
Small-Cap Stock Fund 21.05 16.94 12.32 14.39
(6/1/56)
Science & Technology
Fund 14.23 24.86 N/A 21.72
(9/30/87)
Small-Cap Value Fund 24.61 18.81 N/A 14.67
(6/30/88)
Value Fund 28.51 N/A N/A 31.52
(9/30/94)
Health Sciences Fund 26.75 N/A N/A 26.75
(12/29/95)
Financial Services Fund N/A N/A N/A N/A
(9/30/96)
Mid-Cap Value Fund N/A N/A N/A N/A
(6/28/96)
Mid-Cap Equity
Growth Fund N/A N/A N/A N/A
(7/31/96)
*Since 12/31/82
Outside Sources of Information
PAGE 109
From time to time, in reports and promotional literature:
(1) the Fund's total return performance, ranking, or any other
measure of the Fund's performance may be compared to any one or
combination of the following: (i) a broad based index; (ii)
other groups of mutual funds, including T. Rowe Price Funds,
tracked by independent research firms ranking entities, or
financial publications; (iii) indices of stocks comparable to
those in which the Fund invests; (2) the Consumer Price Index (or
any other measure for inflation, government statistics, such as
GNP may be used to illustrate investment attributes of the Fund
or the general economic, business, investment, or financial
environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and
other persons may be used to illustrate aspects of the Fund's
performance; (4) the effect of tax-deferred compounding on the
Fund's investment returns, or on returns in general in both
qualified and non-qualified retirement plans or any other tax
advantage product, may be illustrated by graphs, charts, etc.;
and (5) the sectors or industries in which the Fund invests may
be compared to relevant indices or surveys in order to evaluate
the Fund's historical performance or current or potential value
with respect to the particular industry or sector.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., T. Rowe Price
mutual fund portfolio managers may discuss economic, financial
and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the
Fund; individual securities within the Fund's portfolio; and
their philosophy regarding the selection of individual stocks,
including why specific stocks have been added, removed or
excluded from the Fund's portfolio.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds
and may help investors achieve various long-term investment
goals, which include, but are not limited to, investing money for
retirement, saving for a down payment on a home, or paying
college costs. To explain how the Fund could be used to assist
investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared
by T. Rowe Price Associates, Inc. and/or T. Rowe Price Investment
Services, Inc. may be made available.
PAGE 110
Growing income from rising dividends
Chart 1
A line graph titled "Growing income from rising dividends" which
depicts hypothetical income and yield on an original investment
of $10,000 in a stock currently yielding 3% and whose dividends
grow 8% a year. The chart shows a range of yields from 0% to 15%
and income from $0 to $1,500, for five year periods from zero to
20. The yield and income for each of the periods are
approximately as listed below.
5 Years 10 Years 15 Years 20 Years
Yield 4% 6% 9% 14%
Income $400 $600 $900 $1,400
Chart depicts hypothetical income and yield on an original
investment of $10,000 in a stock currently yielding 3% and whose
dividends grow 8% a year.
Example is for illustrative purposes only and is not indicative
of an investment in any T. Rowe Price fund.
New Horizons, Small-Cap Stock and Small-Cap Value Funds
PERFORMANCE OF LARGE VS. SMALL COMPANY
STOCKS FOLLOWING RECESSIONS
(Total Return For 12 Months After Recession)
Chart 2
Bar graph appears here comparing large and small company
stocks during eight post-recession periods.
Large Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
________________________________________________________________
36% 38% 13% 11% 28% 14% 26% 11%
_________________________________________________________________
Small Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
PAGE 111
Periods
_________________________________________________________________
51% 53% 18% 12% 58% 45% 44% 28%
_________________________________________________________________
Source: T. Rowe Price Associates, Inc.
Data supplied by Ibbotson Associates
The average price-earnings (p/e) ratio of the T. Rowe Price
New Horizons Fund is a valuation measure widely used by the
investment community with respect to small company stocks, and,
in the opinion of T. Rowe Price, has been a good indicator of
future small-cap stock performance. The following chart is
intended to show the history of the average (unweighted) p/e
ratio of the New Horizons Fund's portfolio companies compared
with the p/e ratio of the Standard & Poor's 500 Index. Of
course, the portfolio of the Small-Cap Stock and Small-Cap Value
Funds will differ from the portfolio of the New Horizons Fund.
Earnings per share are estimated by T. Rowe Price for each
quarter end.
T. ROWE PRICE NEW HORIZONS FUND, INC.
P/E Ratio of Fund's Portfolio Securities
Relative To The S & P "500" P/E Ratio
(12 Months Forward) March 31, 1997
Chart 3
This is a one line chart that shows the average (unweighted) p/e
ratio of the New Horizons Fund's portfolio securities relative to
the p/e ratio of the S&P 500 Stock Index. Earnings per share are
estimated by the New Horizons Fund's investment advisor from each
quarter end. The ratio between the two p/e's is depicted
quarterly from 3/61 to 3/31/96.
The horizontal axis is divided into two year periods. The
vertical axis indicates the relative p/e ratio with 0.5, 1,
1.5, 2 and 2.5 indicated by horizontal lines. The ratio at
3/61 is approximately 2, is at the lowest point in the first
quarter of 1977 at approximately 0.95, is at the highest
point near the end of 1983 at approximately 2.2, and is at
1.23 on March 31, 1997.
Source: T. Rowe Price Associates, Inc.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge
sales fees to investors or use fund assets to finance
distribution activities. These fees are in addition to the
PAGE 112
normal advisory fees and expenses charged by all mutual funds.
There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or
"load") can be charged at the time the fund is purchased
(front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested.
Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1
plans allow for the payment of marketing and sales expenses from
fund assets. These expenses are usually computed daily as a
fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges or
12b-1 fees. No-load funds are generally sold directly to the
public without the use of commissioned sales representatives.
This means that 100% of your purchase is invested for you.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in
kind redemption of portfolio securities of the Fund, brokerage
fees could be incurred by the shareholder in a subsequent sale of
such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for
securities or assets other than cash will be limited to (1) bona
fide reorganizations; (2) statutory mergers; or (3) other
acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Fund; (b) are acquired
for investment and not for resale except in accordance with
applicable law; (c) have a value that is readily ascertainable
via listing on or trading in a recognized United States or
international exchange or market; and (d) are not illiquid.
Balanced Fund
On August 31, 1992, the T. Rowe Price Balanced Fund acquired
substantially all of the assets of the Axe-Houghton Fund B, a
series of Axe-Houghton Funds, Inc. As a result of this
acquisition, the Securities & Exchange Commission requires that
the historical performance information of the Balanced Fund be
based on the performance of Fund B. Therefore, all performance
information of the Balanced Fund prior to September 1, 1992,
reflects the performance of Fund B and investment managers other
than T. Rowe Price. Performance information after August 31,
1992, reflects the combined assets of the Balanced Fund and Fund
B.
PAGE 113
Small-Cap Stock Fund
Effective May 1, 1997, the Fund's name was changed from the
T. Rowe Price OTC Fund to the T .Rowe Price Small-Cap Stock Fund.
All Funds, Except Capital Appreciation, Equity Income and New
America Growth Funds
CAPITAL STOCK
The Fund's Charter authorizes the Board of Directors to
classify and reclassify any and all shares which are then
unissued, including unissued shares of capital stock into any
number of classes or series, each class or series consisting of
such number of shares and having such designations, such powers,
preferences, rights, qualifications, limitations, and
restrictions, as shall be determined by the Board subject to the
Investment Company Act and other applicable law. The shares of
any such additional classes or series might therefore differ from
the shares of the present class and series of capital stock and
from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to
applicable law, and might thus be superior or inferior to the
capital stock or to other classes or series in various
characteristics. The Board of Directors may increase or decrease
the aggregate number of shares of stock or the number of shares
of stock of any class or series that the Fund has authorized to
issue without shareholder approval.
Except to the extent that the Fund's Board of Directors
might provide by resolution that holders of shares of a
particular class are entitled to vote as a class on specified
matters presented for a vote of the holders of all shares
entitled to vote on such matters, there would be no right of
class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no
provision entitling the holders of the present class of capital
stock to a vote as a class on any matter. Accordingly, the
preferences, rights, and other characteristics attaching to any
class of shares, including the present class of capital stock,
might be altered or eliminated, or the class might be combined
with another class or classes, by action approved by the vote of
the holders of a majority of all the shares of all classes
entitled to be voted on the proposal, without any additional
right to vote as a class by the holders of the capital stock or
of another affected class or classes.
Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
PAGE 114
vote in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Fund, a special meeting of shareholders of
the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of
all the votes of the Fund entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Fund the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Fund, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Fund to the extent required by
Section 16(c) of the Investment Company Act of 1940.
Capital Appreciation, Equity Income and New America Growth Funds
ORGANIZATION OF THE FUND
For tax and business reasons, the Funds' were organized as
Massachusetts Business Trusts (1985 for the Equity Income and New
America Growth Funds and 1986 for the Capital Appreciation Fund),
and are registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 as diversified, open-end
investment companies, commonly known as "mutual funds."
The Declaration of Trust permits the Board of Trustees to
issue an unlimited number of full and fractional shares of a
single class. The Declaration of Trust also provides that the
Board of Trustees may issue additional series or classes of
shares. Each share represents an equal proportionate beneficial
interest in the Fund. In the event of the liquidation of the
Fund, each share is entitled to a pro rata share of the net
assets of the Fund.
Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of trustees (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
PAGE 115
shareholders for the purpose of electing trustees unless and
until such time as less than a majority of the trustees holding
office have been elected by shareholders, at which time the
trustees then in office will call a shareholders' meeting for the
election of trustees. Pursuant to Section 16(c) of the
Investment Company Act of 1940, holders of record of not less
than two-thirds of the outstanding shares of the Fund may remove
a trustee by a vote cast in person or by proxy at a meeting
called for that purpose. Except as set forth above, the trustees
shall continue to hold office and may appoint successor trustees.
Voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in the election of trustees can, if
they choose to do so, elect all the trustees of the Trust, in
which event the holders of the remaining shares will be unable to
elect any person as a trustee. No amendments may be made to the
Declaration of Trust without the affirmative vote of a majority
of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of
redemption and the privilege of exchange are described in the
prospectus. Shares are fully paid and nonassessable, except as
set forth below. The Trust may be terminated (i) upon the sale
of its assets to another diversified, open-end management
investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon
liquidation and distribution of the assets of the Trust, if
approved by the vote of the holders of a majority of the
outstanding shares of the Trust. If not so terminated, the Trust
will continue indefinitely.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Fund. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Fund and
requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by
the Fund or a Trustee. The Declaration of Trust provides for
indemnification from Fund property for all losses and expenses of
any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss
on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations,
a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the Fund, the shareholders
of the Fund paying such liability will be entitled to
reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund in such a way so as
to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
PAGE 116
FEDERAL REGISTRATION OF SHARES
All Funds
The Fund's shares are registered for sale under the
Securities Act of 1933. Registration of the Fund's shares is not
required under any state law, but the Fund is required to make
certain filings with and pay fees to the states in order to sell
its shares in the states.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Funds.
INDEPENDENT ACCOUNTANTS
Diversified Small-Cap Growth Fund
_________________________, Maryland, are independent
accountants to the Fund.
Blue Chip Growth, Dividend Growth, Equity Income, Growth &
Income, Mid-Cap Equity Growth, Mid-Cap Growth, Mid-Cap Value, New
America Growth, and New Era Funds
Price Waterhouse LLP, Gateway International II, 1306
Concourse Drive, Suite 100, Linthicum, Maryland 21090-1020, are
independent accountants to the Fund.
Balanced, Capital Appreciation, Capital Opportunity, Equity Index
Fund, Financial Services, Growth Stock, Health Sciences, New
Horizons, Small-Cap Stock, Science & Technology, Small-Cap Value,
and Value Funds
Coopers & Lybrand L.L.P., 217 East Redwood Street,
Baltimore, Maryland 21202, are independent accountants to the
Fund.
