PAGE 1
Registration No.: 811-08207
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 TAX-EFFICIENT BALANCED 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)(1)
PAGE 2
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) 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 Amount of
Title of Securities Being Price Offering Registration
Being Registered Registered Per Unit Price Fee
_________________________________________________________________
Capital Stock - Indefinite Varying prices Not required
$.0001 par value Number calculated as set
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
or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer,
PAGE 3
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
PAGE 4
T. ROWE PRICE TAX-EFFICIENT BALANCED FUND, INC.
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 Transaction and Fund
Registrant Expenses; Fund,
Market, and Risk
Characteristics;
Organization and
Management;
Understanding
Performance
Information;
Investment Policies
and Practices; Types
of Management
Practices
Item 5. Management of the Fund Transaction and Fund
Expenses; Fund,
Market, and Risk
Characteristics;
Organization and
Management
Item 5A. Management's Discussion of
Fund Performance +
Item 6. Capital Stock and Other Distributions and
Securities Taxes; Organization
and Management
Item 7. Purchase of Securities Being Pricing Shares and
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;
Exchanging and
PAGE 5
Redeeming Shares;
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
Factors; Investment
Programs; Investment
Restrictions;
Investment Performance
Item 14. Management of the Registrant Management of Funds
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
Item 16. Investment Advisory and Other Investment Management
Services Services; Custodian;
Independent
Accountants; Legal
Counsel
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Dividends; Capital
Securities Stock
Item 19. Purchase, Redemption and Pricing Ratings of Municipal
of Securities Being Offered Debt Securities;
Ratings of Municipal
Notes and Variable
Rate Securities;
Ratings of Commercial
Paper; Redemptions in
Kind; Pricing of
Securities; Net Asset
Value Per Share;
Federal Registration
of Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for Funds
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
July 1, 1997
Tax-Efficient
Balanced Fund
A tax-efficient fund seeking attractive after-tax total returns.
<PAGE>
FACTS AT A GLANCE
Investment Goal
To provide an attractive level of after-tax total returns over the long term
through capital appreciation and tax-exempt current income while keeping
taxable income relatively low.
As with any mutual fund, there is no guarantee the fund will achieve its goals.
Strategy
To invest in a balanced portfolio consisting of a minimum of 50% to 60% in
tax-exempt municipal securities and the balance in common stocks.
Risk/Reward
The potential to balance over time the capital appreciation offered by stocks
with the tax-exempt income and lesser volatility of municipal bonds. However,
the fund's share price will fluctuate as stock and bond market conditions
change, and could cause a loss.
Investor Profile
Relatively high-income investors seeking a balanced approach to tax-advantaged
total returns who can accept the possibility of share price declines. Not
appropriate for tax-deferred retirement accounts, such as IRAs.
Fees and Charges
100% no load. Shares purchased and held for less than one year 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 Tax-Efficient Balanced Fund, Inc.
Prospectus
July 1, 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 2
Fund, Market, and Risk Characteristics 3
2
ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds 7
Distributions and Taxes 8
Transaction Procedures and Special Requirements 11
3
MORE ABOUT THE FUND
Organization and Management 14
Understanding Performance Information 16
Investment Policies and Practices 17
4
INVESTING WITH T. ROWE PRICE
Account Requirements and Transaction Information 26
Opening a New Account 26
Purchasing Additional Shares 27
Exchanging and Redeeming 28
Shareholder Services 29
Discount Brokerage 32
Investment Information 32
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated July 1, 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 1996 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 Percentage of
Expenses (after reduction) Average Net
Assets
Sales charge "load" on purchases None Management fee ____%/a/
Sales charge "load" on reinvested Marketing fees (12b-1)
distributions None None
Redemption fees (for shares held Total other (shareholder servicing,
less than one year) 1% 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
exceed 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:
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 ____%.
<PAGE>
T. ROWE PRICE 4
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's objective is to provide attractive long-term total returns on an
after-tax basis with a balanced portfolio of stocks and municipal bonds.
What is the fund's investment program?
The fund will invest 50% to 60% of total assets in municipal bonds and the
balance in stocks. The stock portion will be invested primarily in mid- to
large-capitalization stocks selected mainly from the largest 1,000 U.S.
companies. It will also focus on lower-yielding stocks with relatively low
taxable dividend income. The bond portion will be invested primarily in
long-term municipal bonds, with maturities generally exceeding 10 years and
investment-grade ratings of BBB or higher. A maximum of 10% of the bond
component may be invested in below-investment-grade ("junk") bonds to take
advantage of their relatively high tax-exempt income and potential for price
appreciation.
<PAGE>
ABOUT THE FUND 5
To accomplish the fund's goal of minimizing taxes, the portfolio managers
will strive to avoid realizing taxable capital gains. However, the managers
will lock in gains when they believe the risk of remaining in a security
outweights the tax benefit of continuing to hold it.
The fund may purchase convertible securities, warrants, and other securities
when consistent with the fund's investment objective and program, and may
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For details about the fund's investment program and practices, please see
the Investment Policies and Practices section.
What other measures will be taken to enhance the tax efficiency of the fund?
When gains are taken, the managers will attempt to offset them with losses
from other securities whenever possible. This may be accomplished by selling
bonds or stocks at losses and investing the proceeds in similar securities.
The fund is required to invest a minimum of 50% of its assets in municipal
securities (at the end of each fiscal quarter) to maintain the tax-advantaged
status of the bond income. The managers will also strive to keep income from
taxable dividends relatively low. In additional, the fund will not purchase
bonds subject to the alternative minimum tax.
What is a "balanced" investment approach?
This approach attempts to "balance" the potential for growth and greater
volatility of stocks with the stable income and normally more moderate price
fluctuations of fixed income securities. It is widely regarded as a
conservative strategy designed to cushion an investment from the volatility
associated with funds composed exclusively of common stocks.
How does the fund select stocks for the portfolio?
Stock selection is based on fundamental, "bottom-up" analysis that seeks to
identify companies with good appreciation prospects. The fund managers may
use both growth and value approaches to stock selection. In the growth area,
the manager will try to identify companies with capable management,
attractive business niches, sound financial and accounting practices, and a
demonstrated ability to increase revenues, earnings, and cash flow
consistently. In looking for value stocks, the managers will seek companies
whose current stock prices appear undervalued in terms of earnings, projected
cash flow, or asset value per share, and with growth potential temporarily
unrecognized by the market.
o Growth investors look for companies with above-average earnings gains. Value
investors look for undervalued assets.
<PAGE>
T. ROWE PRICE 6
What distinguishes the fund from many other balanced funds?
The stock portion of the portfolio in this fund will be balanced with
tax-exempt income from municipal bonds rather than taxable income in an
effort to achieve the fund's investment objective of generating high
after-tax returns. Investors in the higher tax brackets, in particular, are
increasingly aware of the negative impact of taxes on their overall
investment returns. To meet the growing demand for tax-efficient investing,
the fund's balanced approach is specifically designed to combine the growth
potential of equities with steady tax-free income and a minimum of taxable
current income.
In addition, while turnover is expected to be low in rising markets, turnover
may increase in falling markets to the extent gains from the sale of
securities are offset by losses in a further attempt to meet the fund's
investment objective.
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 this fund?
The fund hopes to provide investors with attractive after-tax total returns
over time with less risk than that of the Standard & Poor's 500 Stock Index
by balancing the potential for capital appreciation with the tax-free income
and lesser volatility of municipal bonds. Stocks and municipal bonds also
have a low historical performance correlation, which could help cushion the
fund's share price decline in a down market. It is important for investors to
view the fund as a long-term investment (minimum five years).
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
in recent years was -22.5% in 1987's fourth quarter.
There are also risks associated with municipal bond investing, including:
interest rate or market risk (the decline in bond prices that accompanies a
rise in the overall level of interest rates); credit risk (the chance that
any of the fund's holdings will have its credit rating downgraded or will
default); political risk (the chance that a significant restructuring of
federal income tax rates, or
<PAGE>
ABOUT THE FUND 7
even serious discussion of the topic in Congress, could reduce the advantages
of municipal bonds and cause their prices to fall); and geographical risk
(the chance of price declines resulting from developments in a single state).
o Investors should have a long-term investment horizon and be willing to wait
out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, your
tolerance for risk, and your tax situation. If you can accept the possibility
of share price decline in an effort to achieve attractive after-tax total
return over the long term, the fund could be an appropriate part of your
overall investment strategy.
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
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>
ABOUT YOUR ACCOUNT 9
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.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
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) quarterly.
o A portion 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.
A significant portion of the fund's quarterly dividend is expected to be
exempt from federal income taxes. However, you need to be aware of the
possible tax consequences when:
<PAGE>
T. ROWE PRICE 10
o You sell fund shares, including an exchange from one fund to another.
o The fund makes a distribution to your account.
Due to 1993 tax legislation, a portion of the capital gains realized on the
sale of market discount bonds with maturities beyond one year may be treated
as ordinary income and cannot be offset by other capital losses. Therefore,
to the extent the fund invests in these securities, the likelihood of a
taxable gain distribution will be increased.
Note: For shareholders who receive Social Security benefits, the receipt of
tax-exempt interest may increase the portion of benefits that are subject to
tax.
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. If you realize a
loss on the sale or exchange of fund shares held six months or less, your
capital loss is reduced by the tax-exempt dividends received on those shares.
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."
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 fund intends to invest a sufficient portion of its assets in municipal
bonds and notes so that it will qualify to pay tax-exempt dividends. The
portion of your income dividend derived from investment in tax-exempt
securities will be exempt from federal income tax. The amount of such
dividends will be reported to you on your calendar year-end statement.
In January, you will also be sent Form 1099-DIV indicating the tax status of
any taxable dividend and capital gain distribution made to you. This
information will also be reported to the IRS. 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.
<PAGE>
ABOUT YOUR ACCOUNT 11
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.
o Capital gain or dividend 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 may
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 investing. Of course, the fund's share price may, at any time,
reflect undistributed capital gains, taxable income and unrealized
appreciation. To the extent these amounts are eventually distributed, they
will be 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.
<PAGE>
T. ROWE PRICE 12
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.
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.
<PAGE>
ABOUT YOUR ACCOUNT 13
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 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 a 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 elects the fund's officers
and meets regularly to review the fund's investments, performance, expenses,
and other business affairs. The policy of the fund is that a 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 15
Portfolio Management
The fund has an Investment Advisory Committee composed of the following
members: __________________________________________________. The committee
co-chairpersons have day-to-day responsibility for managing the portfolio and
work with the committee in developing and executing the fund's investment
program. Mary J. Miller and Donald J. Peters are co-chairpersons of the
fund's committee. Ms. Miller joined T. Rowe Price in ____ and has been
managing investments since. Mr. Peters jointed T. Rowe Price in ____ and has
been managing investments since ____.
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 February 28, 1998, 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 16
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 the 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 the 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 17
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 18
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; provided that
these limitations do not apply to the fund's purchase of securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
The municipal portion of the fund's portfolio can include the following types
of portfolio securities:
Municipal Securities
o In purchasing municipals, the fund relies on the opinion of the issuer's
bond counsel regarding the tax-exempt status of the investment.
The fund's municipal assets are invested primarily in various tax-free
municipal debt securities. The issuers have a contractual obligation to pay
interest at a stated rate on specific dates and to repay principal (the
bond's face value) on a specified date or dates. An issuer may have the right
to redeem or "call" a bond before maturity, and the investor may have to
reinvest the proceeds at lower rates.
There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as charges for water and sewer service, to
generate money for debt service.
In addition to general obligation and revenue bonds, the fund's municipal
investments may include, but are not limited to, the following types of
securities:
Municipal Lease Obligations
A lease is not a full faith and credit obligation of the issuer and is
usually backed only by the borrowing government's unsecured pledge to make
annual appropriation for lease payments. There have been challenges to the
legality of lease financing in numerous states and, from time to time,
certain municipalities have considered not appropriating money for lease
payments. In deciding whether to purchase a lease obligation, the fund would
assess the financial condition of the borrower, the merits of the project,
the level of public support for the project,
<PAGE>
MORE ABOUT THE FUND 19
and the legislative history of lease financing in the state. These securities
may be less readily marketable than other municipals. The fund may also
purchase unrated lease obligations.
Municipal Warrants
Municipal warrants are essentially call options on municipal bonds. In
exchange for a premium, they give the purchaser the right, but not the
obligation, to purchase a municipal bond in the future. The fund might
purchase a warrant to lock in forward supply in an environment where the
current issuance of bonds is sharply reduced. Like options, warrants may
expire worthless and they may have reduced liquidity.
