<PAGE>
Registration No.: 811-10093
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 U.S. BOND INDEX FUND, INC.
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Exact Name of Registrant as Specified in Charter
100 East Pratt Street, Baltimore, Maryland 21202
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Address of Principal Executive Offices Zip Code
410-345-2000
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Registrant's Telephone Number, Including Area Code
Henry H. Hopkins
100 East Pratt Street, Baltimore, Maryland 21202
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Name and Address of Agent for Service
Approximate Date of Proposed Public Offering October 31, 2000
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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)
/ / 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.
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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.
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, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
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T. ROWE PRICE
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U.S. Bond Index Fund, Inc.
Supplement to prospectus dated October 31, 2000
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The fund will begin operations on ________, 2000. However, it will accept
purchase and exchange orders during a subscription period from __________, 2000
to __________, 2000. During this period, you may submit a purchase request by:
. Check. Fill out the New Account Form and follow the "Opening a New Account"
instructions on page ____ of the prospectus. Subscriptions received by
________ will be initially invested in the T. Rowe Price Prime Reserve Fund,
a money market fund. On ________, 2000, your original investment plus any
dividends earned will be automatically exchanged into the U.S. Bond Index
Fund at a price of $10 per share.
. Exchange. Call Shareholder Services to place your exchange order. Your
investment will remain in your existing fund until ________, 2000, at which
time your exchange will be automatically made into the U.S. Bond Index Fund
at a price of $10 per share. Remember that the value of your existing fund
may fluctuate between the time you place your order and the exchange date.
. You may also purchase shares of the fund on or after ________, 2000, via
exchange or any of the methods outlined in the prospectus.
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The date of this supplement is ________, 2000.
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F134-041 00/00/00
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PROSPECTUS
October 31, 2000
T. ROWE PRICE
U.S. Bond Index Fund
A bond fund that seeks to match the performance of a broad U.S. bond index.
(T. ROWE PRICE RAM LOGO)
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
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T. Rowe Price U.S. Bond Index Fund, Inc.
Prospectus
October 31, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Objective, Strategy, Risks, and Expenses
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Other Information About the Fund
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Some Characteristics of
Municipal Securities
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Some Basics of Fixed Income Investing
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving
Sale Proceeds
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Useful Information on Distributions
and Taxes
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Transaction Procedures and
Special Requirements
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3 MORE ABOUT THE FUND
Organization and Management
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Understanding Performance Information
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Investment Policies and Practices
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4 INVESTING WITH T. ROWE PRICE
Account Requirements
and Transaction Information
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Opening a New Account
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Purchasing Additional Shares
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Exchanging and Redeeming Shares
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Rights Reserved by the Funds
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Information About Your Services
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T. Rowe Price Brokerage
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Investment Information
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</TABLE>
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc., and its affiliates managed $179 billion for more than eight million
individual and institutional investor accounts as of June 30, 2000.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
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ABOUT THE FUND
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
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To help you decide whether this fund is appropriate for you, this section
reviews its major characteristics.
What is the fund's objective?
The fund seeks to match the total return performance of the U.S.
investment-grade bond market.
What is the fund's principal investment strategy?
The fund's managers will use passive investment management techniques in an
effort to closely match the performance of the overall U.S. investment-grade
bond market, as represented by the Lehman Brothers Aggregate Bond Index.
Because this Lehman index typically includes more than 5,000 fixed-income
securities, and the cost of owning and trading such a large number of
securities would be prohibitive, the fund intends to use a sampling strategy.
Under this approach, we will consider each broad segment of the benchmark -
government bonds, mortgages, and corporate issues - and within each segment
select a set of U.S. dollar-denominated bonds that is representative of key
benchmark traits. The most important of these traits are interest rate
sensitivity, credit quality, and sector diversification, although other
characteristics will be reflected.
As part of this strategy, we expect to own U.S. government and agency
obligations, mortgage- and asset-backed securities, corporate bonds and U.S.
dollar-denominated securities of foreign issuers. Other types of bonds may
also be purchased so long as the overall portfolio has similar traits as the
index.
The fund's manager will invest substantially all fund assets in bonds
specifically represented in the index. However, we may purchase securities
not held in the index, such as certain types of derivatives, if they have the
same characteristics as index securities but offer more attractive prices or
yields.
T. Rowe Price continually compares the composition of the fund to that of the
index. If a misweighting develops, the portfolio is rebalanced in an effort
to bring it into line with the index. When investing cash flow, the fund may
purchase bonds, futures, options or other derivatives. This approach is
intended to minimize any deviations in performance between the index and the
fund.
The fund may sell securities to better align the portfolio with the
characteristics of its benchmark or to satisfy redemption requests. However,
the fund is not required to sell specific bond issues that have been removed
from the index. The
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T. ROWE PRICE
inclusion of a bond in the Lehman Brothers Aggregate Bond Index is in no way
an endorsement by Lehman Brothers of the bond as an investment, nor is Lehman
Brothers a sponsor of the fund or in any way affiliated with it.
. For details about the fund's investment program, please see the Investment
Policies and Practices section.
What are the main risks of investing in the fund?
This fund is designed to track the performance of investment-grade bonds,
regardless of whether they are rising or falling. Because index funds are
passively managed and fully invested at all times, assets can not be shuffled
from one bond or group of bonds to another based on their prospects in an
attempt to cushion the impact of a market decline. Therefore, actively
managed funds may outperform index funds. In addition, index funds carry the
same overall risks as the indexes they are designed to track. The following
are the principal risks the fund may face:
. Interest rate risk Investors should be concerned primarily with this risk.
An increase in interest rates could cause the fund's share price to fall,
resulting in a loss of principal (see Table 2). That's because the bonds and
notes in the fund's portfolio become less attractive to other investors when
securities with higher yields become available. Even GNMAs and other
securities whose principal and interest payments are guaranteed by the U.S.
government can decline in price if rates rise. The longer a bond's maturity,
the greater its potential for price declines if rates rise and for price
gains if rates fall. Because the fund may invest in bonds of any maturity, it
carries more interest rate risk than short-term bond funds.
. Credit risk This is the chance that any of a fund's holdings will have its
credit rating downgraded or will default (fail to make scheduled interest or
principal payments), potentially reducing the fund's income level and share
price. While the fund's overall credit quality is investment grade (AAA-BBB),
BBB securities are more susceptible to adverse economic conditions and some
may have speculative characteristics.
. The fund may continue to hold a security that has been downgraded or loses
its investment-grade rating after purchase.
. Prepayment risk and extension risk A mortgage-backed bond, unlike most other
bonds, can be hurt when interest rates fall, because homeowners tend to
refinance and prepay principal. The loss of high-yielding, underlying
mortgages and the reinvestment of proceeds at lower interest rates can reduce
the bond's potential price gain in response to falling interest rates, reduce
the bond's yield, or even cause the bond's price to fall below what an
investor paid for it, resulting in a
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capital loss. Any of these developments could cause a decrease in the fund's
income, share price, or total return.
Extension risk refers to a rise in interest rates that causes a fund's
average maturity to lengthen unexpectedly due to a drop in mortgage
prepayments. This would increase the fund's sensitivity to rising rates and
its potential for price declines.
. Derivatives risk Shareholders are also exposed to derivatives risk, the
potential that our investments in these complex and volatile instruments
could affect the fund's share price. In addition to CMOs and better-known
instruments such as futures, other derivatives that may be used in limited
fashion by the fund include interest-only (IO) and principal-only (PO)
securities known as "strips." The value of these instruments is derived from
an underlying pool of mortgage-backed securities or a CMO. All these
instruments can be highly volatile, and their value can fall dramatically in
response to rapid or unexpected changes in the mortgage or interest rate
environment.
. Tracking error Differences between the composition of the fund and its
index, as well as differences in pricing sources, will likely result in
tracking error, or the risk that fund performance will not match that of the
index. Tracking error will also result because the fund incurs fees and
transaction expenses while indices have none. The timing of cash flows and
the fund's size can also influence returns.
As with any mutual fund, there can be no guarantee the fund will achieve its
objective.
. The fund's share price may decline, so when you sell your shares, you may
lose money.
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you seek a low-cost way to participate in the
U.S. investment-grade bond market through a passively managed fund that
tracks a well-known benchmark, the fund may be an appropriate investment.
The fund can be used in both regular and tax-deferred accounts, such as IRAs.
. The fund should not represent your complete investment program or be used
for short-term trading purposes.
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T. ROWE PRICE
How has the fund performed in the past?
Because the fund commenced operations in 2000, there is no historical
performance information shown here. Performance history will be available in
the prospectus after the fund has been in operation for one calendar year.
What fees or expenses will I pay?
The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees. Redemption proceeds of less than $5,000 sent by wire are
subject to a $5 fee paid to the fund.
The fund has a single, all-inclusive fee covering investment management and
operating expenses. This fee will not fluctuate. In contrast, most mutual
funds have a fixed management fee plus a fee for operating expenses that
varies according to a number of other factors.
<TABLE>
Table 1 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
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<S> <C>
Management fee NEED%/a// /
Other expenses NEED%
Total annual fund operating NEED%/a// /
expenses
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</TABLE>
/a/ The management fee includes operating expenses.
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other mutual funds. Although your actual costs may be
higher or lower, the table shows how much you would pay if operating expenses
remain the same, you invest $10,000, earn a 5% annual return, and hold the
investment for the following periods and then redeem:
<TABLE>
<CAPTION>
1 year 3 years
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<S> <C>
$NEED $NEED
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</TABLE>
OTHER INFORMATION ABOUT THE FUND
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How does a bond index mutual fund differ from a typical bond mutual fund?
Index funds are passively managed, attempting to construct portfolios that
are substantially similar to a particular benchmark. The typical bond fund is
actively managed, meaning the manager makes buy and sell decisions based on a
partic-
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INVESTING WITH T. ROWE PRICE
ular bond's prospects. Since fewer resources are devoted to researching
bonds, and portfolio turnover (the buying and selling of securities) is low,
an index fund typically incurs lower costs than an actively-managed bond
fund.
What are some of the fund's potential rewards?
The fund can provide income and total return consistent with the overall
investment-grade bond market. In addition, index investing provides investors
with a convenient and relatively low-cost way to approximate the performance
of a broad asset class. Because the fund is passively managed, its expenses
are likely to be lower than the average bond fund. Assuming all other factors
are equal, lower expenses can increase a fund's total return. Lower turnover
should also mean fewer capital gain distributions, which could raise the
fund's after-tax returns.
What types of securities are included in the Lehman Brothers Aggregate Bond
Index?
The Lehman Brothers Aggregate Bond Index represents the U.S. investment-grade
fixed-rate bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed securities. To
be included in the index, a security must be dollar-denominated; must have at
least one year to final maturity; must have at least a $150 million par
amount outstanding; and must be rated investment grade by a major rating
service.
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of management
practices the fund may use.