The financial statements of the Funds for the year ended
December 31, 1996, and the report of independent accountants are
included in the Fund's Annual Report for the year ended December
31, 1996. A copy of the Annual Report accompanies this Statement
of Additional Information. The following financial statements and
the report of independent accountants appearing in the Annual
Report for the year ended December 31, 1996, are incorporated
into this Statement of Additional Information by reference:
PAGE 117
ANNUAL REPORT REFERENCES:
CAPITAL EQUITY EQUITY GROWTH &
APPRECIATION INCOME INDEX INCOME
____________ ________ ______ ________
Report of Independent
Accountants 25 25 32 23
Statement of Net Assets,
December 31, 1996 12-19 9-18 12-26 9-17
Statement of Operations,
year ended
December 31, 1996 20 19 27 18
Statement of Changes in
Net Assets, years ended
December 31, 1996 and
December 31, 1995 21 20 28 19
Notes to Financial
Statements,
December 31, 1996 22-24 21-24 29-31 20-22
Financial Highlights 11 8 11 8
NEW SMALL-
GROWTH AMERICA NEW CAP
STOCK GROWTH ERA STOCK
__________ ____________ _______ ______
Report of Independent
Accountants 25 20 21 25
Statement of Net Assets,
December 31, 1996 11-19 11-14 11-15 10-19
Statement of Operations,
year ended
December 31, 1996 20 15 16 20
Statement of Changes in
Net Assets, years ended
December 31, 1996 and
December 31, 1995 21 16 17 21
Notes to Financial
Statements,
December 31, 1996 22-24 17-19 18-20 22-24
Financial Highlights 10 10 10 9
MID-CAP
BALANCED GROWTH
_________ ________
Report of Independent
Accountants 41 21
Statement of Net Assets,
PAGE 118
December 31, 1996 11-34 11-15
Statement of Operations,
year ended
December 31, 1996 35 16
Statement of Changes in
Net Assets, years ended
December 31, 1996 and
December 31, 1995 36 17
Notes to Financial
Statements,
December 31, 1996 37-40 18-20
Financial Highlights 10 10
NEW SMALL-CAP
HORIZONS VALUE
__________ __________
Report of Independent
Accountants 29 27
Portfolio of Investments,
December 31, 1996 11-22 10-20
Statement of Assets and
Liabilities,
December 31, 1996 23 21
Statement of Operations,
year ended
December 31, 1996 24 22
Statement of Changes
in Net Assets, years ended
December 31, 1996 and
December 31, 1995 25 23
Notes to Financial
Statements, December 31, 1996 26-28 24-26
Financial Highlights 10 9
BLUE CHIP
GROWTH
___________
Report of Independent Accountants 25
Statement of Net Assets, December 31, 1996 12-19
Statement of Operations, year ended December 31, 1996 20
Statement of Changes in Net Assets, years
ended December 31, 1996 and December 31, 1995 21
Notes to Financial Statements, December 31, 1996 22-24
Financial Highlights 11
DIVIDEND
GROWTH
PAGE 119
____________
Report of Independent Accountants 24
Statement of Net Assets, December 31, 1996 10-17
Statement of Operations, year ended December 31, 1996 18
Statement of Changes in Net Assets, years
ended December 31, 1996 and December 31, 1995 19
Notes to Financial Statements, December 31, 1996 20-23
Financial Highlights 9
VALUE
_______
Report of Independent Accountants 21
Statement of Net Assets, December 31, 1996 9-15
Statement of Operations, year ended December 31, 1996 16
Statement of Changes in Net Assets, year ended
December 31, 1996 and December 31, 1995 17
Notes to Financial Statements, December 31, 1995 18-20
Financial Highlights 8
CAPITAL
OPPORTUNITY
_____________
Report of Independent Accountants 20
Statement of Net Assets, December 31, 1996 10-14
Statement of Operations, year ended December 31, 1996 15
Statement of Changes in Net Assets, year ended
December 31, 1996 and December 31, 1995 16
Notes to Financial Statements, December 31, 1996 17-19
Financial Highlights 9
SCIENCE &
TECHNOLOGY
_____________
Report of Independent Accountants 21
Statement of Net Assets, December 31, 1996 12-15
Statement of Operations, year ended December 31, 1996 16
Statement of Changes in Net Assets, year ended
December 31, 1996 and December 31, 1995 17
Notes to Financial Statements, December 31, 1996 18-20
Financial Highlights 11
FINANCIAL
SERVICES
_____________
PAGE 120
Report of Independent Accountants 19
Statement of Net Assets, December 31, 1996 12-13
Statement of Operations, September 30, 1996
(Commencement of Operations) to December 31, 1996 14
Statement of Changes in Net Assets, September 30, 1996
(Commencement of Operations) to December 31, 1996 15
Notes to Financial Statements, December 31, 1996 16-18
Financial Highlights 9
HEALTH
SCIENCES
_____________
Report of Independent Accountants 25
Statement of Net Assets, December 31, 1996 13-19
Statement of Operations, December 31, 1995
(Commencement of Operations) to December 31, 1996 20
Statement of Changes in Net Assets, December 31, 1995
(Commencement of Operations) to December 31, 1996 21
Notes to Financial Statements, December 31, 1996 22-24
Financial Highlights 12
MID-CAP
VALUE
_____________
Report of Independent Accountants 22
Statement of Net Assets, December 31, 1996 10-16
Statement of Operations, June 28, 1996
(Commencement of Operations) to December 31, 1996 17
Statement of Changes in Net Assets, June 28, 1996
(Commencement of Operations) to December 31, 1996 18
Notes to Financial Statements, December 31, 1996 19-21
Financial Highlights 9
MID-CAP
EQUITY GROWTH
_____________
Report of Independent Accountants 12
Statement of Net Assets, December 31, 1996 5-7
Statement of Operations, July 31, 1996
(Commencement of Operations) to December 31, 1996 8
Statement of Changes in Net Assets, July 31, 1996
(Commencement of Operations) to December 31, 1996 9
Notes to Financial Statements, December 31, 1996 10-11
Financial Highlights 4
PAGE 121
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Services, Inc. (Moody's)
Aaa-Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge."
Aa-Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A-Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations.
Baa-Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba-Bonds rated Ba are judged to have speculative elements:
their futures cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
B-Bonds rated B generally lack the characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with
respect to principal or interest.
Ca-Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked short-comings.
C-Lowest-rated; extremely poor prospects of ever attaining
investment standing.
Standard & Poor's Corporation (S&P)
AAA-This is the highest rating assigned by Standard & Poor's
PAGE 122
to a debt obligation and indicates an extremely strong capacity
to pay principal and interest.
AA-Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong.
A-Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB-Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, C, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
D-In default.
Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight
market fluctuation other than through changes in the money rate.
The prime feature of a "AAA" bond is the showing of earnings
several times or many times interest requirements for such
stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features
may enter, such as a wide margin of protection through
collateral, security or direct lien on specific property.
Sinking funds or voluntary reduction of debt by call or purchase
or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable.
Their merits are not greatly unlike those of "AAA" class but a
bond so rated may be junior though of strong lien, or the margin
of safety is less strikingly broad. The issue may be the
PAGE 123
obligation of a small company, strongly secured, but influenced
as to rating by the lesser financial power of the enterprise and
more local type of market.
PAGE 124
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements. A Statement of Assets and Liabilities
of Registrant as of _____________, 1997, appears in the
Statement of Additional Information. Such Statement has
been examined by ____________________, independent
accountants, and has been included in the Statement of
Additional Information in reliance on the report of such
accountants appearing in the Statement of Additional
Information given upon their authority as experts in
auditing and accounting.+ All other financial statements,
schedules and historical information have been omitted as
the subject matter is not required, not present, or not
present in amounts sufficient to require submission.
(b) Exhibits.
(1) Articles of Incorporation of Registrant, dated April
22, 1997 (electronically filed with Initial
Registration Statement dated May 1, 1997)
(2) By-Laws of Registrant (electronically filed with
Initial Registration Statement dated May 1, 1997)
(3) Inapplicable
(4) See Article SIXTH, Capital Stock, subparagraphs
(b)-(g) of the Articles of Incorporation and Article
II, Shareholders, in its entirety, and Article VIII,
Capital Stock, in its entirety, of the Bylaws
electronically filed as exhibits to this
Registration Statement.
(5) Investment Management Agreement between Registrant,
and T. Rowe Price Associates, Inc. (to be filed by
amendment)
(6) Underwriting Agreement between Registrant, and T.
Rowe Price Investment Services, Inc. (to be filed by
amendment)
(7) Inapplicable
+Omitted from Registration Statement as initially filed
since Registrant has no assets or liabilities and has never
had any assets or liabilities. Registrant proposes to raise
its minimum capital through an initial private offering
PAGE 125
of shares at $_____ per share.
(8)(a) Custodian Agreement between T. Rowe Price Funds and
State Street Bank and Trust Company, dated September
28, 1987, as amended to June 24, 1988, October 19,
1988, February 22, 1989, July 19, 1989, September
15, 1989, December 15, 1989, December 20, 1989,
January 25, 1990, February 21, 1990, June 12, 1990,
July 18, 1990, October 15, 1990, February 13, 1991,
March 6, 1991, September 12, 1991, November 6, 1991,
April 23, 1992, September 2, 1992, November 3, 1992,
December 16, 1992, December 21, 1992, and January
28, 1993, April 22, 1993, September 16, 1993,
November 3, 1993, March 1, 1994, April 21, 1994,
July 27, 1994, September 21, 1994, November 1, 1994,
November 2, 1994, January 25, 1995, September 20,
1995, November 1, 1995, December 11, 1995, April 24,
1996, August 2, 1996, November 12, 1996, and April
24, 1997 (to be filed by amendment)
(8)(b) Global Custody Agreement between The Chase Manhattan
Bank, N.A. and T. Rowe Price Funds, dated January 3,
1994, as amended April 18, 1994, August 15, 1994,
November 28, 1994, May 31, 1995, November 1, 1995,
and July 31, 1996 (to be filed by amendment)
(9)(a) Transfer Agency and Service Agreement between T.
Rowe Price Services, Inc. and T. Rowe Price Funds,
dated January 1, 1997, as amended April 24, 1997 (to
be filed by amendment)
(9)(b) Agreement between T. Rowe Price Associates, Inc. and
T. Rowe Price Funds for Fund Accounting Services,
dated January 1, 1997, as amended April 24, 1997 (to
be filed by amendment)
(9)(c) Agreement between T. Rowe Price Retirement Plan
Services, Inc. and the Taxable Funds, dated January
1, 1997, as amended April 24, 1997 (to be filed by
amendment)
(10) Opinion of Counsel, dated May 1, 1997
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
PAGE 126
(15) Inapplicable
(16) Inapplicable
(17) Financial Data Schedule as of May 1, 1997
(18) Inapplicable
(19) Inapplicable
Item 25. Persons Controlled by or Under Common Control With
Registrant.
None.
Item 26. Number of Holders of Securities
As of May 1, 1997, there were zero shareholders in
the T. Rowe Price Diversified Small-Cap Growth Fund, Inc.
Item 27. Indemnification
The Registrant maintains comprehensive Errors and Omissions
and Officers and Directors insurance policies written by the
Evanston Insurance Company, The Chubb Group and ICI Mutual. These
policies provide coverage for the named insureds, which include
T. Rowe Price Associates, Inc. ("Manager"), Rowe Price-Fleming
International, Inc. ("Price-Fleming"), T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price Trust
Company, T. Rowe Price Stable Asset Management, Inc., RPF
International Bond Fund and forty-five other investment
companies, namely, T. Rowe Price Growth Stock Fund, Inc., T. Rowe
Price New Horizons Fund, Inc., T. Rowe Price New Era Fund, Inc.,
T. Rowe Price New Income Fund, Inc., T. Rowe Price Prime Reserve
Fund, Inc., T. Rowe Price Tax-Free Income Fund, Inc., T. Rowe
Price Tax-Exempt Money Fund, Inc., T. Rowe Price International
Funds, Inc., T. Rowe Price Growth & Income Fund, Inc., T. Rowe
Price Tax-Free Short-Intermediate Fund, Inc., T. Rowe Price
Dividend Growth Fund, Inc., T. Rowe Price Short-Term Bond Fund,
Inc., T. Rowe Price High Yield Fund, Inc., T. Rowe Price Tax-Free
High Yield Fund, Inc., T. Rowe Price New America Growth Fund, T.
Rowe Price Equity Income Fund, T. Rowe Price GNMA Fund, T. Rowe
Price Capital Appreciation Fund, T. Rowe Price State Tax-Free
Income Trust, T. Rowe Price California Tax-Free Income Trust, T.
Rowe Price Science & Technology Fund, Inc., T. Rowe Price
Small-Cap Value Fund, Inc., Institutional International Funds,
Inc., T. Rowe Price U.S. Treasury Funds, Inc., T. Rowe Price
Index Trust, Inc., T. Rowe Price Spectrum Fund, Inc., T. Rowe
Price Balanced Fund, Inc., T. Rowe Price Short-Term U.S.
PAGE 127
Government Fund, Inc., T. Rowe Price Mid-Cap Growth Fund, Inc.,
T. Rowe Price OTC Fund, Inc., T. Rowe Price Tax-Free Insured
Intermediate Bond Fund, Inc., T. Rowe Price Blue Chip Growth
Fund, Inc., T. Rowe Price Summit Funds, Inc., T. Rowe Price
Summit Municipal Funds, Inc., T. Rowe Price Equity Series, Inc.,
T. Rowe Price International Series, Inc., T. Rowe Price Fixed
Income Series, Inc., T. Rowe Price Personal Strategy Funds, Inc.,
T. Rowe Price Value Fund, Inc., T. Rowe Price Capital Opportunity
Fund, Inc., T. Rowe Price Corporate Income Fund, Inc., T. Rowe
Price Health Sciences Fund, Inc., T. Rowe Price Mid-Cap Value
Fund, Inc., Institutional Equity Funds, Inc., and T. Rowe Price
Financial Services Fund, Inc. The Registrant and the forty-five
investment companies listed above, with the exception of
Institutional International Funds, Inc., will be
collectively referred to as the Price Funds. The investment
manager for the Price Funds, excluding T. Rowe Price
International Funds, Inc. and T. Rowe Price International Series
, Inc., is the manager. Price-Fleming is the manager to T. Rowe
Price International Funds, Inc., T. Rowe Price International
Series, Inc. and Institutional International Funds, Inc. and is
50% owned by TRP Finance, Inc., a wholly owned subsidiary of the
Manager, 25% owned by Copthall Overseas Limited, a wholly owned
subsidiary of Robert Fleming Holdings Limited, and 25% owned by
Jardine Fleming International Holdings Limited. In addition to
the corporate insureds, the policies also cover the officers,
directors, and employees of each of the named insureds. The
premium is allocated among the named corporate insureds in
accordance with the provisions of Rule 17d-1(d)(7) under the
Investment Company Act of 1940.
Article X, Section 10.01 of the Registrant's By-Laws
provides as follows:
Section 10.01. Indemnification and Payment of Expenses in
Advance. The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer,
employee, or agent of the Corporation, or who is or has been
serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, who, by reason of his
position was, is, or is threatened to be made, a party to any
threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against
any judgments, penalties, fines, settlements, and reasonable
expenses (including attorneys' fees) incurred by such Indemnitee
in connection with any Proceeding, to the fullest extent that
such indemnification may be lawful under applicable Maryland law,
as from time to time amended. The Corporation shall pay any
reasonable expenses so incurred by such Indemnitee in defending a
PAGE 128
Proceeding in advance of the final disposition thereof to the
fullest extent that such advance payment may be lawful under
applicable Maryland Law, as from time to time amended. Subject to
any applicable limitations and requirements set forth in the
Corporation's Articles of Incorporation and in these By-Laws, any
payment of indemnification or advance of expenses shall be made
in accordance with the procedures set forth in applicable
Maryland law, as from time to time amended.
Notwithstanding the foregoing, nothing herein shall protect
or purport to protect any Indemnitee against any liability to
which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office ("Disabling
Conduct").
Anything in this Article X to the contrary notwithstanding,
no indemnification shall be made by the Corporation to any
Indemnitee unless:
(a) there is a final decision on the merits by a court or
other body before whom the Proceeding was brought that
the Indemnitee was not liable by reason of Disabling
Conduct; or
(b) in the absence of such a decision, there is a
reasonable determination, based upon a review of the
facts, that the Indemnitee was not liable by reason of
Disabling Conduct, which determination shall be made
by:
(i)the vote of a majority of a quorum of directors who
are neither "interested persons" of the Corporation,
as defined in Section 2(a)(19) of the Investment
Company Act of 1940, nor parties to the Proceeding;
or
(ii)an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding,
any advance of expenses by the Corporation to any Indemnitee
shall be made only upon the undertaking by such Indemnitee to
repay the advance unless it is ultimately determined that such
Indemnitee is entitled to indemnification as above provided, and
only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking;
or
PAGE 129
(b) the Corporation shall be insured against losses arising
by reason of any lawful advances; or
(c) there is a determination, based on a review of readily
available facts, that there is reason to believe that
the Indemnitee will ultimately be found entitled to
indemnification, which determination shall be made by:
(i)a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined
in Section 2(a)(19) of the Investment Company Act of
1940, nor parties to the Proceeding; or
(ii)an independent legal counsel in a written
opinion.