Operating policy The fund will not invest more than 2% of its total municipal
assets in municipal warrants.
Securities With "Puts" or Other Demand Features
Some longer-term municipals give the investor the right to "put" or sell the
security at par (face value) within a specified number of days following the
investor's request-usually one to seven days. This demand feature enhances a
security's liquidity by dramatically shortening its effective maturity and
enables it to trade at a price equal to or very close to par. If the demand
feature were terminated prior to being exercised, the fund would hold the
longer-term security.
Securities With Credit Enhancements
o Letters of credit Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying municipal security should default.
o T. Rowe Price periodically reviews the credit quality of the insurer.
o Municipal Bond Insurance This insurance, which is usually purchased by the
bond issuer from a private, nongovernmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond's principal and
interest will be paid when due. Insurance does not guarantee the price of the
bond or the share price of any fund. The credit rating of an insured bond
reflects the credit rating of the insurer, based on its claims-paying
ability.
The obligation of a municipal bond insurance company to pay a claim extends
over the life of each insured bond. Although defaults on insured municipal
bonds have been low to date and municipal bond insurers have met their
claims, there is no assurance this will continue. A higher than expected
default rate could strain the insurer's loss reserves and adversely affect
its ability to pay claims to bondholders, such as the fund. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating.
<PAGE>
T. ROWE PRICE 20
o Standby Purchase Agreements A Standby Bond Purchase Agreement (SBPA) is a
liquidity facility provided to pay the purchase price of bonds that cannot be
remarketed. The obligation of the liquidity provider (usually a bank) is only
to advance funds to purchase tendered bonds that cannot be remarketed and
does not cover principal or interest under any other circumstances. The
liquidity provider's obligations under the SBPA are usually subject to
numerous conditions, including the continued creditworthiness of the
underlying borrower.
Synthetic or Derivative Securities
These securities are created from existing municipal bonds:
o Residual Interest Bonds (A type of potentially high-risk derivative.) The
income stream provided by an underlying bond is divided to create two
securities, one short-term and one long-term. The interest rate on the
short-term component is reset by an index or auction process normally every 7
to 35 days. After income is paid on the short-term securities at current
rates, the residual income goes to the long-term securities. Therefore,
rising short-term interest rates result in lower income for the longer-term
portion, and vice versa. The longer-term bonds can be very volatile and may
be less liquid than other municipals of comparable maturity.
Operating policy The fund will not invest more than 10% of its total
municipal assets in residual interest bonds.
o Participation Interests This term covers various types of securities created
by converting fixed rate bonds into short-term, variable rate certificates.
These securities have been developed in the secondary market to meet the
demand for short-term, tax-exempt securities. The fund will invest only in
securities deemed tax-exempt by a nationally recognized bond counsel, but
there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter.
o Embedded interest rate swaps enhance yields, but also increase interest rate
risk.
o Embedded Interest Rate Swaps and Caps In a fixed rate, long-term municipal
bond with an interest rate swap attached to it, the bondholder usually
receives the bond's fixed coupon payment as well as a variable rate payment
that represents the difference between a fixed rate for the term of the swap
(which is typically shorter than the bond it is attached to) and a variable
rate short-term municipal index. The bondholder receives excess income when
short-term rates remain below the fixed interest rate swap rate. If
short-term rates rise above the fixed income swap rate, the bondholder's
income is reduced. At the end of the interest rate swap term, the bond
reverts to a single fixed coupon payment.
<PAGE>
MORE ABOUT THE FUND 21
An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates.
Both instruments may be volatile and of limited liquidity, and their use may
adversely affect the fund's total return.
Operating policy The fund will not invest more than 10% of its total
municipal assets in embedded interest rate swaps and caps.
High-Yield/High-Risk Investing
The total return and yield of lower-quality (high-yield/high-risk) bonds,
commonly referred to as "junk" bonds, can be expected to fluctuate more than
the total return and yield of higher-quality bonds. Junk bonds (those rated
below BBB or in default) are regarded as predominantly speculative with
respect to the issuer's ability to meet principal and interest payments.
Successful investment in lower-medium- and low-quality bonds involves greater
investment risk and is highly dependent on T. Rowe Price's credit analysis. A
real or perceived economic downturn or rising interest rates could cause a
decline in high-yield bond prices, by lessening the ability of issuers to
make principal and interest payments. These bonds are often thinly traded and
can be more difficult to sell and value accurately than high-quality bonds.
Because objective pricing data may be less available, judgment may play a
greater role in the valuation process.
Operating policy The fund will not purchase a noninvestment-grade debt
security (or junk bond) if immediately after such purchase the fund would
have more than 10% of its total municipal assets invested in such securities.
The fund's investments in convertible securities are not subject to this
limit.
Credit-Quality Considerations
The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's. Credit quality refers to the issuer's
ability to meet all required interest and principal payments. The highest
ratings are assigned to issuers perceived to be the best credit risks. T.
Rowe Price research analysts also evaluate all portfolio holdings of each
fund, including those rated by outside agencies. The lower the rating on a
bond, the higher the yield, other things being equal.
The equity portion of the fund's portfolio can include the following types of
portfolio securities:
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
<PAGE>
T. ROWE PRICE 22
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 a portion of its equity portfolio 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 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 25% of its total equity 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.
<PAGE>
MORE ABOUT THE FUND 23
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 equity assets in
hybrid instruments.
The municipal and equity portion of the fund's portfolio securities may
contain the following:
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. 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 short-term tax-exempt
money market securities; as well as U.S. and foreign dollar-denominated money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less. Some of the tax-exempt securities
may have adjustable, variable, or floating rates. 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; helps in structuring the fund's weighted
average maturity; and serves as a short-term defense during periods of
unusual market volatility.
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.
When-Issued Securities and Forwards
New issues of municipals are often sold on a "when-issued" basis, that is,
delivery and payment take place 15-45 days after the buyer has agreed to the
purchase. Some bonds, called "forwards," have longer than standard settlement
dates,
<PAGE>
T. ROWE PRICE 24
typically 6 to 24 months. When buying these securities, the fund will
maintain cash or high-grade marketable securities held by its custodian equal
in value to its commitment for these securities. The fund does not earn
interest on when-issued and forward securities until settlement, and the
value of the securities may fluctuate between purchase and settlement.
Municipal "forwards" typically carry a substantial yield premium to
compensate the buyer for their greater interest rate, credit, and liquidity
risks.
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 hedge against a potentially unfavorable change in interest rates; to
adjust the portfolio's duration; 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 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.
<PAGE>
MORE ABOUT THE FUND 25
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 resulting in additional taxable gains paid by shareholders.
The fund's portfolio turnover rate is expected to be lower in rising markets
and higher in declining markets. The portfolio turnover rate for the fund's
initial period of operations is not expected to exceed 100%, but could if
deemed prudent by the portfolio managers in order to carry out the fund's
objective of minimizing taxable income.
<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.
Institutional Accounts
Transaction procedures in the following sections may not apply to institutional
accounts. For procedures regarding institutional accounts, please call your
designated account manager or service representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for 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
below. We do not accept third party checks to open new accounts.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
<PAGE>
MORE ABOUT THE FUND 27
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 on the previous page.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.
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.
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for 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.
<PAGE>
T. ROWE PRICE 28
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.
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
<PAGE>
INVESTING WITH T. ROWE PRICE 29
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
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117
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 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.
<PAGE>
T. ROWE PRICE 30
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 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 on the next page.
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.
<PAGE>
INVESTING WITH T. ROWE PRICE 31
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.
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.
<PAGE>
T. ROWE PRICE 32
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.
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
<PAGE>
INVESTING WITH T. ROWE PRICE 33
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.
<PAGE>
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
Investor Services
1-800-638-5660 1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587 24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Investor Centers
101 East Lombard St. Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
F119-040 7/1/97
PAGE 7
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price Tax-Exempt Money Fund, Inc.
T. Rowe Price Tax-Free Short-Intermediate Fund, Inc.
T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc.
T. Rowe Price Tax-Free Income Fund, Inc.
T. Rowe Price Tax-Free High Yield Fund, Inc.
T. Rowe Price Tax-Efficient Balanced Fund, Inc.
(the "Funds")
This Statement of Additional Information is not a
prospectus but should be read in conjunction with the Funds'
prospectuses dated July 1, 1997, 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
July 1, 1997.
SAI-TFF 7/1/97
PAGE 8
TABLE OF CONTENTS
Page Page
Capital Stock . . . . . . Management of Funds . . . .
Code of Ethics . . . . . Municipal Securities . . .
Custodian . . . . . . . . Net Asset Value Per Share .
Determination of Maturity of Options . . . . . . . . . .
Money Market Securities Participation Interests . .
Distributor for Funds . . Portfolio Transactions . .
Dividends . . . . . . . . Pricing of Securities . . .
Federal Registration of Principal Holders of
Shares . . . . . . . . . Securities . . . . . . .
Forwards . . . . . . . . Ratings of Commercial Paper
Futures Contracts . . . . Ratings of Municipal Debt
General Information Securities . . . . . . .
and History . . . . . . Ratings of Municipal Notes and
Independent Accountants . Variable Rate Securities
Investment Management Residual Interest Bonds . .
Services . . . . . . . Risk Factors . . . . . . .
Investment in Taxable Money Tax-Exempt vs. Taxable
Market Securities . . . Yields . . . . . . . . .
Investment Objectives Tax Status . . . . . . . .
and Policies . . . . . Variable and Floating Rate
Investment Performance . Securities . . . . . . .
Investment Programs . . . When-Issued Securities . .
Investment Restrictions . Yield Information . . . . .
Legal Counsel . . . . . .
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 its Board of
Directors 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 "Fund" is intended to refer to each Fund listed on the cover
page, unless otherwise indicated.
PAGE 9
RISK FACTORS
General
The Fund is designed for investors who, because of
their tax bracket, can benefit from investment in municipal bonds
whose income is exempt from federal taxes. The Fund is not
appropriate for qualified retirement plans where income is
already tax deferred.
Because of their investment policies, the Funds may or
may not be suitable or appropriate for all investors. The Funds
(except for the Money Fund) are not an appropriate investment for
those whose primary objective is principal stability. The value
of the portfolio securities of the Fund will fluctuate based upon
market conditions. The Tax-Efficient Balanced Fund will normally
have 40-50% of its assets in equity securities. This portion of
the Tax-Efficient Balanced Fund's assets will be subject to all
of the risks of investing in the stock market.
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.
Municipal Securities
There can be no assurance that the Fund will achieve
its investment objectives. Yields on municipal securities are
dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the
size of a particular offering, the maturity of the obligation,
and the rating of the issue. Municipal securities with longer
maturities tend to produce 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 municipal 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 all the Funds to achieve
their investment objectives is also dependent on the continuing
ability of the issuers of municipal securities in which the Funds
invest to meet their obligations for the payment of interest and
principal when due. The ratings of Moody's, S&P, and Fitch
represent their opinions as to the quality of municipal
securities which they undertake to rate. Ratings are not
absolute standards of quality; consequently, municipal securities
with the same maturity, coupon, and rating may have different
yields. There are variations in municipal securities, both
within a particular classification and between classifications,
PAGE 10
depending on numerous factors. It should also be pointed out
that, unlike other types of investments, municipal securities
have traditionally not been subject to regulation by, or
registration with, the SEC, although there have been proposals
which would provide for regulation in the future.
The federal bankruptcy statutes relating to the debts
of political subdivisions and authorities of states of the United
States provide that, in certain circumstances, such subdivisions
or authorities may be authorized to initiate bankruptcy
proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in
the rights of holders of their obligations.
Proposals have been introduced in Congress to restrict
or eliminate the federal income tax exemption for interest on
municipal securities, and similar proposals may be introduced in
the future. Proposed "Flat Tax" and "Valued Added Tax" proposals
would also have the effect of eliminating the tax preference for
municipal securities. Some of the past proposals would have
applied to interest on municipal securities issued before the
date of enactment, which would have adversely affected their
value to a material degree. If such a proposal were enacted, the
availability of municipal securities for investment by the Fund
and the value of a Fund's portfolio would be affected and, in
such an event, a Fund would reevaluate its investment objectives
and policies.
Although the banks and securities dealers with which
the Fund will transact business will be banks and securities
dealers that T. Rowe Price believes to be financially sound,
there can be no assurance that they will be able to honor their
obligations to the Fund with respect to such securities.