SOME BASICS OF FIXED INCOME INVESTING
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Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
(Although money fund prices are stable, income is variable.)
Is yield the same as total return?
Not for bond funds. A fund's total return is the result of reinvested
distributions from income and capital gains and the change in share price for
a given period. Income is always a positive contributor to total return and
can either enhance a rise in share price or help offset a price decline.
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T. ROWE PRICE
What is credit quality and how does it affect yield?
Credit quality refers to a bond issuer's expected ability to make all
required interest and principal payments on time. Because highly rated
issuers represent less risk, they can borrow at lower interest rates than
less creditworthy issuers. Therefore, a fund investing in high-quality
securities should have a lower yield than an otherwise comparable fund
investing in lower-quality securities.
What is meant by a bond fund's maturity?
Every bond has a stated maturity date when the issuer must repay the bond's
entire principal value to the investor. However, many bonds are "callable,"
meaning their principal can be repaid earlier, on or after specified call
dates. Bonds are most likely to be called when interest rates are falling
because the issuer can refinance at a lower rate, just as a homeowner
refinances a mortgage. In that environment, a bond's "effective maturity" is
usually its nearest call date. For example, the rate at which homeowners pay
down their mortgage principal determines the effective maturity of
mortgage-backed bonds.
A bond mutual fund has no real maturity, but it does have a weighted average
maturity and a weighted average effective maturity. This number is an average
of the stated or effective maturities of the underlying bonds, with each
bond's maturity "weighted" by the percentage of fund assets it represents.
Some funds target effective maturities rather than stated maturities when
computing the average. This provides additional flexibility in portfolio
management-but, all else being equal, could result in higher volatility than
a fund targeting a stated maturity or maturity range.
What is meant by a bond fund's duration?
Duration is a calculation that seeks to measure the price sensitivity of a
bond or a bond fund to changes in interest rates. It is expressed in years,
like maturity, but it is a better indicator of price sensitivity than
maturity because it takes into account the time value of cash flows generated
over the bond's life. Future interest and principal payments are discounted
to reflect their present value and then are multiplied by the number of years
they will be received to produce a value expressed in years - the duration.
"Effective" duration takes into account call features and sinking fund
payments that may shorten a bond's life.
Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on share price by multiplying fund duration by an
expected change in interest rates. For example, the price of a bond fund with
a duration of five years would be expected to fall approximately 5% if rates
rose by one percentage point. (T. Rowe Price shareholder reports show
duration.)
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How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa. In
general, the longer a bond's maturity, the greater the price increase or
decrease in response to a given change in rates, as shown in Table 2.
<TABLE>
Table 2 How Interest Rates May Affect Bond Prices
<CAPTION>
Price per $1,000 of bond face value if interest rates:
Bond maturity Coupon Increase Decrease
1 point 2 points 1 point 2
poi
<S> <C> <C> <C> <C> <
1 year 6.06% $991 $981 $1,010 $1,
5 years 6.18 959 919 1,044 1,
10 years 6.02 929 864 1,078 1,
30 years 5.90 874 772 1,156 1,
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</TABLE>
Coupons reflect yields on Treasury securities as of June 30, 2000. The table
may not be as representative of price changes for mortgage-backed securities
because of prepayments. This is an illustration and does not represent expected
yields or share price changes of any T. Rowe Price fund.
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ABOUT YOUR ACCOUNT
PRICING SHARES AND RECEIVING SALE PROCEEDS
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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 a fund
is calculated at the close of the New York Stock Exchange, normally 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. Current market values are used to price fund shares.
. 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.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
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
. 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.
ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000
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banks, savings banks, and credit unions. Proceeds sent by ACH transfer should
be credited the second business day after the sale. Proceeds sent by bank
wire should be credited to your account the first business day after the
sale.
. Exception: Under certain circumstances and when deemed to be in a fund's
best interest, your proceeds may not be sent for up to seven calendar days
after we receive your redemption request.
. If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
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. 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 day of the
reinvestment and to reinvest all subsequent distributions in shares of the
fund. No interest will accrue on amounts represented by uncashed distribution
or redemption checks.
Income dividends
. Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.
. Dividends are ordinarily paid on the first business day of each month.
. Fund shares will earn dividends through the date of redemption; also, shares
redeemed on a Friday or prior to a holiday will continue to earn dividends
until the next business day. Generally, if you redeem all of your shares at
any time during the month, you will also receive all dividends earned through
the date of redemption in the same check. When you redeem only a portion of
your shares, all dividends accrued on those shares will be reinvested, or
paid in cash, on the next dividend payment date.
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T. ROWE PRICE
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a 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.
Tax Information
. You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. A fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For most new accounts or those opened by
exchange in 1984 or later, we will provide the gain or loss on the shares you
sold during the year, based on the "average cost," single category 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
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions are generally taxable to you for
the year in which they were paid. You will be sent any additional information
you need to determine your taxes on fund distributions, such as the portion
of your dividends, if any, that may be exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income and long-term gains on securities held more
than 12 months are taxed at a maximum rate of 20%. However, if you realized a
loss on the sale
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or exchange of fund shares that you held six months or less, your short-term
loss will be reclassified to a long-term loss to the extent of any long-term
capital gain distribution received during the period you held the shares.
. Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future taxable distributions.
. The preceding tax information summary does not apply to retirement
accounts, such as IRAs, which are not subject to current tax.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
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. Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If you pay with a check or ACH transfer that does not clear or if your
payment is not timely received, 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 account 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; type of check
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
Holds on immediate redemptions: 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. If, during the
clearing period, we receive a check drawn
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T. ROWE PRICE
against your bond or money market account, it will be returned marked
"uncollected." (The 10-day hold does not apply to purchases paid for by bank
wire or automatic purchases through your paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the boxes that state you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures to verify the identity of the shareholder.
If these procedures are followed, the funds and their agents are not liable
for any losses that may occur from acting on unauthorized instructions. A
confirmation is sent promptly after a transaction. Please review it carefully
and contact T. Rowe Price immediately about any transaction you believe to be
unauthorized. All telephone 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 fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
. T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades in your account or accounts controlled by you can disrupt
management of the fund and raise its expenses. To deter such activity, the
fund has adopted an excessive trading policy. If you violate our excessive
trading policy, you may be barred indefinitely and without further notice
from further purchases of T. Rowe Price funds.
. Trades placed directly with T. Rowe Price If you trade directly with T.
Rowe Price, you can make one purchase and one sale involving the same fund
within any 120-day period. For example, if you are in fund A, you can move
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 this limit, or
if your trade activity involves market timing, you are in violation of our
excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a nonmoney fund are
not exempt); and 2) systematic purchases and redemptions (see Information
About Your Services).
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INVESTING WITH T. ROWE PRICE
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party, you can make one purchase and one sale involving the same fund within
any 120-day period. If you exceed this limit or if you hold fund shares for
less than 60 calendar days, you are in violation of our excessive trading
policy. Systematic purchases and redemptions are exempt from this policy.
Keeping Your Account Open
Due to the relatively high cost to a 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. The valuation of accounts and the deduction
are expected to take place during the last five business days of September.
The fee is deducted from accounts with balances below $2,000, except for
UGMA/UTMA accounts, for which the minimum is $500. The fee is waived for any
investor whose T. Rowe Price mutual fund accounts 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
does not apply to IRAs and other retirement plan accounts and accounts
maintained by intermediaries through the National Securities Clearing
Corporation Networking platform, but a separate custodial fee may apply to
such accounts.
Signature Guarantees
. 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:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
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T. ROWE PRICE
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.
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MORE ABOUT THE FUND
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 2000 and is an open-end investment
company, or mutual fund. Mutual funds pool money received from shareholders
and invest it to try to achieve specified objectives.
. Shareholders benefit from T. Rowe Price's 63 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:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. 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, to avoid unnecessary
costs to fund shareholders, do not do so except when certain matters, such as
a change in fundamental policies, must 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 instructions on voting by mail
or telephone, or on the Internet.
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price Associates, Inc.
(T. Rowe Price).
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T. ROWE PRICE
. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Edmund M. Notzon, Chairman, _______________, and _______________. The
committee chairman has day-to-day responsibility for managing the fund and
works with the committee in developing and executing the fund's investment
program. Mr. Notzon has been chairman of the fund's committee since its
inception. He has been managing investments since joining T. Rowe Price in
1989.
The Management Fee
The fund pays T. Rowe Price an annual all-inclusive fee based on its average
daily net assets. The fund calculates and accrues the fee daily. The
management fee includes operating expenses.
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 T. Rowe Price
advertisements; and in the media.
Total Return
This tells you how much an investment 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. Therefore, total return numbers include
the effect of compounding.
Advertisements may include cumulative or average annual total return figures,
which may be compared with various indices, other performance measures, or
other mutual funds.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, an investment could have a
10-year positive cumulative return despite experiencing some negative years
during that time.
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INVESTING WITH T. ROWE PRICE
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
Yield
The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the price at
the end of the period. For example, a fund providing $5 of annual income per
share and a price of $50 has a current yield of 10%. Yields can be calculated
for any time period.
The advertised or SEC yield is found by determining the net income per share
(as defined by the Securities and Exchange Commission) earned by a fund
during a 30-day base period and dividing this amount by the per share price
on the last day of the base period. The SEC yield-also called the
standardized yield-may differ from the dividend yield.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of fund securities
and the various kinds of investment practices that may be used in day-to-day
portfolio management. Fund investments are subject to further restrictions
and risks described in the Statement of Additional Information.
Shareholder approval is required to substantively change fund objectives 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. Fund
investment restrictions and policies are adhered to at the time of
investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
Changes in fund holdings, fund performance, and the contribution of various
investments are discussed in the shareholder reports sent to you.
. Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help achieve fund objectives.
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T. ROWE PRICE
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 its investment program. The following pages describe various
types of fund securities and investment management practices.
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 outstanding voting securities of the issuer would be held by the fund.
These limitations do not apply to the fund's purchase of securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
Bonds
A bond is an interest-bearing security - an IOU - issued by companies or
governmental units. The issuer has 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. 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 market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates that are adjusted periodically. These
interest rate adjustments tend to minimize fluctuations in the bonds'
principal values. The maturity of those securities may be shortened under
certain specified conditions.
Bonds may be designated as senior or subordinated obligations. Senior
obligations generally have the first claim on a corporation's earnings and
assets and, in the event of liquidation, are paid before subordinated debt.
Foreign Securities
Investments may be made in U.S. dollar-denominated foreign securities. 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 and disclosure, settlement, and
regulatory practices that differ from U.S. standards.