Section 10.02 of the Registrant's By-Laws provides as
follows:
Section 10.02. Insurance of Officers, Directors, Employees,
and Agents. To the fullest extent permitted by applicable
Maryland law and by Section 17(h) of the Investment Company Act
of 1940, as from time to time amended, the Corporation may
purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee, or agent of the Corporation,
or who is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against
any liability asserted against him and incurred by him in or
arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
PAGE 130
issue.
Item 28. Business and Other Connections of Investment Manager.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), a
Maryland corporation, is a corporate joint venture 50% owned by
TRP Finance, Inc., a wholly owned subsidiary of the Manager.
Price-Fleming was incorporated in Maryland in 1979 to provide
investment counsel service with respect to foreign securities for
institutional investors in the United States. In addition to
managing private counsel client accounts, Price-Fleming also
sponsors registered investment companies which invest in foreign
securities, serves as general partner of RPFI International
Partners, Limited Partnership, and provides investment advice to
the T. Rowe Price Trust Company, trustee of the International
Common Trust Fund.
T. Rowe Price Investment Services, Inc. ("Investment
Services"), a wholly owned subsidiary of the Manager, was
incorporated in Maryland in 1980 for the purpose of acting as the
principal underwriter and distributor for the Price Funds.
Investment Services is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. In 1984, Investment
Services expanded its activities to include a discount brokerage
service.
TRP Distribution, Inc., a wholly owned subsidiary of
Investment Services, was incorporated in Maryland in 1991. It was
organized for and engages in the sale of certain investment
related products prepared by Investment Services.
T. Rowe Price Associates Foundation, Inc. (the
"Foundation"), was incorporated in 1981 (and is not a subsidiary
of the Manager). The Foundation s overall objective emphasizes
various community needs by giving to a broad range of
educational, civic, cultural, and health-related institutions.
The Foundation has a very generous matching gift program whereby
employee gifts designated to qualifying institutions are matched
according to established guidelines.
T. Rowe Price Services, Inc. ("Price Services"), a wholly
owned subsidiary of the Manager, was incorporated in Maryland in
1982 and is registered as a transfer agent under the Securities
Exchange Act of 1934. Price Services provides transfer agent,
dividend disbursing, and certain other services, including
shareholder services, to the Price Funds.
T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a
wholly owned subsidiary of the Manager, was incorporated in
PAGE 131
Maryland in 1991 and is registered as a transfer agent under the
Securities Exchange Act of 1934. RPS provides administrative,
recordkeeping, and subaccounting services to administrators of
employee benefit plans.
T. Rowe Price Trust Company ("Trust Company"), a wholly
owned subsidiary of the Manager, is a Maryland-chartered limited-
purpose trust company, organized in 1983 for the purpose of
providing fiduciary services. The Trust Company serves as
trustee/custodian for employee benefit plans, individual
retirement accounts, and common trust funds and as
trustee/investment agent for one trust.
T. Rowe Price Investment Technologies, Inc. was incorporated
in Maryland in 1996. A wholly owned subsidiary of the Manager, it
owns the technology rights, hardware, and software of the Manager
and affiliated companies and provides technology services to
them.
T. Rowe Price Threshold Fund Associates, Inc., a wholly
owned subsidiary of the Manager, was incorporated in Maryland in
1994 and serves as the general partner of T. Rowe Price Threshold
Fund III, L.P., a Delaware limited partnership established in
1994.
T. Rowe Price Threshold Fund II, L.P., a Delaware limited
partnership, was organized in 1986 by the Manager and invests in
private financings of small companies with high growth potential;
the Manager is the General Partner of the partnership.
T. Rowe Price Threshold Fund III, L.P., a Delaware limited
partnership, was organized in 1994 by the Manager and invests in
private financings of small companies with high growth potential;
T. Rowe Price Threshold Fund Associates, Inc. is the General
Partner of this partnership.
RPFI International Partners, L.P., is a Delaware limited
partnership organized in 1985 for the purpose of investing in a
diversified group of small and medium-sized non-U.S. companies.
Price-Fleming is the general partner of this partnership, and
certain institutional investors, including advisory clients of
Price-Fleming, are its limited partners.
T. Rowe Price Real Estate Group, Inc. ("Real Estate Group"),
is a Maryland corporation and a wholly owned subsidiary of the
Manager established in 1986 to provide real estate services.
Subsidiaries of Real Estate Group are: T. Rowe Price Realty
Income Fund I Management, Inc., a Maryland corporation (General
Partner of T. Rowe Price Realty Income Fund I, A No-Load Limited
Partnership), T. Rowe Price Realty Income Fund II Management,
PAGE 132
Inc., a Maryland corporation (General Partner of T. Rowe Price
Realty Income Fund II, America's Sales-Commission-Free Real
Estate Limited Partnership), T. Rowe Price Realty Income Fund III
Management, Inc., a Maryland corporation (General Partner of T.
Rowe Price Realty Income Fund III, America's
Sales-Commission-Free Real Estate Limited Partnership, and T.
Rowe Price Realty Income Fund IV Management, Inc., a Maryland
corporation (General Partner of T. Rowe Price Realty Income Fund
IV, America's Sales-Commission-Free Real Estate Limited
Partnership). Real Estate Group serves as investment manager to
T. Rowe Price Renaissance Fund, Ltd., A Sales-Commission-Free
Real Estate Investment, established in 1989 as a Maryland
corporation which qualifies as a REIT.
T. Rowe Price Stable Asset Management, Inc. ("Stable Asset
Management"), was incorporated in Maryland in 1988 as a wholly
owned subsidiary of the Manager. Stable Asset Management, is
registered as an investment adviser under the Investment Advisers
Act of 1940, and specializes in the management of investment
portfolios which seek stable and consistent investment returns
through the use of guaranteed investment contracts, bank
investment contracts, structured investment contracts, and
short-term fixed income securities.
T. Rowe Price Recovery Fund Associates, Inc., a Maryland
corporation, is a wholly owned subsidiary of the Manager
organized in 1988 for the purpose of serving as the General
Partner of T. Rowe Price Recovery Fund, L.P., T. Rowe Price
Recovery Fund II, L.P., Delaware limited partnerships which
invest in financially distressed companies.
T. Rowe Price Recovery Fund II Associates, Inc., is a
Maryland limited liability Company organized in 1996. Wholly
owned by the Manager, it serves as the General Partner of T. Rowe
Price Recovery Fund II, L.P., a Delaware limited partnership
which also invests in financially distressed companies.
T. Rowe Price (Canada), Inc. ("TRP Canada") is a Maryland
corporation organized in 1988 as a wholly owned subsidiary of the
Manager. This entity is registered as an investment adviser under
the Investment Advisers Act of 1940 and as a non-Canadian Adviser
under the Securities Act (Ontario).
T. Rowe Price Insurance Agency, Inc., is a wholly owned
subsidiary of T. Rowe Price Associates, Inc. organized in
Maryland in 1994 and licensed to do business in several states to
act primarily as an insurance agency in connection with the sale
of the Price Funds' variable annuity products.
Since 1983, the Manager has organized several distinct
PAGE 133
Maryland limited partnerships, which are informally called the
Pratt Street Ventures partnerships, for the purpose of acquiring
interests in growth-oriented businesses.
TRP Suburban, Inc., is a Maryland corporation organized in
1990 as a wholly owned subsidiary of the Manager. It entered into
agreements with McDonogh School and CMANE-McDonogh-Rowe Limited
Partnership to construct an office building in Owings Mills,
Maryland, which currently houses the Manager's transfer agent,
plan administrative services, retirement plan services, and
operations support functions.
TRP Suburban Second, Inc., a wholly owned Maryland
subsidiary of T. Rowe Price Associates, Inc., was incorporated in
1995 to primarily engage in the development and ownership of real
property located in Owings Mills, Maryland.
TRP Finance, Inc., a wholly owned subsidiary of the Manager,
is a Delaware corporation organized in 1990 to manage certain
passive corporate investments and other intangible assets.
T. Rowe Price Strategic Partners Fund II, L.P. is a Delaware
limited partnership organized in 1992 for the purpose of
investing in small public and private companies seeking capital
for expansion or undergoing a restructuring of ownership. The
general partner of the Fund is T. Rowe Price Strategic Partners,
L.P., ("Strategic Partners"), a Delaware limited partnership
whose general partner is T. Rowe Price Strategic Partners
Associates, Inc., a Maryland corporation which is a wholly owned
subsidiary of the Manager.
Listed below are the directors of the Manager who have other
substantial businesses, professions, vocations, or employment
aside from that of Director of the Manager:
JAMES E. HALBKAT, JR., Director of the Manager. Mr. Halbkat is
President of U.S. Monitor Corporation, a provider of public
response systems. Mr. Halbkat's address is: P.O. Box 23109,
Hilton Head Island, South Carolina 29925.
RICHARD L. MENSCHEL, Director of the Manager. Mr. Menschel is a
limited partner of The Goldman Sachs Group, L.P. Mr. Menschel's
address is 85 Broad Street, 2nd Floor, New York, New York 10004.
JOHN W. ROSENBLUM, Director of the Manager. Mr. Rosenblum is the
Dean of the Jepson School of Leadership Studies at the University
of Richmond and a director of: Chesapeake Corporation, a
manufacturer of paper products; Cadmus Communications Corp., a
provider of printing and communication services; Comdial
Corporation, a manufacturer of telephone systems for businesses;
PAGE 134
Cone Mills Corporation, a textiles producer; and Providence
Journal Company, a publisher of newspapers and owner of broadcast
television stations. Mr. Rosenblum's address is: University of
Richmond, Virginia 23173.
ROBERT L. STRICKLAND, Director of the Manager. Mr. Strickland is
Chairman of Lowe's Companies, Inc., a retailer of specialty home
supplies and a Director of Hannaford Bros., Co., a food retailer.
Mr. Strickland's address is 604 Two Piedmont Plaza Building,
Winston-Salem, North Carolina 27104.
PHILIP C. WALSH, Director of the Manager. Mr. Walsh is a
Consultant to Cyprus Amax Minerals Company, Englewood, Colorado.
Mr. Walsh's address is: Pleasant Valley, Peapack, New Jersey
07977.
ANNE MARIE WHITTEMORE, Director of the Manager. Mrs. Whittemore
is a partner of the law firm of McGuire, Woods, Battle & Boothe
and is a director of Owens & Minor, Inc.; USF&G Corporation; the
James River Corporation of Virginia; and Albemarle Corporation.
Mrs. Whittemore's address is One James Center, Richmond, Virginia
23219.
With the exception of Messrs. Halbkat, Menschel, Rosenblum,
Strickland, and Walsh, and Mrs. Whittemore, all of the following
directors of the Manager are employees of the Manager.
George J. Collins is a Director of the Manager.
James S. Riepe, who is a Vice-Chairman of the Board, Director,
and Managing Director of the Manager, is also a Director of
Price-Fleming.
George A. Roche, who is Chairman of the Board, President, a
Director, and Managing Director of the Manager, is a Director and
Vice President of Price-Fleming.
M. David Testa, who is a Vice-Chairman of the Board, Director,
and Managing Director of the Manager, is Chairman of the Board of
Price-Fleming.
Henry H. Hopkins, who is a Director and Managing Director of the
Manager, is a Vice President of Price-Fleming.
Charles P. Smith and Peter Van Dyke, who are Managing Directors
of the Manager, are Vice Presidents of Price-Fleming.
James A. C. Kennedy III, John H. Laporte, Jr., William T.
Reynolds, and Brian C. Rogers are Directors and Managing
Directors of the Manager.
PAGE 135
Preston G. Athey, Brian W.H. Berghuis, Edward C. Bernard, Stephen
W. Boesel, Thomas H. Broadus, Jr., Michael A. Goff, Andrew C.
Goresh, Mary J. Miller, Charles A. Morris, Edmund M. Notzon III,
R. Todd Ruppert, Charles E. Vieth, and Richard T. Whitney are
Managing Directors of the Manager.
George A. Murnaghan, who is a Managing Director of the Manager,
is also an Executive Vice President of Price-Fleming.
Robert P. Campbell, Michael J. Conelius, Roger L. Fiery III, R.
Aran Gordon, Veena A. Kutler, Heather R. Landon, Nancy M. Morris,
Robert W. Smith, William F. Wendler II, and Edward A. Wiese, who
are Vice Presidents of the Manager, are Vice Presidents of
Price-Fleming.
Todd J. Henry, and Kathleen G. Polk, who are employees of the
Manager, are Vice Presidents of Price-Fleming.
Kimberly A. Haker, an Assistant Vice President of the Manager, is
Assistant Vice President and Controller of Price-Fleming.
Alvin M. Younger, Jr., who is Chief Financial Officer, Managing
Director, Secretary, and Treasurer of the Manager, is Secretary
and Treasurer of Price-Fleming.
Nolan L. North, who is a Vice President and Assistant Treasurer
of the Manager, is Assistant Treasurer of Price-Fleming.
Leah P. Holmes, who is an Assistant Vice President of the
Manager, is a Vice President of Price-Fleming.
Ava M. Rainey, Assistant Vice President of the Manager, is
Assistant Vice President of Price-Fleming.
Barbara A. Van Horn, who is Assistant Secretary of the Manager,
is Assistant Secretary of Price-Fleming.
Elsie S. Crawford, employee of the Manager, is Assistant Vice
President of Price-Fleming.
Certain directors and officers of the Manager are also
officers and/or directors of one or more of the Price Funds
and/or one or more of the affiliated entities listed herein.
See also "Management of Fund," in Registrant's Statement of
Additional Information.
PAGE 136
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is
Investment Services. Investment Services acts as the
principal underwriter for the other seventy-six Price
Funds. Investment Services, a wholly owned subsidiary
of the Manager, is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc.
Investment Services has been formed for the limited
purpose of distributing the shares of the Price Funds
and will not engage in the general securities business.
Since the Price Funds are sold on a no-load basis,
Investment Services will not receive any commission or
other compensation for acting as principal underwriter.
(b) The address of each of the directors and officers of
Investment Services listed below is 100 East Pratt
Street, Baltimore, Maryland 21202.