After purchase by the Fund, a security may cease to be
rated or its rating may be reduced below the minimum required for
purchase by the Fund. For the Money Fund, the procedures set
forth in Rule 2a-7, under the Investment Company Act of 1940, may
require the prompt sale of any such security. For the other
Funds, neither event would require a sale of such security by the
Fund. However, T. Rowe Price Associates, Inc. ("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 Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), or Fitch Investors
Service, Inc. ("Fitch") 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. When
purchasing unrated securities, T. Rowe Price, under the
supervision of the Fund's Board of Directors, determines whether
the unrated security is of a qualify comparable to that which the
Fund is allowed to purchase.
PAGE 11
Municipal Bond Insurance. The Fund may purchase
insured bonds from time to time. The Tax-Free Insured
Intermediate Fund must purchase such bonds. Municipal bond
insurance provides an unconditional and irrevocable guarantee
that the insured bond's principal and interest will be paid when
due. The guarantee is purchased from a private, non-governmental
insurance company.
There are two types of insured securities that may be
purchased by the Fund, bonds carrying either (1) new issue
insurance or (2) secondary insurance. New issue insurance is
purchased by the issuer of a bond in order to improve the bond's
credit rating. By meeting the insurer's standards and paying an
insurance premium based on the bond's total debt service, the
issuer is able to obtain a higher credit rating for the bond.
Once purchased, municipal bond insurance cannot be cancelled, and
the protection it affords continues as long as the bonds are
outstanding and the insurer remains solvent.
The Fund may also purchase bonds which carry secondary
insurance purchased by an investor after a bond's original
issuance. Such policies insure a security for the remainder of
its term. Generally, the Fund expects that portfolio bonds
carrying secondary insurance will have been insured by a prior
investor. However, the Fund may, on occasion, purchase secondary
insurance on its own behalf.
Each of the municipal bond insurance companies has
established reserves to cover estimated losses. Both the method
of establishing these reserves and the amount of the reserves
vary from company to company. The obligation of a municipal bond
insurance company may have to pay a claim extends over the life
of each insured bond. Municipal bond insurance companies are
obligated to pay a bond's interest and principal when due if the
issuing entity defaults on the insured bond. Although defaults
on insured municipal bonds have been low to date and municipal
insurers have met these claims, there is no assurance this low
rate will continue in the future. A higher than expected default
rate could deplete loss reserves and adversely affect the ability
of a municipal bond insurer to pay claims to holders of insured
bonds, such as the Fund.
Money Fund
The Fund will limit its purchases of portfolio
instruments to those U.S. dollar-denominated securities which the
Fund's Board of Directors determines present minimal credit risk,
and which are Eligible Securities as defined in Rule 2a-7 under
the Investment Company Act of 1940 (1940 Act). Eligible
Securities are generally securities which have been rated (or
whose issuer has been rated or whose issuer has comparable
securities rated) in one of the two highest short-term rating
PAGE 12
categories by nationally recognized statistical rating
organizations or, in the case of any instrument that is not so
rated, is of comparable high quality as determined by T. Rowe
Price pursuant to written guidelines established in accordance
with Rule 2a-7 under the Investment Company Act of 1940 under the
supervision of the Fund's Board of Directors. In addition, the
Funds may treat variable and floating rate instruments with
demand features as short-term securities pursuant to Rule 2a-7
under the 1940 Act.
There can be no assurance that the Money Fund will
achieve its investment objectives or be able to maintain its net
asset value per share at $1.00. The price stability and
liquidity of the Money Fund may not be equal to that of a taxable
money market fund which exclusively invests in short-term taxable
money market securities. The taxable money market is a broader
and more liquid market with a greater number of investors,
issuers, and market makers than the short-term municipal
securities market. The weighted average maturity of the Fund
varies (subject to a 90 day maximum under Rule 2a-7): the
shorter the average maturity of a portfolio, the less its price
will be impacted by interest rate fluctuations.
Bond and Balanced Funds
Because of their investment policies, the Bond and
Balanced Funds may not be suitable or appropriate for all
investors. The Funds are designed for investors who wish to
invest in non-money market funds for income, and who would
benefit, because of their tax bracket, from receiving income that
is exempt from federal income taxes. The Funds' investment
programs permit the purchase of investment grade securities that
do not meet the high quality standards of the Money Fund. 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. In addition, the principal value of
long term 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. The value of the portfolio securities of the Bond
Funds will fluctuate based upon market conditions. Although
these Funds seek to reduce credit risk by investing in a
diversified portfolio, such diversification does not eliminate
all risk. The Funds are also not intended to provide a vehicle
for short-term trading purposes.
Special Risks of High Yield Investing.
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-
PAGE 13
medium quality bonds involves greater investment risk, to the
extent the Funds invest in such bonds, achievement of their
investment objectives will be more dependent on T. Rowe Price's
credit analysis than would be the case if the Funds were
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 leverage 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.
Tax-Efficient Balanced Fund
Foreign Securities
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
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.
PAGE 14
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 Fund's assets denominated in that currency. Such changes
will also affect the Fund's 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 Fund. 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.
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 Fund's
PAGE 15
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.
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 Fund's 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.
PAGE 16
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
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
PAGE 17
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 PROGRAMS
Type of Securities
Set forth below is additional information about certain
of the investments described in the Fund's prospectus.
Municipal Securities
Subject to the investment objectives and programs
described in the prospectus and the additional investment
restrictions described in this Statement of Additional
Information, the Fund's portfolio may consist of any combination
of the various types of municipal securities described below or
other types of municipal securities that may be developed. The
amount of the Fund's assets invested in any particular type of
municipal security can be expected to vary.
The term "municipal securities" means obligations
issued by or on behalf of states, territories, and possessions of
the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, as well
as certain other persons and entities, the interest from which is
exempt from federal income tax. In determining the tax-exempt
status of a municipal security, the Fund relies on the opinion of
the issuer's bond counsel at the time of the issuance of the
PAGE 18
security. However, it is possible this opinion could be
overturned, and as a result, the interest received by the Fund
from such a security might not be exempt from federal income tax.
Municipal securities are classified by maturity as notes, bonds,
or adjustable rate securities.
Municipal Notes. Municipal notes generally are used to
provide for short-term operating or capital needs and generally
have maturities of one year or less. Municipal notes include the
following:
Tax Anticipation Notes. Tax anticipation notes are
issued to finance working capital needs of
municipalities. Generally, they are issued in
anticipation of various seasonal tax revenue, such as
income, property, use and business taxes, and are
payable from these specific future taxes.
Revenue Anticipation Notes. Revenue anticipation notes
are issued in expectation of receipt of other types of
revenue, such as federal or state revenues available
under the revenue sharing or grant programs.
Bond Anticipation Notes. Bond anticipation notes are
issued to provide interim financing until long-term
financing can be arranged. In most cases, the
long-term bonds then provide the money for the
repayment of the notes.
Tax-Exempt Commercial Paper. Tax-exempt commercial
paper is a short-term obligation with a stated maturity
of 270 days or less. It is issued by state and local
governments or their agencies to finance seasonal
working capital needs or as short-term financing in
anticipation of longer term financing.
Municipal Bonds. Municipal bonds, which meet longer
term capital needs and generally have maturities of
more than one year when issued, have two principal
classifications: general obligation bonds and revenue
bonds. Two additional categories of potential
purchases are lease revenue bonds and pre-
refunded/escrowed to maturity bonds. Another type of
municipal bond is referred to as an Industrial
Development Bond.
General Obligation Bonds. Issuers of general
obligation bonds include states, counties, cities,
towns, and special districts. The proceeds of these
obligations are used to fund a wide range of public
projects, including construction or improvement of
schools, public buildings, highways and roads, and
general projects not supported by user fees or
PAGE 19
specifically identified revenues. The basic security
behind general obligation bonds is the issuer's pledge
of its full faith and credit and taxing power for the
payment of principal and interest. The taxes that can
be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of
special assessments. In many cases voter approval is
required before an issuer may sell this type of bond.
Revenue Bonds. The principal security for a revenue
bond is generally the net revenues derived from a
particular facility, or enterprise, or in some cases,
the proceeds of a special charge or other pledged
revenue source. Revenue bonds are issued to finance a
wide variety of capital projects including: electric,
gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and
universities; and hospitals. Revenue bonds are
sometimes used to finance various privately operated
facilities provided they meet certain tests established
for tax-exempt status.
Although the principal security behind these bonds
may vary, many provide additional security in the form
of a mortgage or debt service reserve fund. Some
authorities provide further security in the form of the
state's ability (without obligation) to make up
deficiencies in the debt service reserve fund. Revenue
bonds usually do not require prior voter approval
before they may be issued.
Lease Revenue Bonds. Municipal borrowers may also
finance capital improvements or purchases with
tax-exempt leases. The security for a lease is
generally the borrower's pledge to make annual
appropriations for lease payments. The lease payment
is treated as an operating expense subject to
appropriation risk and not a full faith and credit
obligation of the issuer. Lease revenue bonds are
generally considered less secure than a general
obligation or revenue bond and often do not include a
debt service reserve fund. To the extent the Fund's
Board determines such securities are illiquid, they
will be subject to the Fund's 15% limit on illiquid
securities (10% limit for the Money Fund). There have
also been certain legal challenges to the use of lease
revenue bonds in various states.
The liquidity of such securities will be determined
based on a variety of factors which may include, among
others: (1) the frequency of trades and quotes for the
obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other
PAGE 20
potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; (4) the
nature of the marketplace trades, including, the time
needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer; and
(5) the rating assigned to the obligation by an
established rating agency or T. Rowe Price.
Pre-refunded/Escrowed to Maturity Bonds. Certain
municipal bonds have been refunded with a later bond
issue from the same issuer. The proceeds from the
later issue are used to defease the original issue. In
many cases the original issue cannot be redeemed or
repaid until the first call date or original maturity
date. In these cases, the refunding bond proceeds
typically are used to buy U.S. Treasury securities that
are held in an escrow account until the original call
date or maturity date. The original bonds then become
"pre-refunded" or "escrowed to maturity" and are
considered as high quality investments. While still
tax-exempt, the security is the proceeds of the escrow
account. To the extent permitted by the Securities and
Exchange Commission and the Internal Revenue Service, a
Fund's investment in such securities refunded with U.S.
Treasury securities will, for purposes of
diversification rules applicable to the Fund, be
considered as an investment in the U.S. Treasury
securities.
Private Activity Bonds. Under current tax law all
municipal debt is divided broadly into two groups:
governmental purpose bonds and private activity bonds.
Governmental purpose bonds are issued to finance
traditional public purpose projects such as public
buildings and roads. Private activity bonds may be
issued by a state or local government or public
authority but principally benefit private users and are
considered taxable unless a specific exemption is
provided.
The tax code currently provides exemptions for
certain private activity bonds such as not-for-profit
hospital bonds, small-issue industrial development
revenue bonds and mortgage subsidy bonds, which may
still be issued as tax-exempt bonds. Some, but not
all, private activity bonds are subject to alternative
minimum tax.
Industrial Development Bonds. Industrial development
bonds are considered Municipal Bonds if the interest
paid is exempt from federal income tax. They are
issued by or on behalf of public authorities to raise
money to finance various privately operated facilities
PAGE 21
for business and manufacturing, housing, sports, and
pollution control. These bonds are also used to
finance public facilities such as airports, mass
transit systems, ports, and parking. The payment of the
principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet
its financial obligations and the pledge, if any, of
real and personal property so financed as security for
such payment.
Adjustable Rate Securities. Municipal securities may
be issued with adjustable interest rates that are reset
periodically by pre-determined formulas or indexes in
order to minimize movements in the principal value of
the investment. Such securities may have long-term
maturities, but may be treated as a short-term
investment under certain conditions. Generally, as
interest rates decrease or increase, the potential for
capital appreciation or depreciation on these
securities is less than for fixed-rate obligations.
These securities may take the following forms:
Variable Rate Securities. Variable rate securities
are those whose terms provide for the adjustment of
their interest rates on set dates and which, upon
each adjustment until the final maturity of the
instrument or the period remaining until the
principal amount can be recovered through demand,
can reasonably be expected to have a market value
that approximates its amortized cost. Subject to
the provisions of Rule 2a-7 under the Investment
Company Act of 1940 (1940 Act): (1) a variable rate
security, the principal amount of which is
scheduled to be paid in 397 calendar days or less,
is deemed to have a maturity equal to the earlier
of the period remaining until the next readjustment
of the interest rate or the period remaining until
the principal amount can be recovered through
demand; (2) a variable rate security, the principal
amount of which is scheduled to be paid in more
than 397 calendar days, which is subject to a
demand feature, as defined in Rule 2a-7, is deemed
to have a maturity equal to the longer of the
period remaining until the next readjustment of the
interest rate or the period remaining until the
principal amount can be recovered through demand;
and (3) a security that is issued or guaranteed by
the U.S. Government or any agency thereof which has
a variable rate of interest readjusted no less
frequently than every 762 calendar days may be
deemed to have a maturity equal to the period
remaining until the next readjustment of the
interest rate. Should the provisions of Rule 2a-7
PAGE 22
change, the Fund will determine the maturity of these
securities in accordance with the amended provisions of
such Rule.