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INVESTING WITH T. ROWE PRICE
Asset-Backed Securities
An underlying pool of assets, such as credit card or automobile trade
receivables or corporate loans or bonds, backs these bonds and provides the
interest and principal payments to investors. Credit quality depends
primarily on the quality of the underlying assets and the level of credit
support, if any, provided by the issuer. The underlying assets (i.e., loans)
are sometimes subject to prepayments which can shorten the security's
weighted average life and may lower its return. The value of these securities
also may change because of actual or perceived changes in the
creditworthiness of the originator, servicing agent, or of the financial
institution providing the credit support.
Mortgage-Backed Securities
The fund may invest in a variety of mortgage-backed securities. Mortgage
lenders pool individual home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the fund. Interest
and principal payments generated by the underlying mortgages are passed
through to the investors. The "big three" issuers are the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
GNMA certificates are backed by the full faith and credit of the U.S.
government, while others, such as Fannie Mae and Freddie Mac certificates,
are only supported by the ability to borrow from the U.S. Treasury or
supported only by the credit of the agency. Private mortgage bankers and
other institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates. In addition,
when interest rates fall, the pace of mortgage prepayments picks up. These
refinanced mortgages are paid off at face value (par), causing a loss for any
investor who may have purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation of these
securities and can negatively affect the fund's net asset value. When rates
rise, the prices of mortgage-backed securities can be expected to decline,
although historically these securities have experienced smaller price
declines than comparable quality bonds. In addition, when rates rise and
prepayments slow, the effective duration of mortgage-backed securities
extends, resulting in increased volatility.
Additional mortgage-backed securities in which the fund may invest include:
. Collateralized Mortgage Obligations (CMOs) CMOs are debt securities that are
fully collateralized by a portfolio of mortgages or mortgage-backed
securities. All interest and principal payments from the underlying mortgages
are passed
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T. ROWE PRICE
through to the CMOs in such a way as to create some classes with more stable
average lives than the underlying mortgages and other classes with more
volatile average lives. CMO classes may pay fixed or variable rates of
interest, and certain classes have priority over others with respect to the
receipt of prepayments.
. Stripped Mortgage Securities Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest and
principal payments generated by a pool of mortgage-backed securities or a CMO
to create additional classes of securities. Generally, one class receives
only interest payments (IOs), and another receives principal payments (POs).
Unlike with other mortgage-backed securities and POs, the value of IOs tends
to move in the same direction as interest rates. The fund can use IOs as a
hedge against falling prepayment rates (interest rates are rising) and/or a
bear market environment. POs can be used as a hedge against rising prepayment
rates (interest rates are falling) and/or a bull market environment. IOs and
POs are acutely sensitive to interest rate changes and to the rate of
principal prepayments.
A rapid or unexpected increase in prepayments can severely depress the price
of IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. Of course, under the opposite conditions these securities
may appreciate in value. These securities can be very volatile in price and
may have lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMO classes may also exhibit these qualities, especially those
that pay variable rates of interest that adjust inversely with, and more
rapidly than, short-term interest rates. In addition, if interest rates rise
rapidly and prepayment rates slow more than expected, certain CMO classes, in
addition to losing value, can exhibit characteristics of longer-term
securities and become more volatile. There is no guarantee the fund's
investment in CMOs, IOs, or POs will be successful, and the fund's total
return could be adversely affected as a result.
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 or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an
efficient means of pursuing a variety of investment goals, including duration
management, and increased total return. Hybrids may not bear interest or pay
dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more
steeply and rapidly than the benchmark. These benchmarks may be sensitive to
economic and political events which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a
hybrid could be zero. Thus, an investment in a hybrid may entail significant
market risks that are not associated with a similar invest-
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INVESTING WITH T. ROWE PRICE
ment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the fund to the credit risk of the issuer of
the hybrid. These risks may cause significant fluctuations in the net asset
values of the fund.
One type of hybrid the fund may purchase is the bond index swap. The fund
would purchase these in an effort to mimic all or a portion of the index. An
index swap can help the fund replicate the index when the fund is small or
when investing cash flow.
. Hybrids can have volatile prices and limited liquidity, and their use may
not be successful.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy Fund investments in illiquid securities are limited to 15%
of net assets.
Types of Investment Management Practices
Reserve Position
The fund will hold a certain portion of its assets in cash or cash
equivalents. The fund's reserve position can consist of shares of a T. Rowe
Price internal money market fund and U.S. and foreign dollar-denominated
money market securities, including repurchase agreements, in the two highest
rating categories, maturing in one year or less. The reserve position
provides flexibility in meeting redemptions, expenses, and the timing of new
investments.
Borrowing Money and Transferring Assets
Fund borrowings may be made from banks and other T. Rowe Price funds for
temporary emergency purposes to facilitate redemption requests, or for other
purposes consistent with fund policies as set forth in this prospectus. 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 policy Fund transfers of portfolio securities as collateral will
not be made except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of fund
total assets. Fund purchases of additional securities will not be made when
borrowings exceed 5% of total assets.
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T. ROWE PRICE
Futures and Options
The fund may make such investments to provide an efficient means of
maintaining liquidity while being invested in the market, to facilitate
trading or to reduce transaction costs. The fund may also purchase call
options on bonds. Such options would be used in a manner similar to the
fund's use of futures.
Futures contracts and options prices can be highly volatile; using them could
lower the funds' total returns and the potential loss from the use of futures
can exceed the funds' initial investment in such contracts.
Operating policies Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not exceed 5% of the fund's net asset
value. Options on bonds: The fund will not commit more than 5% of total
assets to premiums when purchasing call options.
Lending of Portfolio Securities
Fund securities may be lent 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, a fund
could experience delays in recovering its securities, and capital losses.
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
When-Issued Securities and Forward Commitment Contracts
The fund may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. There is no
limit on the fund's investment in these securities. The price of these
securities is fixed at the time of the commitment to buy, but delivery and
payment can take place a month or more later. During the interim period, the
market value of the securities can fluctuate, and no interest accrues to the
purchaser. At the time of delivery, the value of the securities may be more
or less than the purchase or sale price. To the extent the fund remains fully
or almost fully invested (in securities with a remaining maturity of more
than one year) at the same time it purchases these securities, there will be
greater fluctuations in the fund's net asset value than if the fund did not
purchase them.
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, result in additional taxable gain distribution, and reduce
the fund's performance.
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INVESTING WITH T. ROWE PRICE
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or tax identification number on a
signed New Account Form or W-9 Form. Otherwise, federal law requires the funds
to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts ($25,000 minimum initial investment for
Summit Funds only)
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
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts, except for IRA Roll-
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T. ROWE PRICE
over checks that are properly endorsed. In addition, T. Rowe Price does not
accept purchases made by credit card check.
via U.S. Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300
via private carriers/overnight services
T. Rowe Price Account Services Mailcode 17300 4515 Painters Mill Road Owings
Mills, MD 21117-4903
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
Receiving Bank: PNC Bank, N.A. (Pittsburgh) Receiving Bank ABA#: 043000096
Beneficiary: T. Rowe Price [fund name] Beneficiary Account: 1004397951
Originator to Beneficiary Information (OBI): name of owner(s) and account
number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until we receive a signed New Account Form. Also, retirement plan accounts and
IRAs cannot be opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Information About Your 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 back cover and
obtain a receipt.
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INVESTING WITH T. ROWE PRICE
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase ($1,000 minimum purchase for Summit Funds); $50 minimum
for retirement plans, Automatic Asset Builder, and gifts or transfers to minors
(UGMA/ UTMA) accounts ($100 minimum for Summit Funds)
By ACH Transfer
Use Tele*Access or your personal computer or call Shareholder Services if you
have established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address listed in Opening a New
Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address 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.
via U.S. Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300
/(For //mail via private carriers and overnight services//, 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
----------------------------------------------------------
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 fund is registered.)
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T. ROWE PRICE
Redemptions
Redemption proceeds can be mailed to your account address, sent by ACH transfer
to your bank, or wired to your bank (provided your bank information is already
on file). For charges, see Electronic Transfers - By Wire under Information
About Your Services.
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, one year, or two years, as specified in
the prospectus. The fee is paid to the fund.
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer or Tele*Access (if you have
previously authorized these services), mailgram, or express mail. For exchange
policies, please see Transaction Procedures and Special Requirements - Excessive
Trading.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to specify any fund you
are exchanging out of and the fund or funds you are exchanging into. 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). Please use the appropriate address below:
For nonretirement and IRA accounts:
via U.S. Postal Service
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302
via private carriers/overnight services
T. Rowe Price Account Services Mailcode 17302 4515 Painters Mill Road Owings
Mills, MD 21117-4903
For employer-sponsored retirement accounts:
via U.S. Postal Service
T. Rowe Price Trust Company P.O. Box 17479 Baltimore, MD 21297-1479
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INVESTING WITH T. ROWE PRICE
via private carriers/overnight services
T. Rowe Price Trust Company Mailcode 17479 4515 Painters Mill Road Owings Mills,
MD 21117-4903
Requests for redemptions from employer-sponsored retirement accounts must be in
writing; please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUNDS
----------------------------------------------------------
T. Rowe Price funds and their agents reserve the following rights: (1) to waive
or lower investment minimums; (2) to accept initial purchases by telephone or
mailgram; (3) to refuse any purchase or exchange order; (4) to cancel or rescind
any purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) 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; (5)
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; (6) to otherwise modify
the conditions of purchase and any services at any time; and (7) to act on
instructions believed to be genuine. These actions will be taken when, in the
sole discretion of management, they are deemed to be in the best interest of the
fund.
In an effort to protect T. Rowe Price funds from the possible adverse effects of
a substantial redemption in a large account, as a matter of general policy, no
shareholder or group of shareholders controlled by the same person or group of
persons will knowingly be permit-
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T. ROWE PRICE
ted to purchase in excess of 5% of the outstanding shares of a fund, except upon
approval of the fund's management.
INFORMATION ABOUT YOUR SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 Investor Services 1-800-638-5660
Many services are available to you as a shareholder; some you receive
automatically, and others you must authorize or request 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 discusses some of the services currently offered. Our Services Guide,
which we mail to all new shareholders, contains detailed descriptions of these
and other services.
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: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k)s, and 403(b)(7)s. For
information on IRAs or our no-load variable annuity, call Investor Services. For
information on all other retirement plans, please call our Trust Company at
1-800-492-7670.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via a toll-free number enables you to (1) access information on
fund performance, 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 in this section).
<PAGE>
INVESTING WITH T. ROWE PRICE
Web Address www.troweprice.com
You can sign up online to conduct account transactions through our Web site on
the Internet. If you subscribe to America Online/(R)/, you can access our Web
site via keyword "T. Rowe Price" and conduct transactions in your account.
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 back 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 ($100 minimum for Summit Funds) You can invest automatically in
several different ways, including:
Automatic Asset Builder
You can instruct us to move $50 ($100 for Summit Funds) 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.