Positions and
Name and Principal Positions and Offices Offices With
Business Address With Underwriter Registrant
__________________ ______________________ ______________
James S. Riepe Chairman of the Board Vice President
and Director
Edward C. Bernard President None
Henry H. Hopkins Vice President and DirectorVice
President
Charles E. Vieth Vice President and DirectorNone
Patricia M. Archer Vice President None
Joseph C. Bonasorte Vice President None
Darrell N. Braman Vice President None
Ronae M. Brock Vice President None
Meredith C. Callanan Vice President None
Christine M. Carolan Vice President None
Laura H. Chasney Vice President None
Renee M. Christoff Vice President None
Victoria C. Collins Vice President None
Alana S. Curtice Vice President None
Christopher W. Dyer Vice President None
Christine S. Fahlund Vice President None
Forrest R. Foss Vice President None
Andrea G. Griffin Vice President None
Douglas E. Harrison Vice President None
David J. Healy Vice President None
Joseph P. Healy Vice President None
Walter J. Helmlinger Vice President None
Eric G. Knauss Vice President None
PAGE 137
Douglas G. Kremer Vice President None
Sharon R. Krieger Vice President None
Keith W. Lewis Vice President None
James Link Vice President None
Sarah McCafferty Vice President None
Maurice A. Minerbi Vice President None
Nancy M. Morris Vice President None
George A. Murnaghan Vice President None
Steven E. Norwitz Vice President None
Kathleen M. O'Brien Vice President None
Scott R. Powell Vice President None
Pamela D. Preston Vice President None
Corbin D. Riemer Vice President None
Lucy B. Robins Vice President None
John R. Rockwell Vice President None
Christopher S. Ross Vice President None
Kenneth J. Rutherford Vice President None
Daniel S. Schreiner Vice President None
Kristin E. Seeberger Vice President None
Monica R. Tucker Vice President None
William F. Wendler II Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Alvin M. Younger, Jr. Secretary and Treasurer None
Mark S. Finn Controller & Vice PresidentNone
Richard J. Barna Assistant Vice President None
Catherine L. Berkenkemper Assistant Vice President None
Robin C.B. Binkley Assistant Vice President None
Patricia S. Butcher Assistant Vice President Assistant
Secretary
Cheryl L. Emory Assistant Vice President None
John A. Galateria Assistant Vice President None
Edward F. Giltenan Assistant Vice President None
Janelyn A. Healey Assistant Vice President None
Kathleen Hussey Assistant Vice President None
Valerie King Assistant Vice President None
Steven A. Larson Assistant Vice President None
Jeanette M. LeBlanc Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Janice D. McCrory Assistant Vice President None
Sandra J. McHenry Assistant Vice President None
Mark J. Mitchell Assistant Vice President None
Danielle N. Nicholson Assistant Vice President None
Barbara A. O'Connor Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Carin C. Quinn Assistant Vice President None
David A. Roscum Assistant Vice President None
Arthur J. Silber Assistant Vice President None
Jerome Tuccille Assistant Vice President None
Linda C. Wright Assistant Vice President None
PAGE 138
Nolan L. North Assistant Treasurer None
Barbara A. Van Horn Assistant Secretary None
(c) Not applicable. Investment Services will not receive
any compensation with respect to its activities as
underwriter for the Price Funds since the Price Funds
are sold on a no-load basis.
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be
maintained by T. Rowe Price Diversified Small-Cap Growth
Fund, Inc. under Section 31(a) of the Investment Company Act
of 1940 and the rules thereunder will be maintained by T.
Rowe Price Diversified Small-Cap Growth Fund, Inc., at its
offices at 100 East Pratt Street, Baltimore, Maryland 21202.
Transfer agent, dividend disbursing, and shareholder service
activities are performed by T. Rowe Price Services, Inc., at
100 East Pratt Street, Baltimore, Maryland 21202.
Item 31. Management Services.
The Registrant is not a party to any management-related
service contract, other than as set forth in the Prospectus.
Item 32. Undertakings.
(a) The undersigned Registrant hereby undertakes to file an
amendment to the Registration Statement with certified
financial statements showing the initial capital
received before accepting subscriptions from any
persons in excess of 25 if it raises its initial
capital pursuant to Section 14(a)(3) of the 1940 Act.
(b) The Fund will file, within four to six months from the
effective date of its registration statement, a
post-effective amendment using financial statements
which need not be certified.
(c) If requested to do so by the holders of at least 10% of
all votes entitled to be cast, the Registrant will call
a meeting of shareholders for the purpose of voting on
the question of removal of a director or directors and
will assist in communications with other shareholders
to the extent required by Section 16(c).
(d) Each series of the Registrant agrees to furnish, upon
request and without charge, a copy of its latest Annual
Report to each person to whom as prospectus is
delivered.
PAGE 139
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Baltimore, State of Maryland, this 1st
day of May, 1997.
T. ROWE PRICE DIVERSIFIED SMALL-CAP
GROWTH FUND, INC.
By: /s/Richard T. Whitney
Richard T. Whitney
President
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
_________ ______ _____
/s/Richard T. Whitney
Richard T. Whitney President
(Principal
Executive Officer) May 1, 1997
/s/Carmen F. Deyesu
Carmen F. Deyesu Treasurer
(Principal Financial
Officer) May 1, 1997
/s/Donald W. Dick, Jr.
Donald W. Dick, Jr. Director May 1, 1997
/s/David K. Fagin
David K. Fagin Director May 1, 1997
/s/John H. Laporte
John H. Laporte Director May 1, 1997
/s/Hanne M. Merriman
Hanne M. Merriman Director May 1, 1997
PAGE 140
/s/James S. Riepe
James S. Riepe Director May 1, 1997
/s/M. David Testa
M. David Testa Director May 1, 1997
/s/Hubert D. Vos
Hubert D. Vos Director May 1, 1997
/s/Paul M. Wythes
Paul M. Wythes Director May 1, 1997
PAGE 1
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
ARTICLES OF INCORPORATION
FIRST: THE UNDERSIGNED, Henry H. Hopkins, whose address
is 100 East Pratt Street, Baltimore, Maryland 21202, being at
least eighteen years of age, acting as incorporator, does hereby
form a corporation under the General Laws of the State of
Maryland.
SECOND: (a) The name of the corporation (which is
hereinafter called the "Corporation") is:
T. Rowe Price Diversified Small-Cap Growth Fund, Inc.
(b) The Corporation acknowledges that it is adopting its
corporate name through permission of T. Rowe Price Associates,
Inc., a Maryland corporation (hereinafter referred to as "Price
Associates"), and acknowledges that Price Associates has the sole
and exclusive right to use or license the use of the name "T.
Rowe Price" in commerce. The Corporation agrees that if at any
time and for any cause, the investment adviser or distributor of
the Corporation ceases to be Price Associates or an affiliate of
Price Associates, the Corporation shall at the written request of
Price Associates take all requisite action to amend its charter
to eliminate the name "T. Rowe Price" from the Corporation's
corporate name and from the designations of its shares of capital
stock. The Corporation further acknowledges that Price
Associates reserves the right to grant the non-exclusive right to
use the name "T. Rowe Price" to any other corporation, including
other investment companies, whether now in existence or hereafter
created.
THIRD: (a) The purposes for which the Corporation is
formed and the business and objects to be carried on and promoted
by it are:
(1) To engage generally in the business of investing,
reinvesting, owning, holding or trading in securities, as
defined in the Investment Company Act of 1940, as from time
to time amended (hereinafter referred to as the "Investment
Company Act"), as an investment company classified under the
Investment Company Act as a management company.
PAGE 2
(2) To engage in any one or more businesses or
transactions, or to acquire all or any portion of any entity
engaged in any one or more businesses or transactions, which
the Board of Directors may from time to time authorize or
approve, whether or not related to the business described
elsewhere in this Article or to any other business at the
time or theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be
in no way limited or restricted by reference to, or inference
from, the terms of any other clause of this or any other Article
of the charter of the Corporation, and each shall be regarded as
independent; and they are intended to be and shall be construed
as powers as well as purposes and objects of the Corporation and
shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of
Maryland.
FOURTH: The present address of the principal office of the
Corporation in this State is:
100 East Pratt Street
Baltimore, Maryland 21202
FIFTH: The name and address of the resident agent of the
Corporation in this State are:
Henry H. Hopkins
100 East Pratt Street
Baltimore, Maryland 21202
Said resident agent is a citizen of the State of Maryland,
and actually resides therein.
SIXTH: (a) The total number of shares of stock of all
classes and series which the Corporation initially has authority
to issue is One Billion (1,000,000,000) shares of capital stock
(par value $.0001 per share), amounting in aggregate par value to
One Hundred Thousand Dollars ($100,000). All of such shares are
initially classified as "Common Stock" of the "Diversified Small-
Cap Growth" series. The Board of Directors may classify and
reclassify any unissued shares of capital stock (whether or not
such shares have been previously classified or reclassified) by
setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock.
(b) The following is a description of the preferences,
PAGE 3
conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of redemption of the shares of Common Stock classified
as the "Diversified Small-Cap Growth" series and any additional
series of Common Stock of the Corporation (unless provided
otherwise by the Board of Directors with respect to any such
additional series at the time it is established and designated):
(1) Assets Belonging to Series. All consideration
received by the Corporation from the issue or sale of shares
of a particular series, together with all assets in which
such consideration is invested or reinvested, all income,
earnings, profits and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any
investment or reinvestment of such proceeds in whatever form
the same may be, shall irrevocably belong to that series for
all purposes, subject only to the rights of creditors, and
shall be so recorded upon the books of account of the
Corporation. Such consideration, assets, income, earnings,
profits and proceeds, together with any General Items
allocated to that series as provided in the following
sentence, are herein referred to collectively as "assets
belonging to" that series. In the event that there are any
assets, income, earnings, profits or proceeds which are not
readily identifiable as belonging to any particular series
(collectively, "General Items"), such General Items shall be
allocated by or under the supervision of the Board of
Directors to and among any one or more of the series
established and designated from time to time in such manner
and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable; and any General Items
so allocated to a particular series shall belong to that
series. Each such allocation by the Board of Directors
shall be conclusive and binding for all purposes.
(2) Liabilities of Series. The assets belonging to
each particular series shall be charged with the liabilities
of the Corporation in respect of that series and all
expenses, costs, charges and reserves attributable to that
series, and any general liabilities, expenses, costs,
charges or reserves of the Corporation which are not readily
identifiable as pertaining to any particular series, shall
be allocated and charged by or under the supervision of the
Board of Directors to and among any one or more of the
series established and designated from time to time in such
manner and on such basis as the Board of Directors, in its
sole discretion, deems fair and equitable. The liabilities,
expenses, costs, charges and reserves allocated and so
charged to a series are herein referred to collectively as
PAGE 4
"liabilities of" that series. Each allocation of
liabilities, expenses, costs, charges and reserves by or
under the supervision of the Board of Directors shall be
conclusive and binding for all purposes.
(3) Dividends and Distributions. Dividends and
capital gains distributions on shares of a particular series
may be paid with such frequency, in such form and in such
amount as the Board of Directors may determine by resolution
adopted from time to time, or pursuant to a standing
resolution or resolutions adopted only once or with such
frequency as the Board of Directors may determine, after
providing for actual and accrued liabilities of that series.
All dividends on shares of a particular series shall be paid
only out of the income belonging to that series and all
capital gains distributions on shares of a particular series
shall be paid only out of the capital gains belonging to
that series. All dividends and distributions on shares of a
particular series shall be distributed pro rata to the
holders of that series in proportion to the number of shares
of that series held by such holders at the date and time of
record established for the payment of such dividends or
distributions, except that in connection with any dividend
or distribution program or procedure, the Board of Directors
may determine that no dividend or distribution shall be
payable on shares as to which the shareholder's purchase
order and/or payment have not been received by the time or
times established by the Board of Directors under such
program or procedure.
Dividends and distributions may be paid in cash,
property or additional shares of the same or another series,
or a combination thereof, as determined by the Board of
Directors or pursuant to any program that the Board of
Directors may have in effect at the time for the election by
shareholders of the form in which dividends or distributions
are to be paid. Any such dividend or distribution paid in
shares shall be paid at the current net asset value thereof.
(4) Voting. On each matter submitted to a vote of the
shareholders, each holder of shares shall be entitled to one
vote for each share standing in his name on the books of the
Corporation, irrespective of the series thereof, and all
shares of all series shall vote as a single class ("Single
Class Voting"); provided, however, that (i) as to any matter
with respect to which a separate vote of any series is
required by the Investment Company Act or by the Maryland
General Corporation Law, such requirement as to a separate
vote by that series shall apply in lieu of Single Class
Voting; (ii) in the event that the separate vote requirement
PAGE 5
referred to in (i) above applies with respect to one or more
series, then, subject to (iii) below, the shares of all
other series shall vote as a single class; and (iii) as to
any matter which does not affect the interest of a
particular series, including liquidation of another series
as described in subsection (7) below, only the holders of
shares of the one or more affected series shall be entitled
to vote.
(5) Redemption by Shareholders. Each holder of shares
of a particular series shall have the right at such times as
may be permitted by the Corporation to require the
Corporation to redeem all or any part of his shares of that
series, at a redemption price per share equal to the net
asset value per share of that series next determined after
the shares are properly tendered for redemption, less such
redemption fee or sales charge, if any, as may be
established by the Board of Directors in its sole
discretion. Payment of the redemption price shall be in
cash; provided, however, that if the Board of Directors
determines, which determination shall be conclusive, that
conditions exist which make payment wholly in cash unwise or
undesirable, the Corporation may, to the extent and in the
manner permitted by the Investment Company Act, make payment
wholly or partly in securities or other assets belonging to
the series of which the shares being redeemed are a part, at
the value of such securities or assets used in such
determination of net asset value.
Notwithstanding the foregoing, the Corporation may
postpone payment of the redemption price and may suspend the
right of the holders of shares of any series to require the
Corporation to redeem shares of that series during any
period or at any time when and to the extent permissible
under the Investment Company Act.
(6) Redemption by Corporation. The Board of Directors
may cause the Corporation to redeem at net asset value the
shares of any series from a holder (i) if the Board of
Directors of the Corporation determines in its sole
discretion that failure to so redeem such shares may have
materially adverse consequences to the holders of shares of
the Corporation or any series, or (ii) upon such other
conditions with respect to the maintenance of shareholder
accounts of a minimum amount as may from time to time be
established by the Board of Directors in its sole
discretion.
(7) Liquidation. In the event of the liquidation of a
particular series, the shareholders of the series that is
PAGE 6
being liquidated shall be entitled to receive, as a class,
when and as declared by the Board of Directors, the excess
of the assets belonging to that series over the liabilities
of that series. The holders of shares of any particular
series shall not be entitled thereby to any distribution
upon liquidation of any other series. The assets so
distributable to the shareholders of any particular series
shall be distributed among such shareholders in proportion
to the number of shares of that series held by them and
recorded on the books of the Corporation. The liquidation
of any particular series in which there are shares then
outstanding may be authorized by vote of a majority of the
Board of Directors then in office, subject to the approval
of a majority of the outstanding voting securities of that
series, as defined in the Investment Company Act, and
without the vote of the holders of shares of any other
series. The liquidation of a particular series may be
accomplished, in whole or in part, by the transfer of assets
of such series to another series or by the exchange of
shares of such series for the shares of another series.