Floating Rate Securities. Floating rate securities are
those whose terms provide for the adjustment of their
interest rates whenever a specified interest rate
changes and which, at any time until the final maturity
of the instrument or the period remaining until the
principal amount can be recovered through demand, can
reasonably be expected to have a market value that
approximates its amortized cost. Subject to the
provisions of Rule 2a-7 under the 1940 Act: (1) the
maturity of a floating rate security, the principal
amount of which must be unconditionally paid in 397
calendar days or less, is deemed to be one day; and (2)
a floating rate security, the principal amount of which
is scheduled to be paid in more than 397 calendar days,
that is subject to a demand feature, is deemed to have
a maturity equal to the period remaining until the
principal amount can be recovered through demand.
Should the provisions of Rule 2a-7 change, the Fund
will determine the maturity of these securities in
accordance with the amended provisions of such Rule.
Put Option Bonds. Long-term obligations with
maturities longer than one year may provide
purchasers an optional or mandatory tender of the
security at par value at predetermined intervals,
often ranging from one month to several years
(e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a
maturity equal to the period remaining to the put
date.
Residual Interest Bonds (These are a type of high-
risk derivative) (Bond and Balanced Funds). The
Funds may purchase municipal bond issues that are
structured as two-part, residual interest bond and
variable rate security offerings. The issuer is
obligated only to pay a fixed amount of tax-free
income that is to be divided among the holders of
the two securities. The interest rate for the
holders of the variable rate securities will be
determined by an index or auction process held
approximately every 7 to 35 days while the bond
holders will receive all interest paid by the
issuer minus the amount given to the variable rate
security holders and a nominal auction fee.
Therefore, the coupon of the residual interest
bonds, and thus the income received, will move
inversely with respect to short-term, 7 to 35 day
tax-exempt interest rates. There is no assurance
PAGE 23
that the auction will be successful and that the
variable rate security will provide short-term
liquidity. The issuer is not obligated to provide
such liquidity. In general, these securities offer
a significant yield advantage over standard
municipal securities, due to the uncertainty of the
shape of the yield curve (i.e., short term versus
long term rates) and consequent income flows.
Unlike many adjustable rate securities, residual
interest bonds are not necessarily expected to
trade at par and in fact present significant market
risks. In certain market environments, residual
interest bonds may carry substantial premiums or be
at deep discounts. This is a relatively new
product in the municipal market with limited
liquidity to date.
Participation Interests. The Fund may purchase
from third parties participation interests in all
or part of specific holdings of municipal
securities. The purchase may take different forms:
in the case of short-term securities, the
participation may be backed by a liquidity facility
that allows the interest to be sold back to the
third party (such as a trust, broker or bank) for a
predetermined price of par at stated intervals.
The seller may receive a fee from the Fund in
connection with the arrangement.
In the case of longer term bonds, the Intermediate
and Income Funds may purchase interests in a pool
of municipal bonds or a single municipal bond or
lease without the right to sell the interest back
to the third party.
The Fund will not purchase participation interests
unless a satisfactory opinion of counsel or ruling
of the Internal Revenue Service has been issued
that the interest earned from the municipal
securities on which the Fund holds participation
interests is exempt from federal income tax to the
Fund. However, there is no guarantee the IRS would
treat such interest income as tax-exempt.
Embedded Interest Rate Swaps and Caps (Bond and
Balanced Funds). In a fixed-rate, long-term
municipal bond with an interest rate swap attached
to it, the bondholder usually receives the bond's
fixed-coupon payment as well as a variable rate
payment that represents the difference between a
fixed rate for the term of the swap (which is
typically shorter than the bond it is attached to)
PAGE 24
and a variable rate short-term municipal index. The
bondholder receives excess income when short-term
rates remain below the fixed interest rate swap
rate. If short-term rates rise above the
fixed-income swap rate, the bondholder's income is
reduced. At the end of the interest rate swap term,
the bond reverts to a single fixed-coupon payment.
Embedded interest rate swaps enhance yields, but
also increase interest rate risk.
An embedded interest rate cap allows the bondholder
to receive payments whenever short-term rates rise
above a level established at the time of purchase.
They normally are used to hedge against rising
short-term interest rates.
Both instruments may be volatile and of limited
liquidity and their use may adversely affect a
fund's total return.
The Funds may invest in other types of derivative
instruments as they become available.
There are, of course, other types of municipal
securities that are, or may become, available, and the Funds
reserve the right to invest in them.
For the purpose of the Fund's investment restrictions,
the identification of the "issuer" of municipal securities which
are not general obligation bonds is made by the Fund's investment
manager, T. Rowe Price, on the basis of the characteristics of
the obligation as described above, the most significant of which
is the source of funds for the payment of principal and interest
on such securities.
When-Issued Securities
New issues of municipal securities are often offered on
a when-issued basis; that is, delivery and payment for the
securities normally takes place 15 to 45 days or more after the
date of the commitment to purchase. The payment obligation and
the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A
Fund will only make a commitment to purchase such securities with
the intention of actually acquiring the securities. However, a
Fund may sell these securities before the settlement date if it
is deemed advisable as a matter of investment strategy. Each
Fund will maintain cash and/or high-grade marketable debt
securities with its custodian bank equal in value to commitments
for when-issued securities. Such securities either will mature
or, if necessary, be sold on or before the settlement date.
Securities purchased on a when-issued basis and the securities
PAGE 25
held in a Fund's portfolio are subject to changes in market value
based upon the public perception of the creditworthiness of the
issuer and changes in the level of interest rates (which will
generally result in similar changes in value; i.e., both
experiencing appreciation when interest rates decline and
depreciation when interest rates rise). Therefore, to the extent
a Fund remains fully invested or almost fully invested at the
same time that it has purchased securities on a when-issued
basis, there will be greater fluctuations in its net asset value
than if it solely set aside cash to pay for when-issued
securities. In the case of the Money Fund, this could increase
the possibility that the market value of the Fund's assets could
vary from $1.00 per share. In addition, there will be a greater
potential for the realization of capital gains, which are not
exempt from federal income tax. When the time comes to pay for
when-issued securities, a Fund will meet its obligations from
then-available cash flow, sale of securities or, although it
would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or less
than the payment obligation). The policies described in this
paragraph are not fundamental and may be changed by a Fund upon
notice to its shareholders.
Forwards
Bond and Balanced Funds
The Fund may purchase bonds on a when-issued basis with
longer than standard settlement dates, in some cases exceeding
one to two years. In such cases, the Fund must execute a receipt
evidencing the obligation to purchase the bond on the specified
issue date, and must segregate cash internally to meet that
forward commitment. Municipal "forwards" typically carry a
substantial yield premium to compensate the buyer for the risks
associated with a long when-issued period, including: shifts in
market interest rates that could materially impact the principal
value of the bond, deterioration in the credit quality of the
issuer, loss of alternative investment options during the when-
issued period, changes in tax law or issuer actions that would
affect the exempt interest status of the bonds and prevent
delivery, failure of the issuer to complete various steps
required to issue the bonds, and limited liquidity for the buyer
to sell the escrow receipts during the when-issued period.
Investment in Taxable Money Market Securities
Although the Fund expects to be solely invested in
municipal securities (except for the Tax-Efficient Balanced
Fund), for temporary defensive purposes they may elect to invest
in the taxable money market securities listed below (without
limitation) when such action is deemed to be in the best
interests of shareholders. The Tax-Efficient Balanced Fund may
invest in such securities as part of its reserve position. The
PAGE 26
interest earned on these money market securities is not exempt
from federal income tax and may be taxable to shareholders as
ordinary income.
U.S. Government Obligations - direct obligations of
the government and its agencies and instrumentalities;
U.S. Government Agency Securities - obligations
issued or guaranteed by U.S. government sponsored enterprises,
federal agencies, and international institutions. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer; and
the remainder are supported only by the credit of the
instrumentality;
Bank Obligations - certificates of deposit,
bankers' acceptances, and other short-term obligations of U.S.
and Canadian banks and their foreign branches;
Commercial Paper - paper rated A-2 or better by
S&P, Prime-2 or better by Moody's, or F-2 or better by Fitch, or,
if not rated, is issued by a corporation having an outstanding
debt issue rated A or better by Moody's, S&P or Fitch and, with
respect to the Money Fund, is of equivalent investment quality as
determined by the Board of Directors; and
Short-Term Corporate Debt Securities - short-term
corporate debt securities rated at least AA by S&P, Moody's or
Fitch.
Determination of Maturity of Money Market Securities
The Money Fund may only purchase securities which at
the time of investment have remaining maturities of 397 calendar
days or less. The other Funds may also purchase money-market
securities. In determining the maturity of money market
securities, the Funds will follow the provisions of Rule 2a-7
under the Investment Company Act of 1940.
Tax-Efficient Balanced Fund
Illiquid or Restricted Securities
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
PAGE 27
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
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
PAGE 28
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
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
PAGE 29
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 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).
PAGE 30
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.
PORTFOLIO MANAGEMENT PRACTICES
Futures Contracts (Bond and Balanced Funds only)
Futures are a potentially high-risk derivative.
Transactions in Futures
The Fund may enter into interest rate futures contracts
("futures" or "futures contracts"). Interest rate futures
contracts may be used as a hedge against changes in prevailing
levels of interest rates in order to establish more definitely
the effective return on securities held or intended to be
acquired by the Fund. The Fund could sell interest rate futures
as an offset against the effect of expected increases in interest
rates and purchase such futures as an offset against the effect
of expected declines in interest rates. Futures can also be used
as an efficient means of regulating a Fund's exposure to the
market.
Tax-Efficient Balanced Fund
The Tax-Efficient Balanced Fund may enter into futures
contracts including stock index, interest rate and currency
futures ("futures or futures contracts"). 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 futures contacts with respect to indices or
PAGE 31
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.
All Funds
The Fund will enter into futures contracts which are
traded on national (and for the Tax-Efficient Balanced Fund,
foreign) futures exchanges and are standardized as to maturity
date and underlying financial instrument. A public market exists
in futures contracts covering various taxable fixed income
securities as well as municipal bonds. Futures exchanges and
trading in the United States are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures for the Tax-Efficient Balanced Fund may also
be 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 invest 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
quality 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 traded on a commodities exchange
will be considered "related options." This policy may be
PAGE 32
modified by the Board of Directors without a shareholder vote and
does not limit the percentage of the Fund's assets at risk to 5%.
The Fund's use of futures will not result in leverage.
Therefore, to the extent necessary, in instances involving the
purchase of futures contracts or the writing of calls 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 debt security)
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.
It is possible that the Fund's hedging activities will
occur primarily through the use of municipal bond index futures
contracts since the uniqueness of that index contract should
better correlate with the Fund's portfolio and thereby be more
effective. However, there may be times when it is deemed in the
best interest of shareholders to engage in the use of Treasury
bond futures, and the Fund reserves to right to use Treasury bond
futures at any time. Use of these futures could occur, as an
example, when both the Treasury bond contract and municipal bond
index futures contract are correlating well with municipal bond
prices, but the Treasury bond contract is trading at a more
advantageous price making the hedge less expensive with the
Treasury bond contract than would be obtained with the municipal
bond index futures contract. The Fund's activity in futures
contracts generally will be limited to municipal bond index
futures contracts and Treasury bond and note contracts.
PAGE 33
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
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.
PAGE 34
As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
municipal bond index futures on an exchange may be fulfilled at
any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the
purchase of one contract of September municipal bond index
futures on the same exchange. In such instance, the difference
between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
Tax-Efficient Balanced Fund
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,
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
PAGE 35
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
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
PAGE 36
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.
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 are written 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
PAGE 37
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
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 are another
type of potentially high risk derivative.
The Fund might trade in municipal bond index option
futures or similar options on futures developed in the future.