<PAGE>
T. ROWE PRICE
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
T. ROWE PRICE BROKERAGE
----------------------------------------------------------
To Open an Account 1-800-638-5660 For Existing Brokerage Customers
1-800-225-7720
Investments available through our brokerage service include stocks, options,
bonds, and others at commission savings over full-service brokers/*/. We also
provide a wide range of services, including:
Automated Telephone and Computer Services
You can enter stock and option orders, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades entered through Tele-Trader save you an additional
10% on commissions. For stock trades entered through Internet-Trader, you will
pay a commission of $24.95 for up to 1,000 shares plus $.02 for each share over
1,000. Option trades entered through Internet-Trader save you 10% over our
standard commission schedule. All trades are subject to a $35 minimum commission
except stock trades placed through Internet-Trader.
Investor Information
A variety of informative reports, such as our Brokerage Insights series and S&P
Market Month newsletter, as well as access to on-line research tools can help
you better evaluate economic trends and investment opportunities.
Dividend Reinvestment Service
If you elect to participate in this service, the cash dividends from the
eligible securities held in your account will automatically be reinvested in
additional shares of the same securities free of charge. Dividend payments must
be $10.00 or greater to qualify for reinvestment. Most securities listed on
national securities exchanges or on Nasdaq are eligible for this service.
/*Services //v//ary //b//y //f//irm./
/T. Rowe Price// Brokerage is a division of //T. Rowe Price// Investment /
/Services, Inc., Member NASD/SIPC./
<PAGE>
INVESTING WITH T. ROWE PRICE
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements. Most of this information is also
available on our Web site at www.troweprice.com.
Shareholder Reports
Fund managers' review of their strategies and performance. If several members of
a household own the same fund, only one fund report is mailed to that address.
To receive additional copies, please call Shareholder Services or write to us at
P.O. Box 17630, Baltimore, Maryland 21297-1630.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies
and including the Performance Update, a review of all T. Rowe Price fund
results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.
<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
informative reports.
A fund Statement of Additional Information has been filed with the Securities
and Exchange Commission and is incorporated by reference into this prospectus.
Further information about fund investments, including a review of market
conditions and the manager's recent strategies and their impact on performance,
is available in the annual and semiannual shareholder reports. To obtain free
copies of any of these documents, or for shareholder inquiries, call
1-800-638-5660.
Fund information and Statements of Additional Information are also available
from the Public Reference Room of the Securities and Exchange Commission. Infor-
mation on the operation of the Public Reference Room may be obtained by calling
the SEC at 1-202-942-8090. Fund reports and other fund information are available
on the EDGAR Database on the SEC's Internet site at http://www.sec.gov. Copies
of this information may be obtained, after paying a duplicating fee, by
electronic request at [email protected], or by writing the Public Reference
Room, Washington D.C. 20549-0102.
Walk-in
Investor Centers
For directions, call 1-800-225-5132 or visit our Web site
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center 4515 Painters Mill Road
Boston Area
386 Washington Street Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center 21800 Oxnard Street Suite 270 Woodland Hills
Tampa
4200 West Cypress Street 10th Floor
Washington, D.C.
900 17th Street, N.W. Farragut Square
For Mutual Fund or T. Rowe Price Brokerage Information
Investor Services
1-800-638-5660
For Existing Accounts
Shareholder Services
1-800-225-5132
For Performance, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
24 hours, 7 days 1-800-638-2587
Internet Address
www.troweprice.com
Plan Account Line
For retirement plan investors: The appropriate 800 number appears on your
retirement account statement.
(LOGO)
T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, MD 21202
F134-040 10/31/00
1940 Act File No. 811-10093
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is March 1, 2000,
revised to October 31, 2000.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market Fund
T. Rowe Price Summit Municipal Intermediate-Term Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE U.S. BOND INDEX FUND, INC.
-------------------------------------------------------------------------------
Mailing Address: T. Rowe Price Investment Services, Inc. 100 East Pratt
Street Baltimore, Maryland 21202 1-800-638-5660
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate fund prospectus dated March 1, 2000
(or October 31, 2000 for the T. Rowe Price U.S. Bond Index Fund, Inc.), which
may be obtained from T. Rowe Price Investment Services, Inc. ("Investment
Services").
Each fund's (other than U.S. Bond Index Fund) financial statements for the
year ended October 31, 1999, and the report of independent accountants are
included in each fund's Annual Report and incorporated by reference into this
Statement of Additional Information.
If you would like a prospectus or an annual or semiannual shareholder report
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.
C09-042 10/31/00
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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Page Page
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<S> <C> <C> <C> <C>
Capital Stock Portfolio Management Practices
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Code of Ethics Portfolio Transactions
---------------------------------- ----------------------------------------
Custodian Pricing of Securities
---------------------------------- ----------------------------------------
Distributor for the Funds Principal Holders of Securities
---------------------------------- ----------------------------------------
Dividends and Ratings of Commercial Paper
Distributions
---------------------------------- ----------------------------------------
Federal Registration of Ratings of Corporate Debt
Shares Securities
---------------------------------- ----------------------------------------
Independent Accountants Ratings of Municipal Debt
Securities
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Investment Management Ratings of Municipal Notes and
Services Variable Rate Securities
---------------------------------- ----------------------------------------
Investment Objectives and Risk Factors for Summit Income
Policies Funds
---------------------------------- ----------------------------------------
Investment Performance Risk Factors for Summit
Municipal Funds
---------------------------------- ----------------------------------------
Investment Program Services by Outside Parties
---------------------------------- ----------------------------------------
Investment Restrictions Tax-Exempt vs. Taxable Yields
---------------------------------- ----------------------------------------
Legal Counsel Tax Status
---------------------------------- ----------------------------------------
Management of the Funds Yield Information
---------------------------------- ----------------------------------------
Net Asset Value Per Share
---------------------------------- ----------------------------------------
</TABLE>
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 substantively change their investment objectives without
obtaining shareholder approval. Unless otherwise specified, the investment
programs and restrictions of the funds are not fundamental policies. Each
fund's operating policies are subject to change by each Board of Directors
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. References to the following are as indicated:
Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
T. Rowe Price International, Inc. ("T. Rowe Price
International")
Throughout this Statement of Additional Information, "the fund" is intended
to refer to each fund listed on the cover page, unless otherwise indicated.
<PAGE>
RISK FACTORS FOR SUMMIT INCOME FUNDS AND U.S. BOND INDEX FUND
-------------------------------------------------------------------------------
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.
Cash Reserves Fund
The Money 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 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 categories (which may include sub-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 under the supervision of the
fund's Board of Directors. In addition, the fund 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 fund will achieve its investment
objectives or be able to maintain its net asset value per share at $1.00. The
price of the fund is not guaranteed or insured, and its yield is not fixed.
While the fund invests in high-grade money market instruments, investment in
the fund is not without risk even if all portfolio instruments are paid in
full at maturity. An increase in interest rates could reduce the value of the
fund's portfolio investments, and a decline in interest rates could increase
the value.
GNMA Fund
The fund may or may not be suitable or appropriate for all investors. The
fund is designed for investors seeking the highest current income and credit
protection available from investment in securities which are backed by the
full faith and credit of the U.S. government and other securities rated
within the highest two credit categories established by a nationally
recognized public rating agency, or, if unrated, of equivalent quality as
determined by T. Rowe Price. Consistent with a long-term financial investment
approach, investors in the fund should not rely on the fund for their
short-term financial needs. The value of the portfolio securities of the fund
will fluctuate based upon market conditions. Although the fund seeks to
reduce risk by investing in a diversified portfolio, such diversification
does not eliminate all risk. There can, of course, be no assurance that the
fund will achieve these results.
Because they consist of underlying mortgages, GNMA securities may not be an
effective means of "locking in" long-term interest rates due to the need for
the fund to reinvest scheduled and unscheduled principal payments. The
incidence of unscheduled principal prepayments is also likely to increase in
mortgage pools owned by the fund when prevailing mortgage loan rates fall
below the mortgage rates of the securities underlying the individual pool.
The effect of such prepayments in a falling rate environment is to (1) cause
the fund to reinvest principal payments at the then lower prevailing interest
rate, and (2) reduce the potential for capital appreciation beyond the face
amount of the security and adversely affect the return to the fund.
Conversely, in a rising interest rate environment such prepayments can be
reinvested at higher prevailing interest rates which will reduce the
potential effect of capital depreciation to which bonds are subject when
interest rates rise. In addition, prepayments of mortgage securities
purchased at a premium (or discount) will cause such securities to be paid
off at par, resulting in a loss (gain) to the fund. T. Rowe Price will
actively manage the fund's portfolio in an attempt to reduce the risk
associated with investment in mortgage-backed securities.
U.S. Bond Index Fund
Because of its investment policy, the fund may or may not be suitable or
appropriate for all investors. The fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. There is risk in all investment. The value of the portfolio
securities of the fund will fluctuate based upon market conditions. Although
the fund seeks to reduce risk by investing in a diversified portfolio,
<PAGE>
such diversification does not eliminate all risk. There can, of course, be no
assurance that the fund will achieve these results.
Debt Obligations
Yields on short-, intermediate-, and long-term debt securities are dependent
on a variety of factors, including the general conditions of the money and
bond markets, the size of a particular offering, the maturity of the
obligation, and the credit quality and rating of the issue. Debt securities
with longer maturities tend to have higher yields and are generally subject
to potentially greater capital appreciation and depreciation than obligations
with shorter maturities and lower yields. The market prices of debt
securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio debt securities,
and a decline in interest rates will generally increase the value of
portfolio debt securities. The ability of the fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
debt securities in which the fund invests to meet their obligations for the
payment of interest and principal when due. Although the fund (except for
U.S. Bond Index Fund) seeks to reduce risk by portfolio diversification,
credit analysis, and attention to trends in the economy, industries, and
financial markets, such efforts will not eliminate all risk. There can, of
course, be no assurance that the fund will achieve its investment objective.
After purchase by the fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the fund.
Neither event will require a sale of such security by the fund. However, T.
Rowe Price will consider such events in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus. 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 quality comparable to that which the
fund is allowed to purchase.
Securities backed by the full faith and credit of the United States (for
example, GNMA and U.S. Treasury securities) are generally considered to be
among the most, if not the most, creditworthy investments available. While
the U.S. government has honored its credit obligations continuously for the
last 200 years, political events in 1995 and 1996, at times, called into
question whether the United States would default on its obligations. Such an
event would be unprecedented and there is no way to predict its results on
the securities markets or the funds. However, it is very likely default by
the U.S. would result in losses to the funds.
Mortgage Securities--All Funds except Cash Reserves Fund
Mortgage-backed securities differ from conventional bonds in that principal
is paid back over the life of the security rather than at maturity. As a
result, the holder of a mortgage-backed security (i.e., the fund) receives
monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. The incidence of unscheduled principal prepayments is also likely
to increase in mortgage pools owned by the fund when prevailing mortgage loan
rates fall below the mortgage rates of the securities underlying the
individual pool. The effect of such prepayments in a falling rate environment
is to (1) cause the fund to reinvest principal payments at the then lower
prevailing interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security. Conversely, the fund may
realize a gain on prepayments of mortgage pools trading at a discount. Such
prepayments will provide an early return of principal which may then be
reinvested at the then higher prevailing interest rate.