(8) Net Asset Value Per Share. The net asset value
per share of any series shall be the quotient obtained by
dividing the value of the net assets of that series (being
the value of the assets belonging to that series less the
liabilities of that series) by the total number of shares of
that series outstanding, all as determined by or under the
direction of the Board of Directors in accordance with
generally accepted accounting principles and the Investment
Company Act. Subject to the applicable provisions of the
Investment Company Act, the Board of Directors, in its sole
discretion, may prescribe and shall set forth in the By-Laws
of the Corporation or in a duly adopted resolution of the
Board of Directors such bases and times for determining the
value of the assets belonging to, and the net asset value
per share of outstanding shares of, each series, or the net
income attributable to such shares, as the Board of
Directors deems necessary or desirable. The Board of
Directors shall have full discretion, to the extent not
inconsistent with the Maryland General Corporation Law and
the Investment Company Act, to determine which items shall
be treated as income and which items as capital and whether
any item of expense shall be charged to income or capital.
Each such determination and allocation shall be conclusive
and binding for all purposes.
The Board of Directors may determine to maintain the
net asset value per share of any series at a designated
constant dollar amount and in connection therewith may adopt
procedures not inconsistent with the Investment Company Act
PAGE 7
for the continuing declaration of income attributable to
that series as dividends and for the handling of any losses
attributable to that series. Such procedures may provide
that in the event of any loss, each shareholder shall be
deemed to have contributed to the capital of the Corporation
attributable to that series his pro rata portion of the
total number of shares required to be canceled in order to
permit the net asset value per share of that series to be
maintained, after reflecting such loss, at the designated
constant dollar amount. Each shareholder of the Corporation
shall be deemed to have agreed, by his investment in any
series with respect to which the Board of Directors shall
have adopted any such procedure, to make the contribution
referred to in the preceding sentence in the event of any
such loss.
(9) Equality. All shares of each particular series
shall represent an equal proportionate interest in the
assets belonging to that series (subject to the liabilities
of that series), and each share of any particular series
shall be equal to each other share of that series. The
Board of Directors may from time to time divide or combine
the shares of any particular series into a greater or lesser
number of shares of that series without thereby changing the
proportionate interest in the assets belonging to that
series or in any way affecting the rights of holders of
shares of any other series.
(10) Conversion or Exchange Rights. Subject to
compliance with the requirements of the Investment Company
Act, the Board of Directors shall have the authority to
provide that holders of shares of any series shall have the
right to convert or exchange said shares into shares of one
or more other classes or series of shares in accordance with
such requirements and procedures as may be established by
the Board of Directors.
(c) The shares of Common Stock of the Corporation, or of
any series of Common Stock of the Corporation to the extent such
Common Stock is divided into series, may be further subdivided
into classes (which may, for convenience of reference be referred
to a term other than "class"). Unless otherwise provided in the
Articles Supplementary establishing such classes, all such
shares, or all shares of a series of Common Stock in a series,
shall have identical voting, dividend, and liquidation rights.
Shares of the classes shall also be subject to such front-end
sales loads, contingent deferred sales charges, expenses
(including, without limitation, distribution expenses under a
Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other arrangement,
PAGE 8
however designated), conversion rights, and class voting rights
as shall be consistent with Maryland law, the Investment Company
Act of 1940, and the rules and regulations of the National
Association of Securities Dealers and shall be contained in
Articles Supplementary establishing such classes.
(d) For the purposes hereof and of any articles
supplementary to the charter providing for the classification or
reclassification of any shares of capital stock or of any other
charter document of the Corporation (unless otherwise provided in
any such articles or document), any class or series of stock of
the Corporation shall be deemed to rank:
(1) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class
or series shall be entitled to the receipt of dividends or
of amounts distributable on liquidation, dissolution or
winding up, as the case may be, in preference or priority to
holders of such other class or series;
(2) on a parity with another class or series either as
to dividends or upon liquidation, whether or not the
dividend rates, dividend payment dates or redemption or
liquidation price per share thereof be different from those
of such others, if the holders of such class or series of
stock shall be entitled to receipt of dividends or amounts
distributable upon liquidation, dissolution or winding up,
as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without
preference or priority over the holders of such other class
or series; and
(3) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders
of such class or series shall be subject or subordinate to
the rights of the holders of such other class or series in
respect of the receipt of dividends or the amounts
distributable upon liquidation, dissolution or winding up,
as the case may be.
(e) Unless otherwise prohibited by law, so long as the
Corporation is registered as an open-end management investment
company under the Investment Company Act, the Board of Directors
shall have the power and authority, without the approval of the
holders of any outstanding shares, to increase or decrease the
number of shares of capital stock or the number of shares of
capital stock of any class or series that the Corporation has
authority to issue.
(f) The Corporation may issue and sell fractions of shares
PAGE 9
of capital stock having pro rata all the rights of full shares,
including, without limitation, the right to vote and to receive
dividends, and wherever the words "share" or "shares" are used in
the charter or By-Laws of the Corporation, they shall be deemed
to include fractions of shares, where the context does not
clearly indicate that only full shares are intended.
(g) The Corporation shall not be obligated to issue
certificates representing shares of any class or series of
capital stock. At the time of issue or transfer of shares
without certificates, the Corporation shall provide the
shareholder with such information as may be required under the
Maryland General Corporation Law.
SEVENTH: The number of directors of the Corporation shall
initially be one (1), which number may be increased or decreased
pursuant to the By-Laws of the Corporation, but shall never be
less than the minimum number permitted by the General Laws of the
State of Maryland now or hereafter in force. James S. Riepe
shall serve as director until the first annual meeting and until
his successor is elected and qualified.
EIGHTH: (a) The following provisions are hereby adopted
for the purpose of defining, limiting, and regulating the powers
of the Corporation and of the directors and shareholders:
(1) The Board of Directors is hereby empowered to
authorize the issuance from time to time of shares of its
stock of any class or series, whether now or hereafter
authorized, or securities convertible into shares of its
stock of any class or series, whether now or hereafter
authorized, for such consideration as may be deemed
advisable by the Board of Directors and without any action
by the shareholders.
(2) No holder of any stock or any other securities of
the Corporation, whether now or hereafter authorized, shall
have any preemptive right to subscribe for or purchase any
stock or any other securities of the Corporation other than
such, if any, as the Board of Directors, in its sole
discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which
the Board of Directors may determine to offer for
subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any
class, series or type of stock or other securities at the
time outstanding to the exclusion of the holders of any or
all other classes, series or types of stock or other
securities at the time outstanding.
PAGE 10
(3) The Board of Directors of the Corporation shall,
consistent with applicable law, have power in its sole
discretion to determine from time to time in accordance with
sound accounting practice or other reasonable valuation
methods what constitutes annual or other net profits,
earnings, surplus, or net assets in excess of capital; to
determine that retained earnings or surplus shall remain in
the hands of the Corporation; to set apart out of any funds
of the Corporation such reserve or reserves in such amount
or amounts and for such proper purpose or purposes as it
shall determine and to abolish any such reserve or any part
thereof; to distribute and pay distributions or dividends in
stock, cash or other securities or property, out of surplus
or any other funds or amounts legally available therefor, at
such times and to the shareholders of record on such dates
as it may, from time to time, determine; and to determine
whether and to what extent and at what times and places and
under what conditions and regulations the books, accounts
and documents of the Corporation, or any of them, shall be
open to the inspection of shareholders, except as otherwise
provided by statute or by the By-Laws, and, except as so
provided, no shareholder shall have any right to inspect any
book, account or document of the Corporation unless
authorized so to do by resolution of the Board of Directors.
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a
majority of the total number of shares of all classes and
series of capital stock or of the total number of shares of
any class or series of capital stock entitled to vote as a
separate class, such action shall be valid and effective if
authorized by the affirmative vote of the holders of a
majority of the total number of shares of all classes and
series outstanding and entitled to vote thereon, or of the
class or series entitled to vote thereon as a separate
class, as the case may be, except as otherwise provided in
the charter of the Corporation.
(5) The Corporation shall indemnify (i) its directors
and officers, whether serving the Corporation or at its
request any other entity, to the full extent required or
permitted by the General Laws of the State of Maryland now
or hereafter in force, including the advance of expenses
under the procedures and to the full extent permitted by
law, and (ii) other employees and agents to such extent as
shall be authorized by the Board of Directors or the By-Laws
and as permitted by law. Nothing contained herein shall be
construed to protect any director or officer of the
Corporation against any liability to the Corporation or its
security holders to which he would otherwise be subject by
PAGE 11
reason of willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct
of his office. The foregoing rights of indemnification
shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of
Directors may take such action as is necessary to carry out
these indemnification provisions and is expressly empowered
to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or
such further indemnification arrangements as may be
permitted by law. No amendment of the charter of the
Corporation or repeal of any of its provisions shall limit
or eliminate the right of indemnification provided hereunder
with respect to acts or omissions occurring prior to such
amendment or repeal.
(6) To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, and
the Investment Company Act, no director or officer of the
Corporation shall be personally liable to the Corporation or
its shareholders for money damages; provided, however, that
nothing herein shall be construed to protect any director or
officer of the Corporation against any liability to the
Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office. No amendment of the
charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the limitation of
liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such
amendment or repeal.
(7) The Corporation reserves the right from time to
time to make any amendments of its charter which may now or
hereafter be authorized by law, including any amendments
changing the terms or contract rights, as expressly set
forth in its charter, of any of its outstanding stock by
classification, reclassification or otherwise.
(b) The enumeration and definition of particular powers of
the Board of Directors included in the foregoing shall in no way
be limited or restricted by reference to or inference from the
terms of any other clause of this or any other Article of the
charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any
powers conferred upon the Board of Directors under the General
Laws of the State of Maryland now or hereafter in force.
NINTH: The duration of the Corporation shall be perpetual.
PAGE 12
IN WITNESS WHEREOF, I have signed these Articles of
Incorporation, acknowledging the same to be my act, on this 22nd
day of April, 1997.
Witness:
/s/Patricia S. Butcher /s/Henry H. Hopkins
Patricia S. Butcher Henry H. Hopkins
PAGE 1
BY-LAWS
OF
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
PAGE 2
TABLE OF CONTENTS
Page
ARTICLE I. NAME OF CORPORATION, LOCATION OF OFFICES AND
SEAL . . . . . . . . . . . . . . . . . . . 1
1.01. Name . . . . . . . . . . . . . . . . . . . 1
1.02. Principal Office . . . . . . . . . . . . . 1
1.03. Seal . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. SHAREHOLDERS . . . . . . . . . . . . . . . 1
2.01. Annual Meetings . . . . . . . . . . . . . . 1
2.02. Special Meetings . . . . . . . . . . . . . 2
2.03. Place of Meetings . . . . . . . . . . . . . 2
2.04. Notice of Meetings . . . . . . . . . . . . 2
2.05. Voting - in General . . . . . . . . . . . . 2
2.06. Shareholders Entitled to Vote . . . . . . . 3
2.07. Voting - Proxies . . . . . . . . . . . . . 3
2.08. Quorum . . . . . . . . . . . . . . . . . . 3
2.09. Absence of Quorum . . . . . . . . . . . . . 3
2.10. Stock Ledger and List of Shareholders . . . 4
2.11. Informal Action by Shareholders . . . . . . 4
ARTICLE III. BOARD OF DIRECTORS . . . . . . . . . . . . 4
3.01. Number and Term of Office . . . . . . . . . 4
3.02. Qualification of Directors . . . . . . . . 4
3.03. Election of Directors . . . . . . . . . . . 5
3.04. Removal of Directors . . . . . . . . . . . 5
3.05. Vacancies and Newly Created Directorships . 5
3.06. General Powers . . . . . . . . . . . . . . 5
3.07. Power to Issue and Sell Stock . . . . . . . 6
3.08. Power to Declare Dividends . . . . . . . . 6
3.09. Annual and Regular Meetings . . . . . . . . 6
3.10. Special Meetings . . . . . . . . . . . . . 6
3.11. Notice . . . . . . . . . . . . . . . . . . 7
3.12. Waiver of Notice . . . . . . . . . . . . . 7
3.13. Quorum and Voting . . . . . . . . . . . . . 7
3.14. Conference Telephone . . . . . . . . . . . 7
3.15. Compensation . . . . . . . . . . . . . . . 7
3.16. Action without a Meeting . . . . . . . . . 7
3.17. Director Emeritus . . . . . . . . . . . . . 7
PAGE 3
ARTICLE IV. EXECUTIVE COMMITTEE AND OTHER COMMITTEES . 8
4.01. How Constituted . . . . . . . . . . . . . . 8
4.02. Powers of the Executive Committee . . . . . 8
4.03. Other Committees of the Board of Directors 8
4.04. Proceedings, Quorum and Manner of Acting . 8
4.05. Other Committees . . . . . . . . . . . . . 8
ARTICLE V. OFFICERS . . . . . . . . . . . . . . . . . 9
5.01. General . . . . . . . . . . . . . . . . . . 9
5.02. Election, Term of Office and Qualifications 9
5.03. Resignation . . . . . . . . . . . . . . . . 9
5.04. Removal . . . . . . . . . . . . . . . . . . 9
5.05. Vacancies and Newly Created Offices . . . . 9
5.06. Chairman of the Board . . . . . . . . . . . 9
5.07. President . . . . . . . . . . . . . . . . . 10
5.08. Vice President . . . . . . . . . . . . . . 10
5.09. Treasurer and Assistant Treasurers . . . . 10
5.10. Secretary and Assistant Secretaries . . . . 10
5.11. Subordinate Officers . . . . . . . . . . . 11
5.12. Remuneration . . . . . . . . . . . . . . . 11
5.13. Surety Bond . . . . . . . . . . . . . . . . 11
ARTICLE VI. CUSTODY OF SECURITIES AND CASH . . . . . . 11
6.01. Employment of a Custodian . . . . . . . . . 11
6.02. Central Certificate Service . . . . . . . . 12
6.03. Cash Assets . . . . . . . . . . . . . . . . 12
6.04. Free Cash Accounts . . . . . . . . . . . . 12
6.05. Action Upon Termination of Custodian
Agreement . . . . . . . . . . . . . . . . . 12
6.06. Other Arrangements . . . . . . . . . . . . 12
ARTICLE VII. EXECUTION OF INSTRUMENTS, VOTING OF
SECURITIES . . . . . . . . . . . . . . . . 13
7.01. Execution of Instruments . . . . . . . . . 13
7.02. Voting of Securities . . . . . . . . . . . 13
ARTICLE VIII. CAPITAL STOCK . . . . . . . . . . . . . . . 13
8.01. Ownership of Shares . . . . . . . . . . . . 13
8.02. Transfer of Capital Stock . . . . . . . . . 13
8.03. Transfer Agents and Registrars . . . . . . 14
8.04. Transfer Regulations . . . . . . . . . . . 14
8.05. Fixing of Record Date . . . . . . . . . . . 14
PAGE 4
ARTICLE IX. FISCAL YEAR, ACCOUNTANT . . . . . . . . . . 14
9.01. Fiscal Year . . . . . . . . . . . . . . . . 14
9.02. Accountant . . . . . . . . . . . . . . . . 14
ARTICLE X. INDEMNIFICATION AND INSURANCE . . . . . . . 15
10.01. Indemnification and Payment of Expenses in Advance
15
10.02. Insurance of Officers, Directors, Employees and
Agents 16
10.03. Amendment . . . . . . . . . . . . . . . . . 16
ARTICLE XI. AMENDMENTS . . . . . . . . . . . . . . . . 17
11.01. General . . . . . . . . . . . . . . . . . . 17
11.02. By Shareholders Only . . . . . . . . . . . 17
ARTICLE XII. MISCELLANEOUS . . . . . . . . . . . . . . . 17
12.01 Use of the Term "Annual Meeting" . . . . . 17
PAGE 5
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
(A Maryland Corporation)
BY-LAWS
ARTICLE I
NAME OF CORPORATION,
LOCATION OF OFFICES AND SEAL
Section 1.01. Name: The name of the Corporation is T. ROWE
PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
Section 1.02. Principal Office: The principal office of
the Corporation in the State of Maryland shall be located in the
City of Baltimore. The Corporation may, in addition, establish
and maintain such other offices and places of business, within
or outside the State of Maryland, as the Board of Directors may
from time to time determine. [MGCL, Sections 2-103(4),
2-108(a)(1)]*
Section 1.03. Seal: The corporate seal of the Corporation
shall be circular in form, and shall bear the name of the
Corporation, the year of its incorporation, and the words
"Corporate Seal, Maryland." The form of the seal shall be
subject to alteration by the Board of Directors and the seal may
be used by causing it or a facsimile to be impressed or affixed
or printed or otherwise reproduced. In lieu of affixing the
corporate seal to any document it shall be sufficient to meet the
requirements of any law, rule, or regulation relating to a
corporate seal to affix the word "(Seal)" adjacent to the
signature of the authorized officer of the Corporation. Any
officer or Director of the Corporation shall have authority to
affix the corporate seal of the Corporation to any document
requiring the same. [MGCL, Sections 1-304(b), 2-103(3)]
ARTICLE II
SHAREHOLDERS
Section 2.01. Annual Meetings: The Corporation shall not
be required to hold an annual meeting of its shareholders in any
year unless the Investment Company Act of 1940 requires an
election of directors by shareholders. In the event that the
Corporation shall be so required to hold an annual meeting, such
meeting shall be held at a date and time set by the Board of
Directors, which date shall be no later than 120 days after the
occurrence of the event requiring the meeting.