In addition, the Fund may also trade in options on futures
contracts on U.S. government securities and any U.S. government
securities futures index contract which might be developed. In
the opinion of T. Rowe Price, there is a high degree of
correlation in the interest rate, and price movements of U.S.
government securities and municipal securities. However, the
U.S. government securities market and municipal securities
markets are independent and may not move in tandem at any point
in time.
The Fund will purchase put options on futures contracts
to hedge its portfolio of municipal securities against the risk
of rising interest rates, and the consequent decline in the
prices of the municipal securities it owns. The Fund will also
write call options on futures contracts as a hedge against a
modest decline in prices of the municipal securities held in the
Fund's portfolio. If the futures price at expiration of a
written call option is below the exercise price, the Fund will
retain the full amount of the option premium, thereby partially
hedging against any decline that may have occurred in the Fund's
holdings of debt securities. If the futures price when the
option is exercised is above the exercise price, however, the
Fund will incur a loss, which may be wholly or partially offset
PAGE 38
by the increase of the value of the securities in the Fund's
portfolio which were being hedged.
Writing a put option on a futures contract serves as a
partial hedge against an increase in the value of securities the
Fund intends to acquire. If the futures price at expiration of
the option is above the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge
against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the futures
price when the option is exercised is below the exercise price,
however, the Fund will incur a loss, which may be wholly or
partially offset by the decrease in the price of the securities
the Fund intends to acquire.
Options 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
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.
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 Fund and the other T. Rowe Price
Funds in a fair and non-discriminatory manner.
Tax-Efficient Balanced Fund
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.
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
PAGE 39
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 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. In the event no such market exists for a
particular contract in which the Fund maintains a position, in
the case of a written option, the Fund would have to wait to sell
the underlying securities or futures positions until the option
expires or is exercised. The Fund would be required to maintain
margin deposits on payments until the contract is closed.
Options on futures are treated for accounting purposes in the
same way as the analogous option on securities are treated.
In addition, the correlation between movements in the
price of options on futures contracts and movements in the price
of the securities hedged can only be approximate. This risk is
significantly increased when an option on a U.S. government
securities future or an option on a municipal securities index
future is used to hedge a municipal bond portfolio. Another risk
is that the movements in the price of options on futures
contracts may not move inversely with changes in interest rates.
If the Fund has written a call option on a futures contract and
the value of the call increases by more than the increase in the
value of the securities held as cover, the Fund may realize a
loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the
premium received for writing the call.
The successful use of options on futures contracts
requires special expertise and techniques different from those
PAGE 40
involved in portfolio securities transactions. 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 or interest rate trends.
During periods when municipal securities market prices are
appreciating, the Fund may experience poorer overall performance
than if it had not entered into any options on futures contracts.
General Considerations
Transactions by the Fund in options on futures will be
subject to limitations established by each of the exchanges,
boards of trade or other trading facilities governing the maximum
number of options in each class which may be written or purchased
by a single investor or group of investors acting in concert,
regardless of whether the options are written on the same or
different exchanges, boards of trade or other trading facilities
or are held or written in one or more accounts or through one or
more brokers. Thus, the number of contracts which the Fund may
write or purchase may be affected by contracts written or
purchased by other investment advisory clients of T. Rowe Price.
An exchange, board of trade or other trading facility may order
the liquidations of positions found to be in excess of these
limits, and it may impose certain other sanctions.
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.
Tax-Efficient Balanced Fund
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
PAGE 41
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
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.
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
effective proxy for other currencies. In such a case, the Fund
PAGE 42
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 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.
PAGE 43
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 Futures Contracts
Although the Fund invests almost exclusively in
securities which generate income which is exempt from federal
income taxes, the instruments described above are not exempt from
such taxes. Therefore, use of the investment techniques
described above could result in taxable income to shareholders of
the Fund.
Generally, the Fund is required, for federal income tax
purposes, to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of
the year as well as those actually realized during the year.
Gain or loss recognized with respect to a futures contract will
generally be 60% long-term capital gain or loss and 40% short-
term capital gain or loss, without regard to the holding period
of the contract.
Futures contracts which are intended to hedge against a
change in the value of securities may be classified as "mixed
straddles," in which case the recognition of losses may be
deferred to a later year. In addition, sales of such futures
contracts on securities may affect the holding period of the
PAGE 44
hedged security and, consequently, the nature of the gain or loss
on such security on disposition.
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. Gains realized on the sale or other disposition of
securities, including futures contracts on securities 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 held less than three months, the
Fund may be required to defer the closing out of futures
contracts beyond the time when it would otherwise be advantageous
to do so. It is anticipated that unrealized gains on futures
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 held
less than three months for purposes of the 30% test.
The Fund will distribute to shareholders annually any
net gains which have been recognized for federal income tax
purposes from futures transactions (including unrealized gains at
the end of the Fund's fiscal year). Such distributions will be
combined with distributions of ordinary income or capital gains
realized on the Fund's other investments. Shareholders will be
advised of the nature of the payments. The Fund's ability to
enter into transactions in options on futures contracts may be
limited by the Internal Revenue Code's requirements for
qualification as a regulated investment company.
Options on Securities
Options are another type of potentially high-risk
derivative.
Bond and Money Funds
The Funds have no current intention of investing in
options on securities, although they reserve the right to do so.
Appropriate disclosure would be added to the Fund's prospectus
and Statement of Additional Information when and if the Fund
decides to invest in options.
Tax-Efficient Balanced Fund
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,
PAGE 45
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
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
PAGE 46
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.
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
PAGE 47
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
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
PAGE 48
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.
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
PAGE 49
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
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
PAGE 50
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
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
PAGE 51
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 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.
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
PAGE 52
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.
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
PAGE 53
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of the securities because it avoids
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 __.)
INVESTMENT RESTRICTIONS
All Funds
Fundamental policies may not be changed without the
approval of the lesser of (1) 67% of a 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 a Fund's outstanding shares. Other restrictions in
the form of operating policies are subject to change by a Fund's
Board of Directors 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, a
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 the Fund (other than the Money Fund) may
enter into futures contracts and options thereon;
PAGE 54
(3) Industry Concentration. 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;
(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.
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 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;
(9) Taxable Securities (All Funds, except Tax-Efficient
Balanced). During periods of normal market
conditions, purchase any security if, as a result,
less than 80% of the Fund's income would be exempt
from federal income tax. The income included under
the 80% test does not include income from securities
subject to the alternative minimum tax (AMT); or
PAGE 55
(10) 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 T. Rowe
Price Fund unless they apply for and receive 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 (1), the Money
Fund has no current intention of engaging in any
borrowing transactions.
With respect to investment restriction (2), the Fund does
not consider hybrid instruments 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.
Industrial development bonds issued by nongovernmental
users are subject to the restriction on concentration.
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) Equity Securities (All Funds, except Tax-Efficient
Balanced). Purchase any equity security or security
convertible into an equity security provided that the
Fund (other than the Money Fund) may invest up to 10%
of its total assets in equity securities which pay
tax-exempt dividends and which are otherwise
consistent with the Fund's investment objective and,
PAGE 56
further provided, that the Money Fund may invest up
to 10% of its total assets in equity securities of
other tax-free open-end money market funds;
(4) 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 positions would exceed 5% of the
Fund's net asset value;
(5) Illiquid Securities. Purchase illiquid securities
if, as a result, more than 15% (10% for the Money
Fund) of its net assets would be invested in such
securities;
(6) Investment Companies. Purchase securities of open-
end or closed-end investment companies except in
compliance with the Investment Company Act of 1940,
provided that, the Money Fund may only purchase the
securities of other tax-free open-end money market
investment companies;
(7) 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;
(8) 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;
(9) Oil and Gas Programs. Purchase participations in, or
other direct interests or enter into leases with
respect to, oil, gas, or other mineral exploration or
development programs if, as a result thereof, more
than 5% of the value of the total assets of the Fund
would be invested in such programs;
(10) 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;
(11) Short Sales. Effect short sales of securities;
or
PAGE 57
(12) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net assets
of the Fund would be invested in warrants.
For purposes of investment restriction (6), the Fund has no
current intention of purchasing the securities of other
investment companies. Duplicate fees could result from any
such purchases.
RATINGS OF MUNICIPAL DEBT SECURITIES
Moody's Investors Service, Inc.
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.
PAGE 58
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
AAA - This is the highest rating assigned by Standard &
Poor's 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 - Bonds rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA - Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rate
F-1+.
PAGE 59
A - Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds rated BBB are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly
speculative with respect to the issuer's capacity to repay
interest and repay principal in accordance with the terms of the
obligation for bond issues not in default. BB indicates the
lowest degree of speculation and C the highest degree of
speculation. The rating takes into consideration special
features of the issue, its relationship to other obligations of
the issuer, and the current and prospective financial condition
and operating performance of the issuer.
RATINGS OF MUNICIPAL NOTES AND VARIABLE SECURITIES
Moody's Investors Services, Inc.
VMIG-1/MIG-1: the best quality. VMIG-2/MIG-2: high quality,
with margins of protection ample though not so large as in the
preceding group.
VMIG-3/MIG-3: favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in particular,
is likely to be less well established. VMIG-4/MIG-4: adequate
quality but there is specific risk.
Standard & Poor's Corporation
SP-1: very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation. SP-2:
satisfactory capacity to pay principal and interest.
SP-3: speculative capacity to pay principal and interest.
Fitch Investors Service, Inc.
F-1+: exceptionally strong credit quality, strongest degree of
assurance for timely payment. F-1: very strong credit quality.
PAGE 60
F-2: good credit quality, having a satisfactory degree of
assurance for timely payment. F-3: fair credit quality,
assurance for timely payment is adequate but adverse changes
could cause the securities to be rated below investment grade.
F-S: weak credit quality, having characteristics suggesting a
minimal degree of assurance for timely payment.
RATINGS OF COMMERCIAL PAPER
Moody's Investors Service, Inc.
P-1: Superior capacity for repayment. P-2: strong capacity for
repayment.
P-3: acceptable capacity for repayment of short-term promissory
obligations.
Standard & Poor's Corporation
A-1: highest category, degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+)
designation. A-2: satisfactory capacity to pay principal and
interest.
A-3: adequate capacity for timely payment, but are vulnerable to
adverse effects of changes in circumstances than higher rated
issues. B, and C: speculative capacity to pay principal and
interest.
Fitch Investors Service, Inc.
F-1+: exceptionally strong credit quality, strongest degree of
assurance for timely payment. F-1: very strong credit quality.
F-2: good credit quality, having a satisfactory degree of
assurance for timely payment. F-3: fair credit quality,
assurance for timely payment is adequate but adverse changes
could cause the securities to be rated below investment grade.
F-5: weak credit quality, having characteristics suggesting a
minimal degree of assurance for timely payment.