The market value of adjustable rate mortgage securities ("ARMs"), like other
U.S. government securities, will generally vary inversely with changes in
market interest rates, declining when interest rates rise and rising when
interest rates decline. Because of their periodic adjustment feature, ARMs
should be more sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage-backed
securities. Thus, while having less risk of a decline during periods of
rapidly rising rates, ARMs may also have less potential for capital
appreciation than other investments of comparable maturities. Interest rate
caps on mortgages underlying ARM securities may prevent income on the ARM
from increasing to prevailing interest rate levels and cause the securities
to decline in value. In addition, to the extent ARMs are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may
result in some
<PAGE>
loss of the holders' principal investment to the extent of the premium paid.
On the other hand, if ARMs are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of principal will increase
current and total returns and will accelerate the recognition of income which
when distributed to shareholders will be taxable as ordinary income.
RISK FACTORS FOR SUMMIT MUNICIPAL FUNDS
-------------------------------------------------------------------------------
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
The funds are designed for investors who, because of their tax bracket, can
benefit from investment in municipal bonds whose income is exempt from
federal taxes. The funds are not appropriate for qualified retirement plans
where income is already tax-deferred.
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 obligations,
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 IBCA, Inc.
("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, depending on
numerous factors. It should also be pointed out that, unlike other types of
investments, offerings of 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
"Value 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 funds 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 transactions.
Municipal Bond Insurance All of the funds may purchase insured bonds from
time to time. 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.
<PAGE>
There are two types of insured securities that may be purchased by the funds:
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 principal value, the issuer is able to
obtain a higher credit rating for the bond. Once purchased, municipal bond
insurance cannot be canceled, and the protection it affords continues as long
as the bonds are outstanding and the insurer remains solvent.
The funds may also purchase bonds that 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 funds expect that portfolio
bonds carrying secondary insurance will have been insured by a prior
investor. However, the funds may, on occasion, purchase secondary insurance
on their 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 risk that a
municipal bond insurance company may experience 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, 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.
Municipal Money Market Fund
The Money 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 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 categories (which may include sub-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 under the supervision of the
fund's Board of Directors. In addition, the fund 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 fund will achieve its investment
objectives or be able to maintain its net asset value per share at $1.00. The
price of the fund is not guaranteed or insured, and its yield is not fixed.
While the fund invests in high-grade money market instruments, investment in
the fund is not without risk even if all portfolio instruments are paid in
full at maturity. An increase in interest rates could reduce the value of the
fund's portfolio investments, and a decline in interest rates could increase
the value.
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: the shorter the average maturity of a portfolio,
the less its price will be impacted by interest rate fluctuations.
Intermediate and Income Funds
Because of their investment policies, the Intermediate and Income Funds may
not be suitable or appropriate for all investors. The funds are designed for
investors who wish to invest in long-term funds for income, and who would
benefit, because of their tax bracket, from receiving income that is exempt
from federal income taxes. The Intermediate and Income 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 yield from such securities normally exceeds
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 Intermediate and Income Funds will
<PAGE>
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. These funds are also not intended to provide a
vehicle for short-term trading purposes.
Debt Obligations
Yields on short-, intermediate-, and long-term debt securities are dependent
on a variety of factors, including the general conditions of the money and
bond markets, the size of a particular offering, the maturity of the
obligation, and the credit quality and rating of the issue. Debt securities
with longer maturities tend to have higher yields and are generally subject
to potentially greater capital appreciation and depreciation than obligations
with shorter maturities and lower yields. The market prices of debt
securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio debt securities,
and a decline in interest rates will generally increase the value of
portfolio debt securities. The ability of the fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
debt securities in which the fund invests to meet their obligations for the
payment of interest and principal when due. Although the fund seeks to reduce
risk by portfolio diversification, credit analysis, and attention to trends
in the economy, industries, and financial markets, such efforts will not
eliminate all risk. There can, of course, be no assurance that the fund will
achieve its investment objective.
After purchase by the fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the fund.
Neither event will require a sale of such security by the fund. However, T.
Rowe Price will consider such events in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus. 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 quality comparable to that which the
fund is allowed to purchase.
Special Risks of High-Yield Investing The fund may invest in low-quality
bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low- and
lower-medium-quality bonds involves greater investment risk, to the extent
the fund invests in such bonds, achievement of its investment objective will
be more dependent on T. Rowe Price's credit analysis than would be the case
if the fund 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
leveraged issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high-yield bonds
may be less liquid than the market for higher-grade bonds, which can
adversely affect the ability of a fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
INVESTMENT PROGRAM
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All Summit Income Funds and U.S. Bond Index Fund
Types of Securities
Set forth below is additional information about certain of the investments
described in each fund's prospectus.
Adjustable Rate Securities
Generally, the maturity of a security is deemed to be the period remaining
until the date (noted on the face of the instrument) on which the principal
amount must be paid, or in the case of an instrument called for redemption,
the date on which the redemption payment must be made. However, certain
securities may be issued with adjustable interest rates that are reset
periodically by predetermined formulas or indexes in order
<PAGE>
to minimize movements in the principal value of the investment in accordance
with Rule 2a-7 under the 1940 Act. 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 A variable rate instrument is one whose terms
provide for the adjustment of its interest rate 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 which approximates its
amortized cost. A variable rate instrument, 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. A variable rate instrument the
principal amount of which is scheduled to be paid in more than 397 calendar
days and which is subject to a demand feature which entitles the purchaser to
receive the principal amount of the underlying security or securities, either
(i) at any time upon notice of no more than 30 days, or (ii) at specified
intervals not exceeding 397 calendar days and upon no more than 30 days'
notice ("Demand Feature"), 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. A government security that is a variable rate security where the
variable rate is readjusted no less frequently than every 762 calendar days
is deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
. Floating Rate Securities A floating rate security provides for the
adjustment of its 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. A floating rate security, the principal amount of which must
unconditionally be paid in 397 calendar days or less is deemed to have a
maturity of one day. 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. A government
security that is a floating rate security is deemed to have a remaining
maturity of one day.
. 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.
When-Issued Securities and Forward Commitment Contracts
The price of such securities, which may be expressed in yield terms, is fixed
at the time the commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs within 90 days of
the purchase for When-Issueds, but may be substantially longer for Forwards.
During the period between purchase and settlement, no payment is made by the
fund to the issuer and no interest accrues to the fund. The purchase of these
securities will result in a loss if their value declines prior to the
settlement date. This could occur, for example, if interest rates increase
prior to settlement. The longer the period between purchase and settlement,
the greater the risks are. At the time the fund makes the commitment to
purchase these securities, it will record the transaction and reflect the
value of the security in determining its net asset value. The fund will cover
these securities by maintaining cash, liquid, high-grade debt securities, or
other suitable cover as permitted by the SEC with its custodian bank equal in
value to commitments for them during the time between the purchase and the
settlement. Therefore, the longer this period, the longer the period during
which alternative investment options are not available to the fund (to the
extent of the securities used for cover). Such securities either will mature
or, if necessary, be sold on or before the settlement date.
To the extent the fund remains fully or almost fully invested (in securities
with a remaining maturity of more than one year) at the same time it
purchases these securities, there will be greater fluctuations in the fund's
net asset value than if the fund did not purchase them.
<PAGE>
Money Market Securities
The money market securities that the funds may invest in are generally
limited to those described below.
. U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
. Commercial Paper and Commercial Notes Short-term promissory notes issued by
corporations primarily to finance short-term credit needs. Certain notes may
have floating or variable rates and may contain options, exercisable by
either the buyer or the seller, that extend or shorten the maturity of the
note.
. Funding Agreements Obligations of indebtedness negotiated privately between
the funds and an insurance company. Often such instruments will have
maturities with unconditional put features, exercisable by the funds,
requiring return of principal within one year or less.
. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
However, the Cash Reserves and U.S. Bond Index Funds will only purchase these
securities if they are payable in U.S. dollars.
. Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
. Supranational Agencies Securities of certain supranational entities, such as
the International Development Bank.
. 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, funds
will follow the provisions of Rule 2a-7 under the 1940 Act.
. First Tier Money Market Securities Defined At least 95% of the Cash Reserves
Fund's total assets will be maintained in first tier money market securities.
First tier money market securities are those which are described as First
Tier Securities under Rule 2a-7 of the 1940 Act. These include any security
with a remaining maturity of 397 days or less that is rated (or that has been
issued by an issuer that is rated with respect to a class of short-term debt
obligations, or any security within that class that is comparable in priority
and security with the security) by any two nationally recognized statistical
rating organizations (NRSROs) (or if only one NRSRO has issued a rating, that
NRSRO) in the highest rating category for short-term debt obligations (within
which there may be sub-categories). First Tier Securities also include
unrated securities comparable in quality to rated securities, as determined
by T. Rowe Price pursuant to written guidelines established in accordance
with Rule 2a-7 under the 1940 Act under the supervision of the fund's Board
of Directors.
<PAGE>
Asset-Backed Securities
Each fund may invest a portion of its assets in debt obligations known as
asset-backed securities.
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or
any other affiliated entities and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets, which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
. Methods of Allocating Cash Flows While many asset-backed securities are
issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to
such payments of the remaining class or classes. See "Types of Credit
Support." Second, multiple classes may permit the issuance of securities with
payment terms, interest rates or other characteristics differing both from
those of each other and from those of the underlying assets. Examples include
so-called "strips" (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of
non-asset-backed securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled
amortization of principal.
Asset-backed securities in which the payment streams on the underlying assets
are allocated in a manner different than those described above may be issued
in the future. The fund may invest in such asset-backed securities if such
investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the fund.
. Types of Credit Support Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering
the pool of assets, to ensure that scheduled payments on the underlying pool
are made in a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the assets in
the
<PAGE>
pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained from third parties "external credit
enhancement," through various means of structuring the transaction "internal
credit enhancement," or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of
the transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as
to the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class)
and asset-backed securities that have "reserve funds" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have
been "over collateralized" (where the scheduled payments on, or the principal
amount of, the underlying assets substantially exceeds that required to make
payment of the asset-backed securities and pay any servicing or other fees).
The degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with
such payments. Depending upon the type of assets securitized, historical
information on credit risk and prepayment rates may be limited or even
unavailable. Delinquency or loss in excess of that anticipated could
adversely affect the return on an investment in an asset-backed security.
. Automobile Receivable Securities The fund may invest in asset-backed
securities which are backed by receivables from motor vehicle installment
sales contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities"). Since installment sales contracts for motor vehicles
or installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing
a financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also, although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not
amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the Automobile Receivable Securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on the securities. In
addition, various state and federal securities laws give the motor vehicle
owner the right to assert against the holder of the owner's Automobile
Contract certain defenses such owner would have against the seller of the
motor vehicle. The assertion of such defenses could reduce payments on the
Automobile Receivable Securities.