_________________________
PAGE 6
* Bracketed citations are to the General Corporation Law of
the State of Maryland ("MGCL") or to the United States
Investment Company Act of 1940, as amended (the "Investment
Company Act"), or to Rules of the United States Securities
and Exchange Commission thereunder ("SEC Rules"). The
citations are inserted for reference only and do not
constitute a part of the By-Laws.
Any shareholders' meeting held in accordance with the preceding
sentence shall for all purposes constitute the annual meeting of
shareholders for the fiscal year of the corporation in which the
meeting is held. At any such meeting, the shareholders shall
elect directors to hold the offices of any directors who have
held office for more than one year or who have been elected by
the Board of Directors to fill vacancies which result from any
cause. Except as the Articles of Incorporation or statute
provides otherwise, Directors may transact any business within
the powers of the Corporation as may properly come before the
meeting. Any business of the Corporation may be transacted at
the annual meeting without being specially designated in the
notice, except such business as is specifically required by
statute to be stated in the notice. [MGCL, Section 2-501]
Section 2.02. Special Meetings: Special meetings of the
shareholders may be called at any time by the Chairman of the
Board, the President, any Vice President, or by the Board of
Directors. Special meetings of the shareholders shall be called
by the Secretary on the written request of shareholders entitled
to cast at least ten (10) percent of all the votes entitled to be
cast at such meeting, provided that (a) such request shall state
the purpose or purposes of the meeting and the matters proposed
to be acted on, and (b) the shareholders requesting the meeting
shall have paid to the Corporation the reasonably estimated cost
of preparing and mailing the notice thereof, which the Secretary
shall determine and specify to such shareholders. Unless
requested by shareholders entitled to cast a majority of all the
votes entitled to be cast at the meeting, a special meeting need
not be called to consider any matter which is substantially the
same as a matter voted upon at any special meeting of the
shareholders held during the preceding twelve (12) months. [MGCL,
Section 2-502]
Section 2.03. Place of Meetings: All shareholders'
meetings shall be held at such place within the United States as
may be fixed from time to time by the Board of Directors. [MGCL,
Section 2-503]
Section 2.04. Notice of Meetings: Not less than ten (10)
days, nor more than ninety (90) days before each shareholders'
meeting, the Secretary or an Assistant Secretary of the
Corporation shall give to each shareholder entitled to vote at
the meeting, and each other shareholder entitled to notice of the
meeting, written notice stating (1) the time and place of the
PAGE 7
meeting, and (2) the purpose or purposes of the meeting if the
meeting is a special meeting or if notice of the purpose is
required by statute to be given. Such notice shall be personally
delivered to the shareholder, or left at his residence or usual
place of business, or mailed to him at his address as it appears
on the records of the Corporation. Notice shall be deemed to be
given when deposited in the United States mail addressed to the
shareholders as aforesaid. No notice of a shareholders' meeting
need be given to any shareholder who shall sign a written waiver
of such notice, whether before or after the meeting, which is
filed with the records of shareholders' meetings, or to any
shareholder who is present at the meeting in person or by proxy.
Notice of adjournment of a shareholders' meeting to another time
or place need not be given if such time and place are announced
at the meeting, unless the adjournment is for more than one
hundred twenty (120) days after the original record date.
Irregularities in the notice of any meeting to, or the nonreceipt
of any such notice by, any of the stockholders shall not
invalidate any action otherwise properly taken by or at any such
meeting. [MGCL, Sections 2-504, 2-511(d)]
Section 2.05. Voting - In General: Except as otherwise
specifically provided in the Articles of Incorporation or these
By-Laws, or as required by provisions of the Investment Company
Act with respect to the vote of a series, if any, of the
Corporation, at every shareholders' meeting, each shareholder
shall be entitled to one vote for each share of stock of the
Corporation validly issued and outstanding and held by such
shareholder, except that no shares held by the Corporation shall
be entitled to a vote. Fractional shares shall be entitled to
fractional votes. Except as otherwise specifically provided in
the Articles of Incorporation, or these By-Laws, or as required
by provisions of the Investment Company Act, a majority of all
the votes cast at a meeting at which a quorum is present is
sufficient to approve any matter which properly comes before the
meeting. The vote upon any question shall be by ballot whenever
requested by any person entitled to vote, but, unless such a
request is made, voting may be conducted in any way approved by
the meeting. [MGCL, Sections 2-214(a)(i), 2-506(a)(2), 2-507(a),
2-509(b)]
At any meeting at which there is an election of Directors,
the Chairman of the meeting may, and upon the request of the
holders of ten (10) percent of the stock entitled to vote at such
election shall, appoint two inspectors of election who shall
first subscribe an oath or affirmation to execute faithfully the
duties of inspectors at such election with strict impartiality
and according to the best of their ability, and shall, after the
election, make a certificate of the result of the vote taken. No
candidate for the office of Director shall be appointed as an
inspector.
PAGE 8
Section 2.06. Shareholders Entitled to Vote: If, pursuant
to Section 8.05 hereof, a record date has been fixed for the
determination of shareholders entitled to notice of or to vote at
any shareholders' meeting, each shareholder of the Corporation
shall be entitled to vote in person or by proxy, each share or
fraction of a share of stock outstanding in his name on the books
of the Corporation on such record date. If no record date has
been fixed for the determination of shareholders, the record date
for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of
business on the day on which notice of the meeting is mailed or
the 30th day before the meeting, whichever is the closer date to
the meeting, or, if notice is waived by all shareholders, at the
close of business on the tenth (10th) day next preceding the date
of the meeting. [MGCL, Sections 2-507, 2-511]
Section 2.07. Voting - Proxies: The right to vote by proxy
shall exist only if the instrument authorizing such proxy to act
shall have been executed in writing by the shareholder himself,
or by his attorney thereunto duly authorized in writing. No
proxy shall be valid more than eleven (11) months after its date
unless it provides for a longer period. All proxies shall be
delivered to the Secretary of the Corporation or to the person
acting as Secretary of the meeting before being voted, who shall
decide all questions concerning qualification of voters, the
validity of proxies, and the acceptance or rejection of votes.
If inspectors of election have been appointed by the chairman of
the meeting, such inspectors shall decide all such questions. A
proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at or
prior to exercise of such proxy the Corporation receives a
specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a shareholder
shall be deemed valid unless challenged at or prior to its
exercise. [MGCL, Section 2-507(b)]
Section 2.08. Quorum: The presence at any shareholders'
meeting, in person or by proxy, of shareholders entitled to cast
a majority of the votes entitled to be cast at the meeting shall
constitute a quorum. [MGCL, Section 2-506(a)]
Section 2.09. Absence of Quorum: In the absence of a
quorum, the holders of a majority of shares entitled to vote at
the meeting and present thereat in person or by proxy, or, if no
shareholder entitled to vote is present in person or by proxy,
any officer present who is entitled to preside at or act as
Secretary of such meeting, may adjourn the meeting sine die or
from time to time. Any business that might have been transacted
at the meeting originally called may be transacted at any such
adjourned meeting at which a quorum is present.
Section 2.10. Stock Ledger and List of Shareholders: It
shall be the duty of the Secretary or Assistant Secretary of the
PAGE 9
Corporation to cause an original or duplicate stock ledger to be
maintained at the office of the Corporation's transfer agent,
containing the names and addresses of all shareholders and the
number of shares of each class held by each shareholder. Such
stock ledger may be in written form, or any other form capable of
being converted into written form within a reasonable time for
visual inspection. Any one or more persons, who together are and
for at least six (6) months have been shareholders of record of
at least five percent (5%) of the outstanding capital stock of
the Corporation, may submit (unless the Corporation at the time
of the request maintains a duplicate stock ledger at its
principal office) a written request to any officer of the
Corporation or its resident agent in Maryland for a list of the
shareholders of the Corporation. Within twenty (20) days after
such a request, there shall be prepared and filed at the
Corporation's principal office a list, verified under oath by an
officer of the Corporation or by its stock transfer agent or
registrar, which sets forth the name and address of each
shareholder and the number of shares of each class which the
shareholder holds. [MGCL, Sections 2-209, 2-513]
Section 2.11. Informal Action By Shareholders: Any action
required or permitted to be taken at a meeting of shareholders
may be taken without a meeting if the following are filed with
the records of shareholders' meetings:
(a) A unanimous written consent which sets forth the
action and is signed by each shareholder entitled
to vote on the matter; and
(b) A written waiver of any right to dissent signed by
each shareholder entitled to notice of the
meeting, but not entitled to vote at it.
[MGCL, Section 2-505]
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. Number and Term of Office: The Board of
Directors shall consist of one (1) Director, which number may be
increased by a resolution of a majority of the entire Board of
Directors, provided that the number of Directors shall not be
more than fifteen (15) nor less than the lesser of (i) three (3)
or (ii) the number of shareholders of the Corporation. Each
Director (whenever elected) shall hold office until the next
annual meeting of shareholders and until his successor is elected
and qualifies or until his earlier death, resignation, or
removal. [MGCL, Sections 2-402, 2-404, 2-405]
PAGE 10
Section 3.02. Qualification of Directors: No member of the
Board of Directors need be a shareholder of the Corporation, but
at least one member of the Board of Directors shall be a person
who is not an interested person (as such term is defined in the
Investment Company Act) of the investment adviser of the
Corporation, nor an officer or employee of the Corporation.
[MGCL, Section 2-403; Investment Company Act, Section 10(d)]
Section 3.03. Election of Directors: Until the first
annual meeting of shareholders, or until successors are duly
elected and qualified, the Board of Directors shall consist of
the persons named as such in the Articles of Incorporation.
Thereafter, except as otherwise provided in Sections 3.04 and
3.05 hereof, at each annual meeting, the shareholders shall elect
Directors to hold office until the next annual meeting and/or
until their successors are elected and qualify. In the event
that Directors are not elected at an annual shareholders'
meeting, then Directors may be elected at a special shareholders'
meeting. Directors shall be elected by vote of the holders of a
plurality of the shares present in person or by proxy and
entitled to vote. [MGCL, Section 2-404]
Section 3.04. Removal of Directors: At any meeting of
shareholders, duly called and at which a quorum is present, the
shareholders may, by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any
Director or Directors from office, either with or without cause,
and may elect a successor or successors to fill any resulting
vacancies for the unexpired terms of removed Directors. [MGCL,
Sections 2-406, 2-407]
Section 3.05. Vacancies and Newly Created Directorships:
If any vacancies occur in the Board of Directors by reason of
resignation, removal or otherwise, or if the authorized number of
Directors is increased, the Directors then in office shall
continue to act, and such vacancies (if not previously filled by
the shareholders) may be filled by a majority of the Directors
then in office, whether or not sufficient to constitute a quorum,
provided that, immediately after filling such vacancy, at least
two-thirds of the Directors then holding office shall have been
elected to such office by the shareholders of the Corporation.
In the event that at any time, other than the time preceding the
first meeting of shareholders, less than a majority of the
Directors of the Corporation holding office at that time were so
elected by the shareholders, a meeting of the shareholders shall
be held promptly and in any event within sixty (60) days for the
purpose of electing Directors to fill any existing vacancies in
the Board of Directors unless the Securities and Exchange
Commission shall by order extend such period. Except as provided
in Section 3.04 hereof, a Director elected by the Board of
Directors to fill a vacancy shall be elected to hold office until
the next annual meeting of shareholders or until his successor is
PAGE 11
elected and qualifies. [MGCL, Section 2-407; Investment Company
Act, Section 16(a)]
Section 3.06. General Powers:
(a) The property, business, and affairs of the
Corporation shall be managed under the direction of the Board of
Directors which may exercise all the powers of the Corporation
except such as are by law, by the Articles of Incorporation, or
by these By-Laws conferred upon or reserved to the shareholders
of the Corporation. [MGCL, Section 2-401]
(b) All acts done by any meeting of the Directors or
by any person acting as a Director, so long as his successor
shall not have been duly elected or appointed, shall,
notwithstanding that it be afterwards discovered that there was
some defect in the election of the Directors or such person
acting as a Director or that they or any of them were
disqualified, be as valid as if the Directors or such person, as
the case may be, had been duly elected and were or was qualified
to be Directors or a Director of the Corporation.