MANAGEMENT OF FUNDS
The officers and directors of each of the Funds are listed
below. Unless otherwise noted, the address of each is 100 East
Pratt Street, Baltimore, Maryland 21202. Except as indicated,
each has been an employee of T. Rowe Price for more than five
years. In the list below, the Funds' directors who are
PAGE 61
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 (except Tax-Efficient Balanced)
Independent Directors
ROBERT P. BLACK, Retired; formerly President, Federal Reserve
Bank of Richmond; Address: 10 Dahlgren Road, Richmond, Virginia
23233
CALVIN W. BURNETT, PH.D., President, Coppin State College;
Board of Directors, McDonogh School, Inc. and Provident Bank of
Maryland; Past President, Baltimore Area Council Boy Scouts of
America; Vice President, Board of Directors, The Walters Art
Gallery; Address: 2500 West North Avenue, Baltimore, Maryland
21216
ANTHONY W. DEERING, Director, President and Chief Executive
Officer, The Rouse Company, real estate developers, Columbia,
Maryland; Advisory Director, Kleinwort, Benson (North America)
Corporation, a registered broker-dealer; Address: 10275 Little
Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, President, F. Pierce Linaweaver &
Associates, Inc., Consulting Environmental & Civil Engineer(s);
formerly (1987-1991) Executive Vice President, EA Engineering,
Science, and Technology, Inc.; and (1987-1990) President, EA
Engineering, Inc., Baltimore, Maryland; Address: The Legg Mason
Tower, 111 South Calvert Street, Suite 2700, Baltimore, Maryland
21202
JOHN G. SCHREIBER, President, Schreiber Investments, Inc., a real
estate investment company; Director and formerly (1/80-12/90)
Executive Vice President, JMB Realty Corporation, a national real
estate investment manager and developer; Address: 1115 East
Illinois Road, Lake Forest, Illinois 60045
All Funds (except Tax-Efficient Balanced)
Officers
*JAMES S. RIEPE, Director and Vice President--Managing
Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Services, Inc., T. Rowe Price Retirement Plan Services, Inc.,
T. Rowe Price Trust Company, and T. Rowe Price Investment
Services, Inc.; Director, 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
JANET G. ALBRIGHT, Vice President--Vice President, T. Rowe Price
PATRICIA S. DEFORD, Vice President--Vice President, T. Rowe Price
PAGE 62
CHARLES O. HOLLAND, Vice President--Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--Vice President, Price-
Fleming and T. Rowe Price Retirement Plan Services, Inc.;
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
ALAN P. RICHMAN, Vice President--Vice President, T. Rowe
Price
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,
and T. Rowe Price Trust Company
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President,
T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee,
T. Rowe Price
Tax-Exempt Money Fund
*WILLIAM T. REYNOLDS, Chairman of the Board--Director and
Managing Director, T. Rowe Price
PATRICE L. BERCHTENBREITER, President--Vice President, T. Rowe
Price
PAUL W. BOLTZ, Vice President--Vice President and Financial
Economist, T. Rowe Price
JOSEPH K. LYNAGH, Vice President--Assistant Vice President,
T. Rowe Price
MARY J. MILLER, Vice President--Managing Director, T. Rowe Price
THEODORE E. ROBSON, Vice President--Assistant Vice President,
T. Rowe Price
C. STEPHEN WOLFE, II, Vice President--Vice President, T. Rowe
Price
LAURA L. MCAREE, Vice President--Assistant Vice President,
T. Rowe Price
JEREMY N. BAKER, Assistant Vice President--Employee, T. Rowe
Price
Tax-Free Short-Intermediate Fund
*WILLIAM T. REYNOLDS, Chairman of the Board--Director and
Managing Director, T. Rowe Price
*MARY J. MILLER, President and Director--Managing Director,
T. Rowe Price
CHARLES B. HILL, Executive Vice President--Vice President,
T. Rowe Price
PAGE 63
PATRICE L. BERCHTENBREITER, Vice President--Vice President,
T. Rowe Price
KONSTANTINE B. MALLAS, Vice President-- Vice President, T. Rowe
Price
LAURA L. MCAREE, Vice President--Assistant Vice President,
T. Rowe Price
HUGH D. MCGUIRK, Vice President--Vice President, T. Rowe Price;
(1991-1993) municipal underwriter, Alex. Brown & Sons, Inc.,
Baltimore, Maryland
C. STEPHEN WOLFE, II, Vice President--Vice President, T. Rowe
Price
Tax-Free Insured Intermediate Bond Fund
*WILLIAM T. REYNOLDS, Director--Director and Managing
Director, T. Rowe Price
MARY J. MILLER, Executive Vice President--Managing Director,
T. Rowe Price
CHARLES B. HILL, Vice President--Vice President, T. Rowe
Price
KONSTANTINE B. MALLAS, Vice President--Assistant Vice President,
T. Rowe Price
HUGH D. MCGUIRK, Vice President--Vice President, T. Rowe Price;
formerly (1991-1993) municipal underwriter, Alex. Brown & Sons,
Inc., Baltimore, Maryland
LAURA L. MCAREE, Vice President--Assistant Vice President,
T. Rowe Price
WILLIAM F. SNIDER, JR., Vice President--Vice President, T. Rowe
Price
Tax-Free Income Fund
*WILLIAM T. REYNOLDS, Chairman of the Board--Director and
Managing Director, T. Rowe Price
MARY J. MILLER, President--Managing Director, T. Rowe Price
PATRICE L. BERCHTENBREITER, Vice President--Vice President,
T. Rowe Price
A. GENE CAPONI, Vice President--Vice President and Analyst,
T. Rowe Price
CHARLES B. HILL, Vice President--Vice President, T. Rowe
Price
KONSTANTINE B. MALLAS, Vice President--Vice President, T. Rowe
Price
HUGH D. MCGUIRK, Vice President--Vice President, T. Rowe Price;
(1991-1993) municipal underwriter, Alex. Brown & Sons, Inc.,
Baltimore, Maryland
WILLIAM F. SNIDER, JR., Vice President--Vice President, T. Rowe
Price
C. STEPHEN WOLFE, II, Vice President--Vice President, T. Rowe
Price
PAGE 64
Tax-Free High Yield Fund
*WILLIAM T. REYNOLDS, Chairman of the Board--Director and
Managing Director, T. Rowe Price
C. STEPHEN WOLFE, II, President--Vice President, T. Rowe Price
A. GENE CAPONI, Vice President--Vice President and Analyst,
T. Rowe Price
CHARLES B. HILL, Vice President--Vice President, T. Rowe
Price
KONSTANTINE B. MALLAS, Vice President--Vice President, T. Rowe
Price
HUGH D. MCGUIRK, Vice President--Vice President, T. Rowe Price;
(1991-1993) municipal underwriter, Alex. Brown & Sons, Inc.,
Baltimore, Maryland
MARY J. MILLER, Vice President--Managing Director, T. Rowe Price
WILLIAM F. SNIDER, JR., Vice President--Vice President, T. Rowe
Price
Tax-Efficient Balanced Fund
DONALD W. DICK, JR., Director--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 F. FAGIN, Director--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
*JAMES A.C. KENNEDY, III, Director and Vice President--Vice
President and Director--Managing Director of T. Rowe Price;
Chartered Financial Analyst
HANNE M. MERRIMAN, Director--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
*JAMES S. RIEPE, Director and President--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.
PAGE 65
*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
HUBERT D. VOS, Director--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, Director--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
MARY J. MILLER, Executive Vice President--Managing Director,
T. Rowe Price
DONALD J. PETERS, Executive Vice President--Vice President,
T. Rowe Price; formerly portfolio manager, Geewax Terker and
Company
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
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
International, Inc. and T. Rowe Price Retirement Plan Services,
Inc.
HUGH D. MCGUIRK, Vice President--Vice President, T. Rowe Price;
(1991-1993) municipal underwriter, Alex. Brown & Sons, Inc.,
Baltimore, Maryland
WILLIAM T. REYNOLDS, Vice President--Managing Director, T. Rowe
Price; Chartered Financial Analyst
WILLIAM F. SNIDER, JR., Vice President--Vice President, T. Rowe
Price
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price; Chartered Financial Analyst
ARTHUR S. VARNADO, Vice President--Vice President, T. Rowe Price
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
The Executive Committee of the Money, Income, High
Yield, and Insured Intermediate Bond Funds is composed of Messrs.
Reynolds, Riepe, and Testa; and the Executive Committee of the
PAGE 66
Short-Intermediate Fund, is composed of Mrs. Miller and Messrs.
Reynolds, Riepe, Testa. The Executive Committee of the Tax-
Efficient Balanced Fund is composed of Messrs. Kennedy, Riepe,
and Testa. These Executive Committees have been authorized by
their respective Board of Directors to exercise all powers of the
Board to manage the Fund in the intervals between meetings of the
Board, except the powers prohibited by statute from being
delegated.
COMPENSATION TABLE
The Funds do not pay pension or retirement benefits to
their officers or directors. Also, any director 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 Group
Person, from Paid to
Position Fund(a) Directors(b)
_________________________________________________________________
Tax-Exempt Money Fund
Robert P. Black, __ $56,917
Director
Calvin W. Burnett, Ph.D, __ 56,917
Director
Anthony W. Deering, __ 70,667
Director
F. Pierce Linaweaver, __ 56,917
Director
John Schreiber, __ 56,917
Director
_________________________________________________________________
Tax-Free Short-Intermediate Fund
Robert P. Black, -- 56,917
Director
Calvin W. Burnett, Ph.D, -- 56,917
Director
Anthony W. Deering, -- 70,667
Director
PAGE 67
F. Pierce Linaweaver, -- 56,917
Director
John G. Schreiber, -- 56,917
Director
_________________________________________________________________
Tax-Free Insured Intermediate Bond Fund
Robert P. Black, -- 56,917
Director
Calvin W. Burnett, Ph.D, -- 56,917
Director
Anthony W. Deering, -- 70,667
Director
F. Pierce Linaweaver, -- 56,917
Director
John Schreiber, -- 56,917
Director
_________________________________________________________________
Tax-Free Income Fund
Robert P. Black, -- 56,917
Director
Calvin W. Burnett, Ph.D, -- 56,917
Director
Anthony W. Deering, -- 70,667
Director
F. Pierce Linaweaver, -- 56,917
Director
John G. Schreiber, -- 56,917
Director
_________________________________________________________________
Tax-Free High Yield Fund
Robert P. Black, -- 56,917
Director
Calvin W. Burnett, Ph.D, -- 56,917
Director
Anthony W. Deering, -- 70,667
Director
F. Pierce Linaweaver, -- 56,917
Director
PAGE 68
John G. Schreiber, -- 56,917
Director
_________________________________________________________________
Tax-Efficient Balanced Fund
Donald W. Dick, Jr., -- 72,917
Director
David K. Fagin, -- 59,167
Director
Hanne M. Merriman, -- 59,167
Director
Hubert D. Vos, -- 59,167
Director
Paul M. Wythes, -- 69,667
Director
a Amounts in this Column are based on accrued compensation for
the period March 1, 1996 through February 28, 1997.
b Amounts in this column are based on compensation received
from the T. Rowe Price Funds from January 1, 1996 through
December 31, 1996. The T. Rowe Price Fund complex included
the funds as of December 31, 1996.
c Amounts for the Tax-Efficient Balanced Fund are
estimated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and
directors of the Funds, as a group, owned less than 1% of the
outstanding shares of each Fund.
As of March 31, 1997, no shareholder beneficially owned
more than 5% of the outstanding shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
Services Provided by T. Rowe Price
Under each Fund's Management Agreement, T. Rowe Price
provides each Fund with discretionary investment services.
Specifically, T. Rowe Price is responsible for supervising and
directing the investments of each Fund in accordance with its
investment objectives, programs, and restrictions as provided in
the prospectus and this Statement of Additional Information. T.
Rowe Price is also responsible for effecting all security
transactions on behalf of each Fund, including the allocation of
PAGE 69
principal business and portfolio brokerage and the negotiation of
commissions. In addition to these services, T. Rowe Price
provides each Fund with certain corporate administrative
services, including: maintaining the Fund's corporate existence,
corporate records, and registering and qualifying the Fund's
shares under federal and state laws; monitoring the financial,
accounting, and administrative functions of each Fund;
maintaining liaison with the agents employed by each Fund such as
the Fund's custodian and transfer agent; assisting each Fund in
the coordination of such agents' activities; and permitting T.
Rowe Price's employees to serve as officers, directors, and
committee members of each Fund without cost to the Fund.
The Management Agreements also provide 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.
Management Fee
Each 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 the 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:
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
PAGE 70
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 Spectrum Fund,
Inc., T. Rowe Price Equity Index Fund, and any institutional or
any 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 table below:
Fund Individual Fund Fee
_______ ________________________
Money 0.10%
Short-Intermediate 0.10%
Insured Intermediate Bond 0.05%
Income 0.15%
High Yield 0.30%
Tax-Efficient Balanced _____%
The following chart sets forth the total management
fees, if any, paid to T. Rowe Price by the Funds, for each of the
last three fiscal years.
Fund 1997 1996 1995
_______ ______ ______ ______
Money $2,993,000 $3,346,000
Short-Intermediate 1,975,000 2,171,000
Insured Intermediate Bond 274,000 206,000
Income 6,613,000 6,547,000
High Yield 5,968,000 5,561,000
Tax-Efficient Balanced * * *
* Prior to commencement of operations.
PAGE 71
Limitation on Fund Expenses
The Management Agreement between each Fund and T. Rowe
Price provides that each Fund will bear all expenses of its
operations not specifically assumed by T. Rowe Price.
For the purpose of determining whether a Fund is
entitled to reimbursement, the expenses of a Fund are calculated
on a monthly basis. If a Fund is entitled to reimbursement, that
month's advisory fee will be reduced or postponed, with any
adjustment made after the end of the year.
Tax-Efficient Fund
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 Fund expenses through February 28,
1997 which would cause the Fund's ratio of expenses to average
net assets to exceed ____%. Fees waived or expenses paid or
assumed under the Management Agreement are subject to
reimbursement by the Fund for a period of two years, ending
February 28, 2001; whenever the Fund's expense ratio is below
____%. No reimbursement will be made if it would result in the
expense ratio exceeding ____%.
This 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.