. Credit Card Receivable Securities The fund may invest in asset-backed
securities backed by receivables from revolving credit card agreements
("Credit Card Receivable Securities"). Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such securities
provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder and principal
payments received on such Accounts are used to fund the transfer to the pool
of assets supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events which signal
a potential deterioration in the quality of the assets backing the security,
such as the imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying account during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any
<PAGE>
other event which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets supporting the
related Credit Card Receivable Security could shorten the weighted average
life and yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other
asset-backed securities, Accounts are unsecured obligations of the
cardholder.
. Other Assets Asset-backed securities backed by assets other than those
described above, including, but not limited to, small-business loans and
accounts receivable, equipment leases, commercial real estate loans, boat
loans and manufacturing housing loans. The fund may invest in such securities
in the future if such investment is otherwise consistent with its investment
objective and policies.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.
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 the fund's Board of Directors. If, through the appreciation of illiquid
securities or the depreciation of liquid securities, the fund should be in a
position where more than 15% (10% for Cash Reserves)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, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
fund's restriction of investing no more than 15% (10% for Cash Reserves)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 following: (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% (10% for Cash Reserves)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.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.
Mortgage-Related Securities
GNMA and U.S. Bond Index Funds
Mortgage-related securities in which the fund may invest include, but are not
limited to, those described below.
<PAGE>
. Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the fund.
This is in contrast to traditional bonds where principal is normally paid
back at maturity in a lump sum. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. (When
a mortgage in the underlying mortgage pool is prepaid, an unscheduled
principal prepayment is passed through to the fund. This principal is
returned to the fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies.
. U.S. Government Agency Mortgage-Backed Securities These are obligations
issued or guaranteed by the United States government or one of its agencies
or instrumentalities, such as the Government National Mortgage Association
("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie
Mae" or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie Mac" or
"FHLMC"), and the Federal Agricultural Mortgage Corporation ("Farmer Mac" or
"FAMC"). FNMA, FHLMC, and FAMC obligations are not backed by the full faith
and credit of the U.S. government as GNMA certificates are, but they are
supported by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro-rata share of monthly payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees paid to the guarantor of such securities and
the servicer of the underlying mortgage loans. Each of GNMA, FNMA, FHLMC, and
FAMC guarantees timely distributions of interest to certificate holders. GNMA
and FNMA guarantee timely distributions of scheduled principal. FHLMC has in
the past guaranteed only the ultimate collection of principal of the
underlying mortgage loan; however, FHLMC now issues mortgage-backed
securities (FHLMC Gold PCS) which also guarantee timely payment of monthly
principal reductions.
. Ginnie Mae Certificates Ginnie Mae is a wholly owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of
mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
guaranteed by the Department of Veterans Affairs under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other
eligible mortgage loans. The Housing Act provides that the full faith and
credit of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In order to meet
its obligations under such guaranty, Ginnie Mae is authorized to borrow from
the United States Treasury with no limitations as to amount.
. Fannie Mae Certificates Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. FNMA Certificates represent a pro-rata
interest in a group of mortgage loans purchased by Fannie Mae. FNMA
guarantees the timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith and credit
of the U.S. government.
. Freddie Mac Certificates Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended ("FHLMC Act"). Freddie Mac Certificates represent a pro-rata interest
in a group of mortgage loans ("Freddie Mac Certificates") purchased by
Freddie Mac. Freddie Mac guarantees timely payment of interest and principal
on certain securities it issues and timely payment of interest and eventual
payment of principal on other securities it issues. The obligations of
Freddie Mac are obligations solely of Freddie Mac and are not backed by the
full faith and credit of the U.S. government.
<PAGE>
. Farmer Mac Certificates Farmer Mac is a federally chartered instrumentality
of the United States established by Title VIII of the Farm Credit Act of
1971, as amended ("Charter Act"). Farmer Mac was chartered primarily to
attract new capital for financing of agricultural real estate by making a
secondary market in certain qualified agricultural real estate loans. Farmer
Mac provides guarantees of timely payment of principal and interest on
securities representing interests in, or obligations backed by, pools of
mortgages secured by first liens on agricultural real estate ("Farmer Mac
Certificates"). Similar to Fannie Mae and Freddie Mac, Farmer Mac
Certificates are not supported by the full faith and credit of the U.S.
government; rather, Farmer Mac may borrow from the U.S. Treasury to meet its
guaranty obligations.
As discussed above, prepayments on the underlying mortgages and their effect
upon the rate of return of a mortgage-backed security, is the principal
investment risk for a purchaser of such securities, like the fund. Over time,
any pool of mortgages will experience prepayments due to a variety of
factors, including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and (3)
increased amortization by the mortgagee. These factors, in turn, depend upon
general economic factors, such as level of interest rates and economic
growth. Thus, investors normally expect prepayment rates to increase during
periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly,
the life of the mortgage-backed security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment rates, it is not possible to predict
the life of a particular mortgage-backed security, but FHA statistics
indicate that 25- to 30-year single family dwelling mortgages have an average
life of approximately 12 years. The majority of Ginnie Mae Certificates are
backed by mortgages of this type, and, accordingly, the generally accepted
practice treats Ginnie Mae Certificates as 30-year securities which prepay in
full in the 12th year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
Fixed rate mortgage-backed securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less certain
fees to GNMA, FNMA, and FHLMC for providing the guarantee, and the issuer for
assembling the pool and for passing through monthly payments of interest and
principal.
Payments to holders of mortgage-backed securities consist of the monthly
distributions of interest and principal less the applicable fees. The actual
yield to be earned by a holder of mortgage-backed securities is calculated by
dividing interest payments by the purchase price paid for the mortgage-backed
securities (which may be at a premium or a discount from the face value of
the certificate).
Monthly distributions of interest, as contrasted to semiannual distributions
which are common for other fixed interest investments, have the effect of
compounding and thereby raising the effective annual yield earned on
mortgage-backed securities. Because of the variation in the life of the pools
of mortgages which back various mortgage-backed securities, and because it is
impossible to anticipate the rate of interest at which future principal
payments may be reinvested, the actual yield earned from a portfolio of
mortgage-backed securities will differ significantly from the yield estimated
by using an assumption of a certain life for each mortgage-backed security
included in such a portfolio as described above.
. Collateralized Mortgage Obligations (CMOs) CMOs are bonds that are
collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO deal are divided into groups, and each group of
bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay principal to
the CMO bondholders. The bonds issued under such CMO structure are retired
sequentially as opposed to the pro-rata return of principal found in
traditional pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required to pay the stated interest) is
used to retire the bonds. Under the CMO structure, the repayment of principal
among the different tranches is prioritized in accordance with the terms of
the particular CMO issuance. The "fastest-pay" tranche of bonds, as specified
in the prospectus for the issuance, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the prospectus, receive all of the
principal payments until they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of bonds,
<PAGE>
is retired. Accordingly, the CMO structure allows the issuer to use cash
flows of long maturity, monthly-pay collateral to formulate securities with
short, intermediate and long final maturities and expected average lives.
In recent years, new types of CMO tranches have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal
and interest received by each tranche from the underlying collateral. Under
certain of these new structures, given classes of CMOs have priority over
others with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the fund invests, the
investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments
on the underlying mortgages serving as collateral and from the structure of
the deal (priority of the individual tranches). An increase or decrease in
prepayment rates (resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs. The prices of
certain CMOs, depending on their structure and the rate of prepayments, can
be volatile. Some CMOs may also not be as liquid as other securities.
. U.S. Government Agency Multiclass Pass-Through Securities Unlike CMOs, U.S.
Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multiclass pass-through securities.
. Multi-Class Residential Mortgage Securities Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi-Class Residential Mortgage Securities is not
guaranteed by the U.S. government or any of its agencies. Accordingly, yields
on Multi-Class Residential Mortgage Securities have been historically higher
than the yields on U.S. government mortgage securities. However, the risk of
loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government or its agencies. Additionally, pools of
such securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on the
underlying mortgage loans must be borne by persons holding subordinated
securities before those holding senior mortgage securities.
. Privately Issued Mortgage-Backed Certificates These are pass-through
certificates issued by non-governmental issuers. Pools of conventional
residential or commercial mortgage loans created by such issuers generally
offer a higher rate of interest than government and government-related pools
because there are no direct or indirect government guarantees of payment.
Timely payment of interest and principal of these pools is, however,
generally supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurance or the
mortgage poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-related security meets the fund's quality standards. The fund may
buy mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers, the
investment manager determines that the securities meet the fund's quality
standards.
. Stripped Mortgage-Backed Securities These instruments are a type of
potentially high-risk derivative. They represent interests in a pool of
mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. IOs and POs are usually structured as tranches of a CMO.
Stripped Mortgage-Backed Securities may be issued by U.S. government agencies
or by private issuers similar to those described above with respect to CMOs
and privately issued mortgage-backed certificates. As interest rates rise and
fall, the value of IOs tends to move in the same direction as interest rates.
The value of the other mortgage-backed securities described herein, like
other debt instruments, will tend to
<PAGE>
move in the opposite direction compared to interest rates. Under the Code,
POs may generate taxable income from the current accrual of original issue
discount, without a corresponding distribution of cash to the fund.
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets. In the case of IOs, prepayments affect the amount, but not
the timing, of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of cash flows
received by investors in POs. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to fully recoup
its initial investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a full faith and
credit obligation. Conversely, if the underlying mortgage assets experience
slower than anticipated prepayments of principal, the price on a PO class
will be affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the SEC has advised the fund that it believes the fund should
treat IOs and POs, other than government-issued IOs or POs backed by fixed
rate mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid securities,
to 15% of the fund's net assets. Under the staff's position, the
determination of whether a particular government-issued IO or PO backed by
fixed rate mortgages is liquid may be made on a case by case basis under
guidelines and standards established by the fund's Board of Directors. The
fund's Board of Directors has delegated to T. Rowe Price the authority to
determine the liquidity of these investments based on the following
guidelines: the type of issuer; type of collateral, including age and
prepayment characteristics; rate of interest on coupon relative to current
market rates and the effect of the rate on the potential for prepayments;
complexity of the issue's structure, including the number of tranches; size
of the issue and the number of dealers who make a market in the IO or PO.