Section 3.07. Power to Issue and Sell Stock: The Board of
Directors may from time to time authorize by resolution the
issuance and sale of any of the Corporation's authorized shares
to such persons as the Board of Directors shall deem advisable
and such resolution shall set the minimum price or value of
consideration for the stock or a formula for its determination,
and shall include a fair description of any consideration other
than money and a statement of the actual value of such
consideration as determined by the Board of Directors or a
statement that the Board of Directors has determined that the
actual value is or will be not less than a certain sum. [MGCL,
Section 2-203]
Section 3.08. Power to Declare Dividends:
(a) The Board of Directors, from time to time as it
may deem advisable, may declare and the Corporation pay
dividends, in cash, property, or shares of the Corporation
available for dividends out of any source available for
dividends, to the shareholders according to their respective
rights and interests. [MGCL, Section 2-309]
(b) The Board of Directors shall cause to be
accompanied by a written statement any dividend payment wholly or
partly from any source other than the Corporation's accumulated
undistributed net income (determined in accordance with good
accounting practice and the rules and regulations of the
Securities and Exchange Commission then in effect) not including
profits or losses realized upon the sale of securities or other
properties. Such statement shall adequately disclose the source
PAGE 12
or sources of such payment and the basis of calculation and shall
be otherwise in such form as the Securities and Exchange
Commission may prescribe. [Investment Company Act, Section 19;
SEC Rule 19a-1; MGCL, Section 2-309(c)]
(c) Notwithstanding the above provisions of this
Section 3.08, the Board of Directors may at any time declare and
distribute pro rata among the shareholders a stock dividend out
of the Corporation's authorized but unissued shares of stock,
including any shares previously purchased by the Corporation,
provided that such dividend shall not be distributed in shares of
any class with respect to any shares of a different class. The
shares so distributed shall be issued at the par value thereof,
and there shall be transferred to stated capital, at the time
such dividend is paid, an amount of surplus equal to the
aggregate par value of the shares issued as a dividend and there
may be transferred from earned surplus to capital surplus such
additional amount as the Board of Directors may determine.
[MGCL, Section 2-309]
Section 3.09. Annual and Regular Meetings: The annual
meeting of the Board of Directors for choosing officers and
transacting other proper business shall be held after the annual
shareholders' meeting at such time and place as may be specified
in the notice of such meeting of the Board of Directors or, in
the absence of such annual shareholders' meeting, at such time
and place as the Board of Directors may provide. The Board of
Directors from time to time may provide by resolution for the
holding of regular meetings and fix their time and place (within
or outside the State of Maryland). [MGCL, Section 2-409(a)]
Section 3.10. Special Meetings: Special meetings of the
Board of Directors shall be held whenever called by the Chairman
of the Board, the President (or, in the absence or disability of
the President, by any Vice President), the Treasurer, or two or
more Directors, at the time and place (within or outside the
State of Maryland) specified in the respective notices or waivers
of notice of such meetings.
Section 3.11. Notice: Notice of annual, regular, and
special meetings shall be in writing, stating the time and place,
and shall be mailed to each Director at his residence or regular
place of business or caused to be delivered to him personally or
to be transmitted to him by telegraph, cable, or wireless at
least two (2) days before the day on which the meeting is to be
held. Except as otherwise required by the By-Laws or the
Investment Company Act, such notice need not include a statement
of the business to be transacted at, or the purpose of, the
meeting. [MGCL, Section 2-409(b)]
Section 3.12. Waiver of Notice: No notice of any meeting
need be given to any Director who is present at the meeting or to
any Director who signs a waiver of the notice of the meeting
PAGE 13
(which waiver shall be filed with the records of the meeting),
whether before or after the meeting. [MGCL, Section 2-409(c)]
Section 3.13. Quorum and Voting: At all meetings of the
Board of Directors the presence of one-third of the total number
of Directors authorized, but not less than two (2) Directors if
there are at least two directors, shall constitute a quorum. In
the absence of a quorum, a majority of the Directors present may
adjourn the meeting, from time to time, until a quorum shall be
present. The action of a majority of the Directors present at a
meeting at which a quorum is present shall be the action of the
Board of Directors unless the concurrence of a greater proportion
is required for such action by law, by the Articles of
Incorporation or by these By-Laws. [MGCL, Section 2-408]
Section 3.14. Conference Telephone: Members of the Board
of Directors or of any committee designated by the Board, may
participate in a meeting of the Board or of such committee by
means of a conference telephone or similar communications
equipment if all persons participating in the meeting can hear
each other at the same time, and participation by such means
shall constitute presence in person at such meeting. [MGCL,
Section 2-409(d)]
Section 3.15. Compensation: Each Director may receive such
remuneration for his services as shall be fixed from time to time
by resolution of the Board of Directors.
Section 3.16. Action Without a Meeting: Except as
otherwise provided under the Investment Company Act, any action
required or permitted to be taken at any meeting of the Board of
Directors or any committee thereof may be taken without a meeting
if a unanimous written consent which sets forth the action is
signed by all members of the Board or of such committee and such
written consent is filed with the minutes of proceedings of the
Board or committee. [MGCL, Section 2-408(c)]
Section 3.17. Director Emeritus: Upon the retirement of a
Director of the Corporation, the Board of Directors may designate
such retired Director as a Director Emeritus. The position of
Director Emeritus shall be honorary only and shall not confer
upon such Director Emeritus any responsibility, or voting
authority, whatsoever with respect to the Corporation. A
Director Emeritus may, but shall not be required to, attend the
meetings of the Board of Directors and receive materials normally
provided Directors relating to the Corporation. The Board of
Directors may establish such compensation as it may deem
appropriate under the circumstances to be paid by the Corporation
to a Director Emeritus.
ARTICLE IV
PAGE 14
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
Section 4.01. How Constituted: By resolution adopted by
the Board of Directors, the Board may appoint from among its
members one or more committees, including an Executive Committee,
each consisting of at least two (2) Directors. Each member of a
committee shall hold office during the pleasure of the Board.
[MGCL, Section 2-411]
Section 4.02. Powers of the Executive Committee: Unless
otherwise provided by resolution of the Board of Directors, the
Executive Committee, in the intervals between meetings of the
Board of Directors, shall have and may exercise all of the powers
of the Board of Directors to manage the business and affairs of
the Corporation except the power to:
(a) Declare dividends or distributions on stock;
(b) Issue stock other than as provided in Section
2-411(b) of Corporations and Associations Article
of the Annotated Code of Maryland;
(c) Recommend to the shareholders any action which
requires shareholder approval;
(d) Amend the By-Laws; or
(e) Approve any merger or share exchange which does
not require shareholder approval.
[MGCL, Section 2-411(a)]
Section 4.03. Other Committees of the Board of Directors:
To the extent provided by resolution of the Board, other
committees shall have and may exercise any of the powers that may
lawfully be granted to the Executive Committee. [MGCL, Section
2-411(a)]
Section 4.04. Proceedings, Quorum, and Manner of Acting:
In the absence of appropriate resolution of the Board of
Directors, each committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting as it
shall deem proper and desirable, provided that the quorum shall
not be less than two (2) Directors. In the absence of any member
of any such committee, the members thereof present at any
meeting, whether or not they constitute a quorum, may appoint a
member of the Board of Directors to act in the place of such
absent member. [MGCL, Section 2-411(c)]
Section 4.05. Other Committees: The Board of Directors may
appoint other committees, each consisting of one or more persons
who need not be Directors. Each such committee shall have such
PAGE 15
powers and perform such duties as may be assigned to it from time
to time by the Board of Directors, but shall not exercise any
power which may lawfully be exercised only by the Board of
Directors or a committee thereof.
ARTICLE V
OFFICERS
Section 5.01. General: The officers of the Corporation
shall be a President, one or more Vice Presidents (one or more of
whom may be designated Executive Vice President), a Secretary,
and a Treasurer, and may include one or more Assistant Vice
Presidents, one or more Assistant Secretaries, one or more
Assistant Treasurers, and such other officers as may be appointed
in accordance with the provisions of Section 5.11 hereof. The
Board of Directors may elect, but shall not be required to elect,
a Chairman of the Board. [MGCL, Section 2-412]
Section 5.02. Election, Term of Office and Qualifications:
The officers of the Corporation (except those appointed pursuant
to Section 5.11 hereof) shall be elected by the Board of
Directors at its first meeting and thereafter at each annual
meeting of the Board. If any officer or officers are not elected
at any such meeting, such officer or officers may be elected at
any subsequent regular or special meeting of the Board. Except
as provided in Sections 5.03, 5.04, and 5.05 hereof, each officer
elected by the Board of Directors shall hold office until the
next annual meeting of the Board of Directors and until his
successor shall have been chosen and qualified. Any person may
hold two or more offices of the Corporation, except that neither
the Chairman of the Board, nor the President, may hold the office
of Vice President, but no person shall execute, acknowledge, or
verify any instrument in more than one capacity if such
instrument is required by law, the Articles of Incorporation, or
these By-Laws to be executed, acknowledged, or verified by two or
more officers. The Chairman of the Board shall be selected from
among the Directors of the Corporation and may hold such office
only so long as he continues to be a Director. No other officer
need be a Director. [MGCL, Sections 2-412, 2-413 and 2-415]
Section 5.03. Resignation: Any officer may resign his
office at any time by delivering a written resignation to the
Board of Directors, the President, the Secretary, or any
Assistant Secretary. Unless otherwise specified therein, such
resignation shall take effect upon delivery.
Section 5.04. Removal: Any officer may be removed from
office by the Board of Directors whenever in the judgment of the
Board of Directors the best interests of the Corporation will be
served thereby. [MGCL, Section 2-413(c)]
PAGE 16
Section 5.05. Vacancies and Newly Created Offices: If any
vacancy shall occur in any office by reason of death,
resignation, removal, disqualification or other cause, or if any
new office shall be created, such vacancies or newly created
offices may be filled by the Board of Directors at any meeting
or, in the case of any office created pursuant to Section 5.11
hereof, by any officer upon whom such power shall have been
conferred by the Board of Directors. [MGCL, Section 2-413(d)]
Section 5.06. Chairman of the Board: Unless otherwise
provided by resolution of the Board of Directors, the Chairman of
the Board, if there be such an officer, shall be the chief
executive and operating officer of the Corporation, shall preside
at all shareholders' meetings, and at all meetings of the Board
of Directors. He shall be ex officio a member of all standing
committees of the Board of Directors. Subject to the supervision
of the Board of Directors, he shall have general charge of the
business, affairs, property, and operation of the Corporation and
its officers, employees, and agents. He may sign (unless the
President or a Vice President shall have signed) certificates
representing stock of the Corporation authorized for issuance by
the Board of Directors and shall have such other powers and
perform such other duties as may be assigned to him from time to
time by the Board of Directors.
Section 5.07. President: Unless otherwise provided by
resolution of the Board of Directors, the President shall, at the
request of or in the absence or disability of the Chairman of the
Board, or if no Chairman of the Board has been chosen, he shall
preside at all shareholders' meetings and at all meetings of the
Board of Directors and shall in general exercise the powers and
perform the duties of the Chairman of the Board. He may sign
(unless the Chairman or a Vice President shall have signed)
certificates representing stock of the Corporation authorized for
issuance by the Board of Directors. Except as the Board of
Directors may otherwise order, he may sign in the name and on
behalf of the Corporation all deeds, bonds, contracts, or
agreements. He shall exercise such other powers and perform such
other duties as from time to time may be assigned to him by the
Board of Directors.
Section 5.08. Vice President: The Board of Directors
shall, from time to time, designate and elect one or more Vice
Presidents (one or more of whom may be designated Executive Vice
President) who shall have such powers and perform such duties as
from time to time may be assigned to them by the Board of
Directors or the President. At the request or in the absence or
disability of the President, the Vice President (or, if there are
two or more Vice Presidents, the Vice President in order of
seniority of tenure in such office or in such other order as the
Board of Directors may determine) may perform all the duties of
the President and, when so acting, shall have all the powers of
and be subject to all the restrictions upon the President. Any
PAGE 17
Vice President may sign (unless the Chairman, the President, or
another Vice President shall have signed) certificates
representing stock of the Corporation authorized for issuance by
the Board of Directors.
Section 5.09. Treasurer and Assistant Treasurers: The
Treasurer shall be the principal financial and accounting officer
of the Corporation and shall have general charge of the finances
and books of account of the Corporation. Except as otherwise
provided by the Board of Directors, he shall have general
supervision of the funds and property of the Corporation and of
the performance by the custodian of its duties with respect
thereto. He may countersign (unless an Assistant Treasurer or
Secretary or Assistant Secretary shall have countersigned)
certificates representing stock of the Corporation authorized for
issuance by the Board of Directors. He shall render to the Board
of Directors, whenever directed by the Board, an account of the
financial condition of the Corporation and of all his
transactions as Treasurer; and as soon as possible after the
close of each fiscal year he shall make and submit to the Board
of Directors a like report for such fiscal year. He shall cause
to be prepared annually a full and correct statement of the
affairs of the Corporation, including a balance sheet and a
financial statement of operations for the preceding fiscal year,
which shall be submitted at the annual meeting of shareholders
and filed within twenty (20) days thereafter at the principal
office of the Corporation. He shall perform all the acts
incidental to the office of the Treasurer, subject to the control
of the Board of Directors. Any Assistant Treasurer may perform
such duties of the Treasurer as the Treasurer or the Board of
Directors may assign, and, in the absence of the Treasurer, he
may perform all the duties of the Treasurer.
Section 5.10. Secretary and Assistant Secretaries: The
Secretary shall attend to the giving and serving of all notices
of the Corporation and shall record all proceedings of the
meetings of the shareholders and Directors in one or more books
to be kept for that purpose. He shall keep in safe custody the
seal of the Corporation and shall have charge of the records of
the Corporation, including the stock books and such other books
and papers as the Board of Directors may direct and such books,
reports, certificates and other documents required by law to be
kept, all of which shall at all reasonable times be open to
inspection by any Director. He shall countersign (unless the
Treasurer, an Assistant Treasurer or an Assistant Secretary shall
have countersigned) certificates representing stock of the
Corporation authorized for issuance by the Board of Directors.
He shall perform such other duties as appertain to his office or
as may be required by the Board of Directors. Any Assistant
Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the
absence of the Secretary, he may perform all the duties of the
Secretary.