Insured Intermediate Bond Fund
From March 1, 1994, through February 29, 1996, T. Rowe
Price agreed to waive its fees and bear any expenses to the
extent such fees and expenses would cause the Insured
Intermediate Bond Fund's ratio of expenses to average net assets
to exceed 0.65%. Fees waived or expenses paid or assumed under
this agreement are subject to reimbursement to T. Rowe Price
whenever the Fund's expense ratio is below 0.65%; however, no
reimbursement will be made after February 29, 1998, or if it
would result in the expense ratio exceeding 0.65%.
Pursuant to the present expense limitation, $_________
of management fees were not accrued by the fund for the year
ended February 28, 1997. Additionally, $_________ of unaccrued
fees and expenses from the prior period are subject to
reimbursement.
PAGE 72
DISTRIBUTOR FOR FUNDS
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 distributor of
the 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. The offering of
each Fund's shares is continuous.
Investment Services is located at the same address as
the Funds and T. Rowe T. Rowe Price -- 100 East Pratt Street,
Baltimore, Maryland 21202.
Investment Services serves as distributor to the Funds
pursuant to individual Underwriting Agreements ("Underwriting
Agreements"), which provide that each Fund will pay all fees and
expenses in connection with: registering and qualifying its
shares under the various state "blue sky" laws; 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 Agreements provide that Investment
Services will pay all fees and expenses in connection with:
printing and distributing prospectuses and reports for use in
offering and selling shares for each Fund; 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 shares for each Fund,
except for those fees and expenses specifically assumed by the
Funds. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Funds in
connection with the sale of their shares in all states in which
the shares are qualified and 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 Funds.
CUSTODIAN
State Street Bank and Trust Company is the custodian
for each Fund's securities and cash, but it does not participate
in the Funds' investment decisions. The Funds have authorized
the Bank to deposit certain portfolio securities in central
depository systems as allowed by federal law. In addition, the
Funds are authorized to maintain certain of their securities, in
particular variable rate demand notes in uncertificated form in
the proprietary deposit systems of various dealers in municipal
securities. State Street Bank's main office is 225 Franklin
Street, Boston, Massachusetts 02107.
PAGE 73
The Tax-Efficient Balanced Fund has entered into a
Custodian Agreement with The Chase Manhattan Bank, N.A., London,
pursuant to which the fund's equity portfolio securities that 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 in
accordance with regulations under the Investment Company Act of
1940. The address for 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
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
PAGE 74
allocation of portfolio brokerage and principal business. The
Fund's purchases and sales of municipal securities are normally
done on a principal basis and do not involve the payment of a
commission although they may involve the designation of selling
concessions. That part of the discussion below relating solely
to brokerage commissions would not normally apply to the Fund's
investments in municipal securities. However, it is included
because T. Rowe Price does manage a significant number of common
stock portfolios (including the equity portion of the Tax-
Efficient Balanced Fund) which do engage in agency transactions
and pay commissions and because some research and services
resulting from the payment of such commissions may benefit the
Funds.
How Brokers and Dealers are Selected
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.
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 brokerage and research services in
connection with such designations in fixed price underwritings.
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.
PAGE 75
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 to
generate all of the information presently provided by brokers and
dealers. T. Rowe Price pays cash for certain research services
received from external 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
PAGE 76
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 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.
PAGE 77
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
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.
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 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
PAGE 78
municipal securities on behalf of its clients in underwritten
offerings.
Other
The Funds engaged in portfolio transactions involving
broker-dealers in the following amounts for the fiscal years
ended February 28, 1997, February 29, 1996, and February 28,
1995:
1997 1996 1995
Money Fund $3,101,344,000$3,476,545,000
Short-Intermediate Fund 1,184,341,000 1,879,637,000
Insured Intermediate Bond Fund 249,376,000 490,025,000
Income Fund 2,558,129,000 2,465,423,000
High Yield Fund 1,643,296,000 1,961,416,000
The following amounts consisted of principal
transactions as to which the Funds have no knowledge of the
profits or losses realized by the respective broker-dealers for
the fiscal years ended February 28, 1997, February 29, 1996, and
February 28, 1995:
1997 1996 1995
Money Fund $3,084,964,000$3,476,545,000
Short-Intermediate Fund 1,113,118,000 1,849,318,000
Insured Intermediate Bond Fund 233,485,000 480,566,000
Income Fund 2,318,802,000 2,296,647,000
High Yield Fund 1,501,879,000 1,855,103,000
The following amounts involved trades with brokers
acting as agents or underwriters for the fiscal years ended
February 28, 1997, February 29, 1996, and February 28, 1995:
1997 1996 1995
Money Fund $16,380,000 $0
Short-Intermediate Fund 71,223,000 30,319,000
Insured Intermediate Bond Fund 15,891,000 9,459,000
Income Fund 239,327,000 168,776,000
High Yield Fund 141,417,000 106,313,000
The following amounts involved trades with brokers
acting as agents or underwriters, in which such brokers received
total commissions, including discounts received in connection
with underwritings for the fiscal years ended February 28, 1997,
February 29, 1996, and February 28, 1995:
PAGE 79
1997 1996 1995
Money Fund $70,000 $0
Short-Intermediate Fund 281,000 68,000
Insured Intermediate Bond Fund 61,000 44,000
Income Fund 1,608,000 932,000
High Yield Fund 970,000 379,000
Of all such portfolio transactions, none were placed
with firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Funds, or in some cases, to the Funds.
The portfolio turnover rates of the Funds for the
fiscal years ended February 28, 1997, February 29, 1996, and
February 28, 1995:
1997 1996 1995
Short-Intermediate Fund 69.9% 93.1%
Insured Intermediate Bond Fund 63.8% 170.8%
Income Fund 48.7% 49.3%
High Yield Fund 39.3% 59.6%
PRICING OF SECURITIES
Fixed income securities are generally traded in the over-
the-counter market. With the exception of the Money Fund,
investments in securities are stated at fair market value using a
bid-side valuation as furnished by dealers who make markets in
such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon,
maturity, and type, as well as prices quoted by dealers who make
markets in such securities. Securities held by the Money Fund
are valued at amortized cost.
There are a number of pricing services available, and the
Directors of the Funds, on the basis of ongoing evaluation of
these services, may use or may discontinue the use of any pricing
service in whole or in part.
Securities or other assets for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value will be appraised at prices deemed best to reflect their
fair value. Such determinations will be made in good faith by or
under the supervision of officers of each Fund as authorized by
the Board of Directors.
PAGE 80
Maintenance of Money Fund's Net Asset Value Per Share at $1.00
It is the policy of the Fund to attempt to maintain a net
asset value of $1.00 per share by using the amortized cost method
of valuation permitted by Rule 2a-7 under the Investment Company
Act of 1940. Under this method, securities are valued by
reference to the Fund's acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than
by reference to their market value. Under Rule 2a-7:
(a)The Board of Directors must establish written
procedures reasonably designed, taking into account
current market conditions and the fund's investment
objectives, to stabilize the fund's net asset value per
share, as computed for the purpose of distribution,
redemption and repurchase, at a single value;
(b)The Fund must (i) maintain a dollar-weighted average
portfolio maturity appropriate to its objective of
maintaining a stable price per share, (ii) not purchase
any instrument with a remaining maturity greater than
397 days, and (iii) maintain a dollar-weighted average
portfolio maturity of 90 days or less;
(c)The Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to those
U.S. dollar-denominated instruments which the Fund's
Board of Directors determines present minimal credit
risks, and which are eligible securities as defined by
Rule 2a-7 (eligible Securities are generally securities
which have been rated or whose issuer has been rated or
whose issuer has comparable securities rated in one of
the two highest rating categories by nationally
recognized statistical rating organizations or, in the
case of any instrument that is not so rated, is of
comparable quality as determined by procedures adopted
by the Fund's Board of Directors); and
(d)The Board of Directors must determine that (i) it is
in the best interest of the Fund and its shareholders
to maintain a stable net asset value per share under
the amortized cost method; and (ii) the Fund will
continue to use the amortized cost method only so long
as the Board of Directors believes that it fairly
reflects the market based net asset value per share.
Although the Fund believes that it will be able to
maintain its net asset value at $1.00 per share under most
conditions, there can be no absolute assurance that it will be
able to do so on a continuous basis. If the Fund's net asset
value per share declined, or was expected to decline, below $1.00
(rounded to the nearest one cent), the Board of Directors of the
Fund might temporarily reduce or suspend dividend payments in an
PAGE 81
effort to maintain the net asset value at $1.00 per share. As a
result of such reduction or suspension of dividends, an investor
would receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption,
a price per share lower than that which he paid. On the other
hand, if the Fund's net asset value per share were to increase,
or were anticipated to increase above $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
supplement dividends in an effort to maintain the net asset value
at $1.00 per share.
Tax-Efficient Balanced Fund
The Fund's municipal securities will be priced as
described above. The Fund's 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.
PAGE 82
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Funds' shares
is equal to the Funds' net asset value per share or share price.
Each Fund determines its net asset value per share by subtracting
the Funds' 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 each Fund is calculated as of the close of trading on
the New York Stock Exchange ("NYSE") every day the NYSE is open
for trading. The net asset value of the Money Fund is also
calculated as of 12:00 noon (Eastern time) 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 a 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 a 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 given
as to whether the conditions prescribed in (b), (c), or (d)
exist.
DIVIDENDS
Unless you elect otherwise, the Fund's annual capital
gain distribution and for the Tax-Efficient Balanced Fund, the
final quarterly dividend, if any, 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
Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").
PAGE 83
Dividends and distributions paid by the Funds are not
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. Each Fund must declare by its year-end
dividends equal to at least 90% of net tax-exempt income (as of
its year-end) to permit pass-through of tax-exempt income to
shareholders, and declare by December 31 98% of capital gains (as
of October 31) in order to avoid a federal excise tax and
distribute within 12 months 100% of capital gains (as of its tax
year-end) to avoid federal income tax.
At the time of your purchase, a 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 as a capital gain
distribution. For federal income tax purposes, a 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 April 30, 1996, the books of each Fund
indicated that the Fund's aggregate net assets included:
Realized Unrealized
Capital Appreciation/
Gains/(Losses) Depreciation
________________ __________________
Money Fund $ (216,299) $ 0
Short-Intermediate Fund (1,298,300) 5,282,791
Insured Intermediate Bond Fund (677,733) 1,628,166
Income Fund (9,378,648) 50,717,923
High Yield Fund (13,517,641) 37,414,363
If, in any taxable year, the Funds should not qualify
as regulated investment companies under the Code: (i) each 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) each 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 or tax-exempt dividends).
The Funds anticipate acquiring bonds after initial
issuance at a price less than the principal amount of such bonds
("market discount bonds"). Gain on the disposition of such bonds
is treated as taxable ordinary income to the extent of accrued
market discount. Such gains cannot be offset by losses on the
sale of other securities but must be distributed to shareholders
annually and taxed as ordinary income.
PAGE 84
Each year, the Funds will mail you information on the
tax status of dividends and distributions. The Funds anticipate
that substantially all of the dividends to be paid by each Fund
will be exempt from federal income taxes. If any portion of a
Fund's dividends is not exempt from federal income taxes, you
will receive a Form 1099 stating the taxable portion. The Funds
will also advise you of the percentage of your dividends, if any,
which should be included in the computation of alternative
minimum tax. Social security recipients who receive interest
from tax-exempt securities may have to pay taxes on a portion of
their social security benefit.
Because the interest on municipal securities is tax
exempt, any interest on money you borrow that is directly or
indirectly used to purchase Fund shares is not deductible. (See
Section 265(2) of the Internal Revenue Code.) Further, entities
or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial
development bonds should consult their tax advisers before
purchasing shares of a Fund. The income from such bonds may not
be tax exempt for such substantial users.
YIELD INFORMATION
Money Fund
The Fund's current and historical yield for a period is
calculated by dividing the net change in value of an account
(including all dividends accrued and dividends reinvested in
additional shares) by the account value at the beginning of the
period to obtain the base period return. This base period return
is divided by the number of days in the period then multiplied by
365 to arrive at the annualized yield for that period. The
Fund's annualized compound yield for such period is compounded by
dividing the base period return by the number of days in the
period, and compounding that figure over 365 days.
The Money Fund's current yield was 2.98% and the
compound yield was 3.02% for the seven days ended February 28,
1997.