. Adjustable Rate Mortgage Securities ARMs, like fixed rate mortgages, have a
specified maturity date, and the principal amount of the mortgage is repaid
over the life of the mortgage. Unlike fixed rate mortgages, the interest rate
on ARMs is adjusted at regular intervals based on a specified, published
interest rate "index" such as a Treasury rate index. The new rate is
determined by adding a specific interest amount, the "margin," to the
interest rate of the index. Investment in ARM securities allows the fund to
participate in changing interest rate levels through regular adjustments in
the coupons of the underlying mortgages, resulting in more variable current
income and lower price volatility than longer-term fixed rate mortgage
securities. ARM securities are a less effective means of locking in long-term
rates than fixed rate mortgages since the income from adjustable rate
mortgages will increase during periods of rising interest rates and decline
during periods of falling rates.
. Characteristics of Adjustable Rate Mortgage Securities The interest rates
paid on the mortgages underlying ARM securities are reset at regular
intervals by adding an interest rate margin to a specified interest rate
index. There are three main categories of indices: those based on U.S.
Treasury securities such as the constant maturity treasury rate ("CMT");
those derived from a calculated measure such as a cost of funds index
("COFI") or a moving average of mortgage rates; and those based on certain
actively traded or prominent short-term rates such as the London Interbank
Offered Rate ("LIBOR"). Some indices, such as the one-year constant maturity
Treasury rate, closely mirror changes in interest rate levels. Others, such
as COFI, tend to lag behind changes in market rate levels but reset monthly,
thus tending to be somewhat less volatile. Such a delay in adjusting to
changes in interest rates may cause securities owned by the fund to increase
or decrease in value, particularly during periods between interest adjustment
dates.
ARMs will frequently have caps and floors which limit the maximum amount by
which the interest rate to the residential borrower may move up or down,
respectively, each adjustment period and over the life of the loan. Interest
rate caps on ARM securities may cause them to decrease in value in an
increasing interest rate environment. Such caps may also prevent their income
from increasing to levels commensurate with prevailing interest rates.
Conversely, interest rate floors on ARM securities may cause their income to
remain higher than prevailing interest rate levels and result in an increase
in the value of such securities. However, this increase may be tempered by
the acceleration of prepayments.
Mortgage securities generally have a maximum maturity of up to 30 years.
However due to the adjustable rate feature of ARM securities, their prices
are considered to have volatility characteristics which approximate the
<PAGE>
average period of time until the next adjustment of the interest rate. As a
result, the principal volatility of ARM securities may be more comparable to
short- and intermediate-term securities than to longer term fixed rate
mortgage securities. Prepayments however, will increase their principal
volatility. See also the discussion of Mortgage-Backed Securities.
. Other Mortgage-Related Securities The fund expects that governmental,
government-related or private entities may create mortgage loan pools
offering pass-through investments in addition to those described above. The
mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may differ from customary
long-term fixed rate mortgages. As new types of mortgage-related securities
are developed and offered to investors, the investment manager will,
consistent with the fund's objective, policies and quality standards,
consider making investments in such new types of securities.
GNMA and U.S. Bond Index Funds
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
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
transaction 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
Instruments.
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
<PAGE>
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counterparty 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).
All Summit Municipal Funds
Types of Securities
Set forth below is additional information about certain of the investments
described in each 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, each 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 each 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 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.
<PAGE>
Municipal Notes
Municipal notes generally are used to provide short-term operating or capital
needs and generally have maturities of one year or less. Municipal notes
include:
. 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 revenues, such as sales taxes, toll revenues or
water and sewer charges, that are used to pay off the notes.
. 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 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 limit on illiquid securities. 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 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.
<PAGE>
. 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 SEC 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 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 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
Generally, the maturity of a security is deemed to be the period remaining
until the date (noted on the face of the instrument) on which the principal
amount must be paid, or in the case of an instrument called for redemption,
the date on which the redemption payment must be made. However, certain
securities may be issued with adjustable interest rates that are reset
periodically by predetermined formulas or indexes in order to minimize
movements in the principal value of the investment in accordance with Rule
2a-7 under the 1940 Act. 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 A variable rate instrument is one whose terms
provide for the adjustment of its interest rate 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 which approximates its
amortized cost. A variable rate instrument, 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. A variable rate instrument the
principal amount of which is scheduled to be paid in more than 397 calendar
days and which is subject to a demand feature which entitles the purchaser to
receive the principal amount of the underlying security or securities, either
(i) at any time upon notice of no more than 30 days, or (ii) at specified
intervals not exceeding 397 calendar days and upon no more than 30 days'
notice ("Demand Feature"), 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. A government security that is a variable rate security where the
variable rate is readjusted no less frequently than every 762 calendar days
is deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
<PAGE>
. Floating Rate Securities A floating rate security provides for the
adjustment of its 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. A floating rate security, the principal amount of which must
unconditionally be paid in 397 calendar days or less is deemed to have a
maturity of one day. 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. A government
security that is a floating rate security is deemed to have a remaining
maturity of one day.
. 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.
. Participation Interests The funds 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 funds in connection with the arrangement.
In the case of longer-term bonds, the 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 funds 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 funds
hold participation interests is exempt from federal income tax to the funds.
However, there is no guarantee the IRS would treat such interest income as
tax-exempt.
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, high-grade marketable debt securities
or other suitable cover 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 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 funds, 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.
Investment in Taxable Money Market Securities
Although the funds expect to be solely invested in municipal securities, for
temporary defensive purposes they may elect to invest in the taxable money
market securities listed next (without limitation) when such action is
<PAGE>
deemed to be in the best interests of shareholders. The 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 Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
. Commercial Paper and Commercial Notes Short-term promissory notes issued by
corporations primarily to finance short-term credit needs. Certain notes may
have floating or variable rates and may contain options, exercisable by
either the buyer or the seller, that extend or shorten the maturity of the
note.
. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
. Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
. Supranational Agencies Securities of certain supranational entities, such as
the International Development Bank.
. 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, funds
will follow the provisions of Rule 2a-7 under the 1940 Act.
Intermediate and Income Funds
. Residual Interest Bonds are a type of high-risk derivative. 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 seven to 35 days while the bondholders 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, seven- to 35-day tax-exempt interest rates. There
is no assurance 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
<PAGE>
substantial premiums or be at deep discounts. This is a relatively new
product in the municipal market with limited liquidity to date.
. 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. 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 the fund's total return.
The funds may invest in other types of derivative instruments as they become
available.
For the purpose of the funds' investment restrictions, the identification of
the "issuer" of municipal securities which are not general obligation bonds
is made by the funds' 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.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.
Intermediate and Income Funds
Forwards
The funds 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 funds 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.
PORTFOLIO MANAGEMENT PRACTICES
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All Funds
Lending of Portfolio Securities
Securities loans are made to broker-dealers, 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,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation
<PAGE>
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.
Interfund Borrowing and Lending
The fund is a party to an exemptive order received from the SEC on December
8, 1998, amended on November 23, 1999, that permits it to borrow money from
and/or lend money to other funds in the T. Rowe Price complex ("Price
Funds"). All loans are set at an interest rate between the rate charged on
overnight repurchase agreements and short-term bank loans. All loans are
subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The program is subject to the oversight
and periodic review of the Boards of Directors of the Price Funds.
Repurchase Agreements
Each fund may enter into repurchase agreements through which investors (such
as the fund) purchases a security (the "underlying security") from a
well-established securities dealer or a bank which is a member of the Federal
Reserve System. Any such dealer or bank will be on T. Rowe Price's approved
list. 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. Each fund will only enter into repurchase
agreements where (i) (A) Cash Reserves Fund--the underlying securities are
------------------
either U.S. government securities or securities that, at the time the
repurchase agreement is entered into, are rated in the highest rating
category by the requisite number of NRSROs (as required by Rule 2a-7 under
the 1940 Act) and otherwise are of the type (excluding maturity limitations)
which the fund's investment guidelines would allow it to purchase directly
(however, the underlying securities will either be U.S. government securities
or securities which, at the time the repurchase agreement is entered into,
are rated in the highest rating category by public rating agencies), (B) GNMA
----
and U.S. Bond Index Funds--the underlying securities are of the type
-------------------------
(excluding maturity limitations) which each 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,
a 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 of engaging in reverse repurchase
agreements, the fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a fund is the seller
of, rather than the investor in, securities, and agrees to repurchase them at
an agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because
it avoids 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.")
GNMA and U.S. Bond Index Funds
Money Market Reserves
It is expected that the fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price. Currently,
two such money market funds are in operation-Reserve Investment Fund ("RIF")
and Government Reserve Investment Fund ("GRF"), each a series of the Reserve
Investment Funds, Inc.
<PAGE>
Additional series may be created in the future. These funds were created and
operate under an Exemptive Order issued by the SEC (Investment Company Act
Release No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
The GRF invests primarily in a portfolio of U.S. government-backed
securities, primarily U.S. Treasuries, and repurchase agreements thereon.
The RIF and GRF provide a very efficient means of managing the cash reserves
of the fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.
Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.
Options
Options are a type of potentially high-risk derivative.
GNMA 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 the fund. In
writing covered call options, the fund expects to generate additional premium
income which should serve to enhance the fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long
term, are deemed to be attractive investments for the fund.
A call option gives the holder (buyer) the "right to purchase," and the
writer (seller) has the "obligation to sell," 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 generally will write only covered call options. This means that the
fund will either 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. From time to time, the fund will write a call option that is not
covered as indicated above but where the fund will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as permitted by the SEC having a value equal to the
fluctuating market value of the optioned securities or currencies. While such
an option would be "covered" with sufficient collateral to satisfy SEC
prohibitions on issuing senior securities, this type of strategy would expose
the fund to the risks of writing uncovered options.
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
generally 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
<PAGE>
retains the risk of loss should the price of the security or currency
decline. Unlike one who owns securities or currencies not subject to an
option, the fund has no control over when it may be required to sell the
underlying securities or currencies, since it may be assigned an exercise
notice at any time prior to the expiration of its obligation as a writer. If
a call option which the fund has written expires, the fund will realize a
gain in the amount of the premium; however, such gain may be offset by a
decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the fund will realize a gain
or loss from the sale of the underlying security or currency. The fund does
not consider a security or currency covered by a call to be "pledged" as that
term is used in the fund's policy which limits the pledging or mortgaging of
its assets. If the fund writes an uncovered option as described above, it
will bear the risk of having to purchase the security subject to the option
at a price higher than the exercise price of the option. As the price of a
security could appreciate substantially, the fund's loss could be
significant.
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
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 written call
or put options exceeds 25% of the market value of the fund's net assets. In
<PAGE>
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 to the
exercise price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related risks and
rewards, is substantially identical to that of call options.
The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, 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 next.
The fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
<PAGE>
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 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 next.
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 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
<PAGE>
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 Over-the-Counter ("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.
Intermediate and Income 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 funds' prospectus and Statement of Additional Information when
and if the funds decide to invest in options.
U.S. Bond Index Fund
The only option activity the fund currently may engage in is the purchase of
call options. Such activity is subject to the same risks described above
under "Purchasing Call Options." However, the fund reserves the right to
engage in other options activity.