PAGE 18
Section 5.11. Subordinate Officers: The Board of Directors
from time to time may appoint such other officers or agents as it
may deem advisable, each of whom shall have such title, hold
office for such period, have such authority and perform such
duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers
or agents the power to appoint any such subordinate officers or
agents and to prescribe their respective rights, terms of office,
authorities, and duties. Any officer or agent appointed in
accordance with the provisions of this Section 5.11 may be
removed, either with or without cause, by any officer upon whom
such power of removal shall have been conferred by the Board of
Directors. [MGCL, Section 2-412(b)]
Section 5.12. Remuneration: The salaries or other
compensation of the officers of the Corporation shall be fixed
from time to time by resolution of the Board of Directors, except
that the Board of Directors may by resolution delegate to any
person or group of persons the power to fix the salaries or other
compensation of any subordinate officers or agents appointed in
accordance with the provisions of Section 5.11 hereof.
Section 5.13. Surety Bond: The Board of Directors may
require any officer or agent of the Corporation to execute a bond
(including, without limitation, any bond required by the
Investment Company Act and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder) to the
Corporation in such sum and with such surety or sureties as the
Board of Directors may determine, conditioned upon the faithful
performance of his or her duties to the Corporation, including
responsibility for negligence and for the accounting for any of
the Corporation's property, funds or securities that may come
into his or her hands.
ARTICLE VI
CUSTODY OF SECURITIES AND CASH
Section 6.01. Employment of a Custodian: The Corporation
shall place and at all times maintain in the custody of a
Custodian (including any sub-custodian for the Custodian) all
funds, securities, and similar investments owned by the
Corporation. The Custodian shall be a bank having an aggregate
capital, surplus, and undivided profits of not less than
$10,000,000. Subject to such rules, regulations, and orders as
the Securities and Exchange Commission may adopt as necessary or
appropriate for the protection of investors, the Corporation's
Custodian may deposit all or a part of the securities owned by
the Corporation in a sub-custodian or sub-custodians situated
within or without the United States. The Custodian shall be
PAGE 19
appointed and its remuneration fixed by the Board of Directors.
[Investment Company Act, Section 17(f)]
Section 6.02. Central Certificate Service: Subject to such
rules, regulations, and orders as the Securities and Exchange
Commission may adopt as necessary or appropriate for the
protection of investors, the Corporation's Custodian may deposit
all or any part of the securities owned by the Corporation in a
system for the central handling of securities established by a
national securities exchange or national securities association
registered with the Commission under the Securities Exchange Act
of 1934, or such other person as may be permitted by the
Commission, pursuant to which system all securities of any
particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged
by bookkeeping entry without physical delivery of such
securities. [Investment Company Act, Section 17(f)]
Section 6.03. Cash Assets: The cash proceeds from the sale
of securities and similar investments and other cash assets of
the Corporation shall be kept in the custody of a bank or banks
appointed pursuant to Section 6.01 hereof, or in accordance with
such rules and regulations or orders as the Securities and
Exchange Commission may from time to time prescribe for the
protection of investors, except that the Corporation may maintain
a checking account or accounts in a bank or banks, each having an
aggregate capital, surplus, and undivided profits of not less
than $10,000,000, provided that the balance of such account or
the aggregate balances of such accounts shall at no time exceed
the amount of the fidelity bond, maintained pursuant to the
requirements of the Investment Company Act and rules and
regulations thereunder, covering the officers or employees
authorized to draw on such account or accounts. [Investment
Company Act, Section 17(f)]
Section 6.04. Free Cash Accounts: The Corporation may,
upon resolution of its Board of Directors, maintain a petty cash
account free of the foregoing requirements of this Article VI in
an amount not to exceed $500, provided that such account is
operated under the imprest system and is maintained subject to
adequate controls approved by the Board of Directors over
disbursements and reimbursements including, but not limited to,
fidelity bond coverage for persons having access to such funds.
[Investment Company Act, Rule 17f-3]
Section 6.05. Action Upon Termination of Custodian
Agreement: Upon resignation of a custodian of the Corporation or
inability of a custodian to continue to serve, the Board of
Directors shall promptly appoint a successor custodian, but in
the event that no successor custodian can be found who has the
required qualifications and is willing to serve, the Board of
Directors shall call as promptly as possible a special meeting of
the shareholders to determine whether the Corporation shall
PAGE 20
function without a custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding
shares of stock of the Corporation, the custodian shall deliver
and pay over all property of the Corporation held by it as
specified in such vote.
Section 6.06. Other Arrangements: The Corporation may make
such other arrangements for the custody of its assets (including
deposit arrangements) as may be required by any applicable law,
rule or regulation.
PAGE 21
ARTICLE VII
EXECUTION OF INSTRUMENTS, VOTING OF SECURITIES
Section 7.01. Execution of Instruments: All deeds,
documents, transfers, contracts, agreements, requisitions or
orders, promissory notes, assignments, endorsements, checks and
drafts for the payment of money by the Corporation, and other
instruments requiring execution by the Corporation shall be
signed by the Chairman, the President, a Vice President, or the
Treasurer, or as the Board of Directors may otherwise, from time
to time, authorize. Any such authorization may be general or
confined to specific instances.
Section 7.02. Voting of Securities: Unless otherwise
ordered by the Board of Directors, the Chairman, the President,
or any Vice President shall have full power and authority on
behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any
meeting of shareholders of any company in which the Corporation
may hold stock. At any such meeting such officer shall possess
and may exercise (in person or by proxy) any and all rights,
powers, and privileges incident to the ownership of such stock.
The Board of Directors may by resolution from time to time confer
like powers upon any other person or persons. [MGCL, Section
2-509]
ARTICLE VIII
CAPITAL STOCK
Section 8.01. Ownership of Shares:
(a) Certificates certifying the ownership of shares
will not be issued for shares purchased or otherwise acquired.
The ownership of shares, full or fractional, shall be recorded on
the books of the Corporation or its agent. The record books of
the Corporation as kept by the Corporation or its agent, as the
case may be, shall be conclusive as to the number of shares held
from time to time by each such shareholder.
Section 8.02. Transfer of Capital Stock:
(a) Shares of stock of the Corporation shall be
transferable only upon the books of the Corporation kept for such
purpose.
(b) The Corporation shall be entitled to treat the
holder of record of any share of stock as the absolute owner
thereof for all purposes, and accordingly shall not be bound to
PAGE 22
recognize any legal, equitable, or other claim or interest in
such share on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise
expressly provided by the statutes of the State of Maryland.
Section 8.03. Transfer Agents and Registrars: The Board of
Directors may, from time to time, appoint or remove transfer
agents and registrars of transfers of shares of stock of the
Corporation, and it may appoint the same person as both transfer
agent and registrar.
Section 8.04. Transfer Regulations: The shares of stock of
the Corporation may be freely transferred, and the Board of
Directors may, from time to time, adopt lawful rules and
regulations with reference to the method of transfer of the
shares of stock of the Corporation.
Section 8.05. Fixing of Record Date: The Board of
Directors may fix in advance a date as a record date for the
determination of the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof,
or to express consent to corporate action in writing without a
meeting, or to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any
rights in respect of any change, conversion, or exchange of
stock, or for any other proper purpose, provided that such record
date shall be a date not more than sixty (60) days nor, in the
case of a meeting of shareholders, less than ten (10) days prior
to the date on which the particular action, requiring such
determination of shareholders, is to be taken. In such case,
only such shareholders as shall be shareholders of record on the
record date so fixed shall be entitled to such notice of, and to
vote at, such meeting or adjournment, or to give such consent, or
to receive payment of such dividend or other distribution, or to
receive such allotment of rights, or to exercise such rights, or
to take other action, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after any
such record date. A meeting of shareholders convened on the date
for which it was called may be adjourned from time to time
without notice to a date not more than one hundred twenty (120)
days after the original record date. [MGCL, Section 2-511]
ARTICLE IX
FISCAL YEAR, ACCOUNTANT
Section 9.01. Fiscal Year: The fiscal year of the
Corporation shall be the twelve (12) calendar months beginning on
the 1st day of January in each year and ending on the last day of
the following December, or such other period of twelve (12)
PAGE 23
calendar months as the Board of Directors may by resolution
prescribe.
Section 9.02. Accountant:
(a) The Corporation shall employ an independent public
accountant or firm of independent public accountants for each
series of the Corporation to examine the accounts of the
Corporation with respect to such series and to sign and certify
financial statements filed by the Corporation with respect to
such series. The certificates and reports of the accountant(s)
shall be addressed both to the Board of Directors and to the
shareholders. The Corporation may employ a different accountant
with respect to each series.
(b) A majority of the members of the Board of
Directors who are not interested persons (as such term is defined
in the Investment Company Act) of the Corporation shall select
the accountant for each series, by vote cast in person, at any
meeting held within such period of time as may be allowed under
the Investment Company Act. Such selection shall be submitted
for ratification or rejection at the next succeeding annual
shareholders' meeting for such series. If such meeting shall
reject such selection, the accountant for such series shall be
selected by majority vote of the Corporation's outstanding voting
securities of such series, either at the meeting at which the
rejection occurred or at a subsequent meeting of shareholders for
such series called for the purpose.
(c) Any vacancy occurring between annual meetings, due
to the death or resignation of the accountant of a series, may be
filled by the vote of a majority of those members of the Board of
Directors who are not interested persons (as so defined) of the
Corporation, cast in person at a meeting called for the purpose
of voting on such action.
(d) The employment of the accountant of a series shall
be conditioned upon the right of such series of the Corporation
by vote of a majority of the outstanding voting securities of
such series at any meeting called for the purpose to terminate
such employment forthwith without any penalty. [Investment
Company Act, Section 32(a)]
ARTICLE X
INDEMNIFICATION AND INSURANCE
Section 10.01. Indemnification and Payment of Expenses in
Advance: The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer,
employee, or agent of the Corporation, or who is or has been
PAGE 24
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, who, by reason of his
position was, is, or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against
any judgments, penalties, fines, settlements, and reasonable
expenses (including attorneys' fees) incurred by such Indemnitee
in connection with any Proceeding, to the fullest extent that
such indemnification may be lawful under Maryland law. The
Corporation shall pay any reasonable expenses so incurred by such
Indemnitee in defending a Proceeding in advance of the final
disposition thereof to the fullest extent that such advance
payment may be lawful under Maryland law. Subject to any
applicable limitations and requirements set forth in the
Corporation's Articles of Incorporation and in these By-Laws, any
payment of indemnification or advance of expenses shall be made
in accordance with the procedures set forth in Maryland law.
Notwithstanding the foregoing, nothing herein shall protect
or purport to protect any Indemnitee against any liability to
which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office ("Disabling
Conduct").
Anything in this Article X to the contrary notwithstanding,
no indemnification shall be made by the Corporation to any
Indemnitee unless:
(a) there is a final decision on the merits by a court
or other body before whom the Proceeding was
brought that the Indemnitee was not liable by
reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a
reasonable determination, based upon a review of
the facts, that the Indemnitee was not liable by
reason of Disabling Conduct, which determination
shall be made by:
(i) the vote of a majority of a quorum of directors
who are neither "interested persons" of the
Corporation as defined in Section 2(a)(19) of the
Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding,
any advance of expenses by the Corporation to any Indemnitee
PAGE 25
shall be made only upon the undertaking by such Indemnitee to
repay the advance unless it is ultimately determined that such
Indemnitee is entitled to indemnification as above provided, and
only if one of the following conditions is met:
(a) the Indemnitee provides a security for his
undertaking; or
(b) the Corporation shall be insured against losses
arising by reason of any lawful advances; or
(c) there is a determination, based on a review of readily
available facts, that there is reason to believe that
the Indemnitee will ultimately be found entitled to
indemnification, which determination shall be made by:
(i) a majority of a quorum of directors who are
neither "interested persons" of the Corporation as
defined in Section 2(a)(19) of the Investment
Company Act, nor parties to the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02. Insurance of Officers, Directors, Employees
and Agents: To the fullest extent permitted by applicable
Maryland law and by Section 17(h) of the Investment Company Act,
as from time to time amended, the Corporation may purchase and
maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the Corporation, or who
is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against
any liability asserted against him and incurred by him in or
arising out of his position, whether or not the Corporation would
have the power to indemnify him against such liability. [MGCL,
Section 2-418(k)]
Section 10.03. Amendment: No amendment, alteration or
repeal of this Article or the adoption, alteration or amendment
of any other provision of the Articles of Incorporation or By-
Laws inconsistent with this Article shall adversely affect any
right or protection of any person under this Article with respect
to any act or failure to act which occurred prior to such
amendment, alteration, repeal or adoption.
ARTICLE XI
AMENDMENTS
PAGE 26
Section 11.01. General: Except as provided in Section 11.02
hereof, all By-Laws of the Corporation, whether adopted by the
Board of Directors or the shareholders, shall be subject to
amendment, alteration, or repeal, and new By-Laws may be made, by
the affirmative vote of a majority of either:
(a) the holders of record of the outstanding shares of
stock of the Corporation entitled to vote, at any annual or
special meeting the notice or waiver of notice of which
shall have specified or summarized the proposed amendment,
alteration, repeal, or new By-Law; or
(b) the Directors present at any regular or special
meeting at which a quorum is present if the notice or waiver
of notice thereof or material sent to the Directors in
connection therewith on or prior to the last date for the
giving of such notice under these By-Laws shall have
specified or summarized the proposed amendment, alteration,
repeal, or new By-Law.
Section 11.02. By Shareholders Only:
(a) No amendment of any section of these By-Laws shall be
made except by the shareholders of the Corporation if the
shareholders shall have provided in the By-Laws that such section
may not be amended, altered, or repealed except by the
shareholders.
(b) From and after the issue of any shares of the Capital
Stock of the Corporation, no amendment of this Article XI shall
be made except by the shareholders of the Corporation.
ARTICLE XII
MISCELLANEOUS
Section 12.01. Use of the Term "Annual Meeting:" The use of
the term "annual meeting" in these By-Laws shall not be construed
as implying a requirement that a shareholder meeting be held
annually.
PAGE 1
May 1, 1997
T. Rowe Price Diversified
Small-Cap Growth Fund, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Dear Sirs:
In connection with the proposed registration of an
indefinite number of shares of Capital Stock of your Company, I
have examined certified copies of your company's Articles of
Incorporation dated April 22, 1997, and the By-Laws of your
Company as presently in effect.
I am of the opinion that:
(i) your Company is a corporation duly organized and
existing under the laws of Maryland; and
(ii) each of such authorized shares of Capital Stock of
your Company, upon payment in full of the price fixed
by the Board of Directors of your Company, will be
legally and validly issued and will be fully paid and
non-assessable.
I hereby consent to the use of this opinion as an exhibit to
the Company's Registration Statement on Form N-1A to be filed
with the Securities and Exchange Commission for the registration
under the Securities Act of 1933 of an indefinite number of
shares of Capital Stock of your Company.
Sincerely,
/s/Henry H. Hopkins
Henry H. Hopkins
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