Bond Funds
From time to time, a Fund may advertise a yield figure
calculated in the following manner:
An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with
regulations of the Securities and Exchange Commission. The
income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period net of
PAGE 85
expected reimbursements are deducted from the income to arrive at
net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding
during the period. The net income per share is divided by the
net asset value on the last day of the period to produce a
monthly yield which is then annualized. A taxable equivalent
yield is calculated by dividing this yield by one minus the
effective federal income tax rate. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future
performance or forecast the dividend per share of the Fund.
The yield of each Fund calculated under the above-
described method for the month ended February 28, 1997 was:
Short-Intermediate 3.76%
Insured Intermediate Bond 4.08%
Income 4.81%
High Yield 5.22%
The tax equivalent yields for these funds for the
same period were 5.45% (Short-Intermediate), 5.91% (Insured
Intermediate), 6.97% (Income), and 7.57% (High Yield). This
assumes a federal tax bracket of 31.0%. Assuming a federal tax
bracket of 28.0%, the tax-equivalent yields for the period would
be 5.22% (Short-Intermediate), 5.67% (Insured Intermediate),
6.68% (Income), and 7.25% (High Yield).
TAX-EXEMPT VS. TAXABLE YIELDS
From time to time, a Fund may also illustrate the
effect of tax equivalent yields using information such as that
set forth below:
_________________________________________________________________
Taxable Income (1996)*
Federal
Joint Return Single Return Tax Rates+
_________________________________________________________________
$40,101- $96,900 $24,001- $58,150 28.0%
96,901- 147,700 58,151- 121,300 31.0
147,701- 263,750 121,301- 263,750 36.0
263,751 and above 263,751 and above 39.6
_________________________________________________________________
A Tax-Exempt Yield Of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
4.17 5.56 6.94 8.33 9.72 11.11 12.50 13.89
4.35 5.80 7.25 8.70 10.14 11.59 13.04 14.49
4.69 6.25 7.81 9.38 10.94 12.50 14.06 15.63
4.97 6.62 8.28 9.93 11.59 13.25 14.90 16.56
PAGE 86
* Net amount subject to federal income tax after deductions and
exemptions.
+ Federal rates may vary depending on family size and amount and
nature of itemized deductions.
INVESTMENT PERFORMANCE
Total Return Performance
Each 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
Since
1 Yr. 5 Yrs. 10 Yrs. Inception
Ended Ended Ended Ended
2/28/97 2/28/97 2/28/97 2/28/97
Short-Intermediate Fund 6.87 30.85 71.93 105.53%
12/23/83
Insured Intermediate
Bond Fund 9.57 26.72
11/30/92
Income Fund 10.31 50.08 100.54 293.20
10/26/76
High Yield Fund 10.62 51.70 125.26 179.86
3/01/85
PAGE 87
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception
2/28/97 2/28/97 2/28/97 2/28/97
Short-Intermediate
Fund 6.87 5.52 5.57 6.09%
12/23/83
Insured Intermediate
Bond Fund 9.57 7.57
11/30/92
Income Fund 10.31 8.46 7.21 7.34
10/26/76
High Yield Fund 10.62 8.69 8.46 9.81
3/01/85
All Funds
Outside Sources of Information
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
PAGE 88
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.
CAPITAL STOCK
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 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 director. The Board of
Directors of each Fund may increase or decrease the aggregate
number of shares of stock or the number of shares of stock of any
class or series authorized to be issued without shareholder
approval.
As set forth in the By-Laws of each Fund, a special
meeting of shareholders of a 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. Each
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.
PAGE 89
Short-Intermediate, Insured Intermediate Bond, Income, High
Yield, and Tax-Efficient Balanced Funds
Each 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 Boards of Directors of
these Funds 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 Funds' Charters
contain 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 of vote as a class by the holders of the capital
stock or of another affected class or classes.
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
PAGE 90
acquisitions of portfolio securities that: (a) meet the
investment objectives and policies of the Funds; (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.
FEDERAL REGISTRATION OF SHARES
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 each of the Funds.
INDEPENDENT ACCOUNTANTS
Tax-Efficient Balanced Fund
_____________________, ______________________________,
are independent accountants to the Fund.
All Funds, except Tax-Efficient Balanced
Coopers & Lybrand L.L.P., 217 East Redwood Street,
Baltimore, Maryland 21202, are independent accountants to the
Funds. The financial statements of the Funds for the fiscal year
ended February 28, 1997 and the report of independent accountants
are included in each Fund's Annual Report on pages 2-20, pages 2-
29, pages 2-15, page 2-17, and page 2-28, respectively. A copy
of each Annual Report accompanies this Statement of Additional
Information. The following financial statements and the report
of independent accountants appearing in each Annual Report for
the fiscal year ended February 28, 1997, are incorporated into
this Statement of Additional Information by reference:
PAGE 91
MONEY FUND HIGH YIELD FUND
ANNUAL ANNUAL
REPORT PAGE REPORT PAGE
___________ _______________
Report of Independent Accountants 20 29
Statement of Net Assets,
February 28, 1997 3-15 3-23
Statement of Operations, year ended
February 28, 1997 16 24
Statement of Changes in Net Assets,
years ended February 28, 1997 and
February 29, 1996 17 25
Notes to Financial Statements,
February 28, 1997 18-19 26-28
Financial Highlights 2 2
INSURED
INTERMEDIATE
BOND FUND
ANNUAL REPORT PAGE
_________________
Report of Independent Accountants 15
Statement of Net Assets, February 28, 1997 3-9
Statement of Operations, year ended February 28, 1997 10
Statement of Changes in Net Assets, years ended
February 28, 1997 and February 29, 1996 11
Notes to Financial Statements, February 28, 1997 12-14
Financial Highlights 2
SHORT-INTERMEDIATE
FUND ANNUAL
REPORT PAGE
__________________
Report of Independent Accountants 17
Statement of Net Assets, February 28, 1997 3-12
Statement of Operations, year ended February 28, 1997 13
Statement of Changes in Net Assets, years ended
February 28, 1997 and February 29, 1996 14
Notes to Financial Statements, February 29, 1996 15-16
Financial Highlights 2
PAGE 92
INCOME FUND
ANNUAL
REPORT PAGE
_______________
Report of Independent Accountants 28
Statement of Net Assets, February 28, 1997 3-22
Statement of Operations, year ended February 28, 1997 23
Statement of Changes in Net Assets, years ended
February 28, 1997 and February 29, 1996 24
Notes to Financial Statements, February 28, 1997 25-27
Financial Highlights 2
Effective March 1, 1995, Coopers & Lybrand L.L.P. became the
independent accountants to the Short-Intermediate and Income
Funds.
PAGE 93
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
(2) By-Laws of Registrant
(3) Inapplicable
(4) Inapplicable
(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 of shares at $______ per
share.
PAGE 94
(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, 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) Inapplicable
(10) Opinion of Counsel, dated May 2, 1997
(11) Inapplicable
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
PAGE 95
(16) The Registrant hereby incorporates by reference the
methodologies used in calculating the performance
information included in: Post-Effective Amendment
No. 45 and Amendment No. 9 of the T. Rowe Price New
Era Fund, Inc. (SEC. File Nos. 2-29866 and 811-1710)
dated March 2, 1988, for the fund's equity portion;
and Post-Effective Amendment No. 36 and Amendment
No. 20 of the T. Rowe Price Tax-Free Income Fund,
Inc. (SEC File Nos. 2-57265 and 811-2684 and CIK
202927) dated April 22, 1994, for the fund's
municipal portion.
(17) Financial Data Schedule for T. Rowe Price Tax-
Efficient Balanced Fund, Inc. as of May 2, 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 2, 1997, there were zero shareholders in the
T. Rowe Price Tax-Efficient Balanced 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
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
PAGE 96
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. Government Fund, Inc., T. Rowe Price Mid-Cap
Growth Fund, Inc., T. Rowe Price Small-Cap Stock Fund, Inc., T.
Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc., T. Rowe
Price Dividend Growth 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
PAGE 97
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 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.
PAGE 98
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
(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
PAGE 99
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 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 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.
PAGE 100
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
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.
PAGE 101
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,
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.
PAGE 102
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
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.
PAGE 103
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;
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.
PAGE 104
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,
Cheif Investment Officer 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.
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.
PAGE 105
Leah P. Holmes, who is an Assistant Vice President of the
Manager, is a Vice President of Price-Fleming.
Ava M. Rainey, who is an 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.
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 is 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 Vice
Director President
PAGE 106
Charles E. Vieth Vice President and
Director None
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
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 and
Vice President None
Richard J. Barna Assistant Vice
President None
PAGE 107
Catherine L. Berkenkemper Assistant Vice
President None
Robin C.B. Binkley Assistant Vice
President None
Patricia S. Butcher Assistant Vice Assistant
President 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
Nolan L. North Assistant Treasurer None
Barbara A. Van Horn Assistant Secretary None
PAGE 108
(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 Tax-Efficient Balanced Fund,
Inc. under Section 31(a) of the Investment Company Act of
1940 and the rules thereunder will be maintained by T. Rowe
Price Tax-Efficient Balanced Fund, Inc., at its offices at
100 East Pratt Street, Baltimore, Maryland 21202. Transfer,
dividend disbursing, and shareholder service activities are
performed by T. Rowe Price Services, Inc., at 100 East Pratt
Street, Baltimore, Maryland 21202. Custodian activities for
T. Rowe Price Tax-Efficient Balanced Fund, Inc. are
performed at State Street Bank and Trust Company's Service
Center (State Street South), 1776 Heritage Drive, Quincy,
Massachusetts 02171.
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) The Fund agrees to furnish, upon request and without
charge, a copy of its latest Annual Report to each
person to whom a prospectus is delivered.
PAGE 109
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 2nd
day of May, 1997.
T. ROWE PRICE TAX-EFFICIENT BALANCED
FUND, INC.
/s/James S. Riepe
_______________________________________
By: James S. Riepe,
President and Director
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/James S. Riepe
____________________ President and Director May 2, 1997
James S. Riepe
/s/Carmen F. Deyesu
____________________ Treasurer May 2, 1997
Carmen F. Deyesu (Chief Financial Officer)
/s/Donald W. Dick, Jr.
____________________ Director May 2, 1997
Donald W. Dick, Jr.
/s/David K. Fagin
____________________ Director May 2, 1997
David K. Fagin
/s/James A.C. Kennedy, III
____________________ Vice President May 2, 1997
James A.C. Kennedy, III and Director
/s/Hanne M. Merriman
____________________ Director May 2, 1997
Hanne M. Merriman
PAGE 110
/s/M. David Testa
____________________ Director May 2, 1997
M. David Testa
/s/Hubert D. Vos
____________________ Director May 2, 1997
Hubert D. Vos
/s/Paul M. Wythes
____________________ Director May 2, 1997
Paul M. Wythes
PAGE 1
T. ROWE PRICE TAX-EFFICIENT BALANCED 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 Tax-Efficient Balanced 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 "Tax-Efficient
Balanced" 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.
PAGE 3
(b) The following is a description of the preferences,
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 "Tax-Efficient Balanced" 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
PAGE 4
charged to a series are herein referred to collectively as
"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
PAGE 5
Voting; (ii) in the event that the separate vote requirement
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.
PAGE 6
(7) Liquidation. In the event of the liquidation of a
particular series, the shareholders of the series that is
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.
PAGE 7
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
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
PAGE 8
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,
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
PAGE 9
capital stock of any class or series that the Corporation has
authority to issue.
(f) The Corporation may issue and sell fractions of shares
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
PAGE 10
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.
(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
PAGE 11
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
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.
PAGE 12
(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.
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 TAX-EFFICIENT BALANCED 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 TAX-EFFICIENT BALANCED 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 TAX-EFFICIENT BALANCED 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)]
_________________________
* 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.
PAGE 6
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.
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]
PAGE 7
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
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
PAGE 8
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.
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
PAGE 9
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
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:
PAGE 10
(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]
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]
PAGE 11
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
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
PAGE 12
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
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
PAGE 13
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
(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
PAGE 14
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.
PAGE 15
ARTICLE IV
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
PAGE 16
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
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
PAGE 17
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)]
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)
PAGE 18
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
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
PAGE 19
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.
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.
PAGE 20
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
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)]
PAGE 21
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
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 22
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.
PAGE 23
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
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
PAGE 24
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 March in each year and ending on the last day of
the following December, or such other period of twelve (12)
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.
PAGE 25
(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
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:
PAGE 26
(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
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.
PAGE 27
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
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.
PAGE 28
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.
May 2, 1997
T. Rowe Price Tax-Efficient Balanced Fund, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Re: T. Rowe Price Tax-Efficient Balanced Fund, Inc.
File No.: 811-08207
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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