Interest Rate Transactions
GNMA Fund
The fund may enter into various interest rate transactions such as interest
rate swaps and the purchase or sale of interest rate caps and floors, to
preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic securities, or to structure transactions
designed for other non-speculative purposes.
Interest rate swaps involve the exchange by the fund with third parties of
its respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor. In circumstances in which T. Rowe
Price anticipates that interest rates will decline, the fund might, for
example, enter into an interest rate swap as the floating rate payor. In the
case where the fund purchases such an interest rate swap, if the floating
rate payments fell below the level of the fixed rate payment set in the swap
agreement, the fund counterparties would pay the fund's amounts equal to
interest computed at the difference between the fixed and floating rates over
the national principal amount. Such payments would offset or partially offset
the decrease in the payments the fund would receive in respect of floating
rate assets being hedged. In the case of purchasing an interest rate floor,
if interest rates declined below the floor rate, the fund would receive
payments from the counterparties which would wholly or partially offset the
decrease in the payments they would receive in respect of the financial
instruments being hedged.
The fund will usually enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the fund receiving or paying, as
the case may be, only the net amount of the two payments. The net
<PAGE>
amount of the excess, if any, of the fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and
an amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in an
account by the fund's custodian. If the fund enters into an interest rate
swap on other than a net basis, the fund would maintain an account in the
full amount accrued on a daily basis of the fund's obligations with respect
to the swap. To the extent the fund sells (i.e., writes) caps and floors, it
will maintain in an account cash or high-quality liquid debt securities
having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the fund's obligations with respect to any caps
or floors. The fund will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of
the counterparty thereto is rated at least A by S&P. T. Rowe Price will
monitor the creditworthiness of counterparties on an ongoing basis. If there
is a default by the other parties to such a transaction, the fund will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. T. Rowe Price has determined that,
as a result, the swap market has become relatively liquid. The fund may enter
into interest rate swaps only with respect to positions held in its
portfolio. Interest rate swaps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the fund is contractually obligated to make. If the other
parties to interest rate swaps default, the fund's risk of loss consists of
the net amount of interest payments that the fund is contractually entitled
to receive. Since interest rate swaps are individually negotiated, the fund
expects to achieve an acceptable degree of correlation between its right to
receive interest on loan interests and its right and obligation to receive
and pay interest pursuant to interest rate swaps.
The aggregate purchase price of caps and floor held by the fund may not
exceed 10% of the fund's total assets. The fund may sell (i.e., write) caps
and floors without limitation, subject to the account coverage requirement
described above.
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The fund may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
GNMA and U.S. Bond Index Funds
Interest rate or currency futures contracts may be used by the GNMA Fund as a
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the fund. In this
regard, the fund could sell interest rate or currency futures as an offset
against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The U.S. Bond Index Fund may only enter into bond futures which are
appropriate for its investment program to provide an efficient means of
maintaining liquidity while being invested in the market to facilitate
trading or to reduce transaction costs. It will not use futures for hedging
purposes, otherwise the nature of such futures and the regulatory limitations
and risks to which they are subject are the same as those described below.
The fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. 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.
<PAGE>
Intermediate and Income Funds
The fund may enter into 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.
The fund will enter into futures contracts which are traded on national
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 CFTC. 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.
All Funds (other than the Money Funds)
Regulatory Limitations
If the fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors without a shareholder vote and does not limit the
percentage of the fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a fund's
assets to cover or identified accounts could impede portfolio management or
the fund's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the fund would comply with such new
restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
units of a stock index) for a specified price, date, time, and place
designated at the time the contract is made. Brokerage fees are incurred when
a futures contract is bought or sold and margin deposits must be maintained.
Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the fund purchases or sells a security, no price would be paid or
received by the fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the fund's open positions
in futures contracts, the fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, or liquid assets 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.
<PAGE>
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 market."
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.
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 Treasury bills 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 Treasury bills 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.
Intermediate and Income Funds
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 the 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.
All Funds (other than the Money Funds)
Special Risks of Transactions in Futures Contracts
. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
<PAGE>
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Margin deposits required on futures trading are low. 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.
. Liquidity The fund may elect to close some or all of its futures positions
at any time prior to their expiration. The fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The fund may close its positions by taking opposite positions which would
operate to terminate the fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the fund, and the fund would realize
a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, 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 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.
<PAGE>
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of 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.
GNMA and U. S. Bond Index Funds
Options on Futures Contracts
The fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the fund and other T. Rowe Price funds. Such aggregated orders would be
allocated among the funds and the other T. Rowe Price funds in a fair and
nondiscriminatory manner.
Intermediate and Income Funds
Options on Futures Contracts
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 may 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
funds 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 by the increase of the value
of the securities in the fund's portfolio which were being hedged.
<PAGE>
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 (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
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.
All Funds (other than the Money Funds)
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. In addition, where the fund seeks to
close out an option position by writing or buying an offsetting option
covering the same index, underlying instrument or contract and having the
same exercise price and expiration date, its ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions, or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (6) 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 some type of index future
is used as a proxy for
<PAGE>
hedging a portfolio consisting of other types of securities. Another risk is
that the movements in the price of options on 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 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.
Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts
GNMA and U.S. Bond Index Funds
The discussion herein may refer to transactions in which the GNMA Fund does
not engage. The fund's prospectus sets forth the types of transactions
permissible for the fund.
The fund may enter into certain options, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will
be treated as Section 1256 contracts or straddles.
Transactions that are considered Section 1256 contracts will be considered to
have been closed at the end of the fund's fiscal year and any gains or losses
will be recognized for tax purposes at that time. Such gains or losses from
the normal closing or settlement of such transactions will be characterized
as 60% long-term capital gain (taxable at a maximum rate of 20%) or loss and
40% short-term capital gain or loss regardless of the holding period of the
instrument (ordinary income or loss for foreign exchange contracts). The fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures, and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar-denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.
<PAGE>
In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures, or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the fund.
Intermediate and Income Funds
Although the fund invests almost exclusively in securities that generate
income that is exempt from federal income taxes, the fund may enter into
certain option, futures, and foreign exchange contracts, including options
and futures on currencies, which will be treated as Section 1256 contracts or
straddles that are not exempt from such taxes. Therefore, use of the
investment techniques described above could result in taxable income to
shareholders of the fund.
Transactions which are considered Section 1256 contracts will be considered
to have been closed at the end of the fund's fiscal year and any gains or
losses will be recognized for tax purposes at that time. Gains or losses
recognized from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, without regard to the holding period of the contract.
The fund will be required to distribute net gains on such transactions to
shareholders even though it may not have closed the transaction and received
cash to pay such distributions.
Options, futures, and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar-denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.
In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures, or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the fund.
All Funds
INVESTMENT RESTRICTIONS
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Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
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, the fund. Calculation of the fund's total assets for
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the
<PAGE>
fund's prospectus or Statement of Additional Information will not include
cash collateral held in connection with securities lending activities.
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 funds
(other than the Municipal Money Market and Cash Reserves Funds) may enter
into futures contracts and options thereon;
(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 provided that for the Cash Reserves Fund
this policy does not apply to securities of the banking industry
including, but not limited to, certificates of deposit and bankers'
acceptances;
(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 securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act;
(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the fund may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
program; or
All Summit Municipal Funds
(10) Equity Securities Purchase equity securities, or securities convertible
into equity securities.
NOTES
The following Notes should be read in connection with the above-described
fundamental policies. The Notes are not fundamental policies.
<PAGE>
With respect to investment restriction (1), the Cash Reserves and the
Municipal Money Market Funds have no current intention of engaging in any
borrowing transactions.
With respect to investment restriction (2), the fund does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state, or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction. Bonds which
are refunded with escrowed U.S. government securities or subject to
certain types of guarantees are not subject to the industry limitation of
25%.
All Summit Municipal Funds
For purposes of investment restriction (5), the fund will treat bonds
which are refunded with escrowed U.S. government securities as U.S.
government securities.
All Funds
Operating Policies
As a matter of operating policy, the fund may not:
(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the fund's net asset value;
(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% (10% for Cash Reserves and Municipal Money Market Funds) of its
net assets would be invested in such securities;
(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; (ii)
securities of the Reserve Investment or Government Reserve Investment
Funds; or (iii) in the case of the Money Funds, only securities of other
money market funds;
(6) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging, or hypothecating may not exceed
33/1//\\/3/\\% of the fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the fund would be invested in such
programs;
(9) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(10) Short Sales Effect short sales of securities; or
(11) Warrants Invest in warrants if, as a result thereof, more than 10% (for
the Summit Income Funds) or 2% (for the Summit Municipal Funds) of the
value of the net assets of the fund would be invested in warrants.
<PAGE>
NOTES
With respect to investment restriction (5), the funds have no current
intention of purchasing the securities of other investment companies.
Duplicate fees could result from any such purchases.
All Funds
Notwithstanding anything in the above fundamental and operating restrictions
to the contrary, the fund may invest all of its assets in a single investment
company or a series thereof in connection with a "master-feeder" arrangement.
Such an investment would be made where the fund (a "Feeder"), and one or more
other funds with the same investment objective and program as the fund,
sought to accomplish its investment objective and program by investing all of
its assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as the
fund. The fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
MANAGEMENT OF THE FUNDS
-------------------------------------------------------------------------------
The officers and directors of the fund are listed below. Unless otherwise
noted, the address of each is 100 East Pratt Street, Baltimore, Maryland
21202. Except as indicated, each has been an employee of T. Rowe Price for
more than five years. In the list below, the fund's directors who are
considered "interested persons" of T. Rowe Price as defined under Section
2(a)(19) of the 1940 Act are noted with an asterisk (*). These directors are
referred to as inside directors by virtue of their officership, directorship,
and/or employment with T. Rowe Price.
All Funds
Independent Directors/(a)/
CALVIN W. BURNETT, PH.D., 3/16/32, President, Coppin State College; formerly:
Director, Maryland Chamber of Commerce and Provident Bank of Maryland;
formerly: President, Baltimore Area Council Boy Scouts of America; Vice
President and Board of Directors, The Walters Art Gallery; Address: 2500 West
North Avenue, Baltimore, Maryland 21216
ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, President, and
Chief Executive Officer, The Rouse Company, real estate developers, Columbia,
Maryland; Address: 10275 Little Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, 8/22/34, President, F. Pierce Linaweaver & Associates,
Inc.; Consulting Environmental & Civil Engineers; formerly (1987-1991)
Executive Vice President, EA Engineering, Science, and Technology, Inc., and
President, EA Engineering, Inc., Baltimore, Maryland; Address: Green Spring
Station, 2360 West Joppa Road, Suite 224, Lutherville, Maryland 21093
JOHN G. SCHREIBER, 10/21/46, Owner/President, Schreiber Investments, Inc., a
real estate investment company; Director, AMLI Residential Properties Trust
and Urban Shopping Centers, Inc.; Partner, Blackstone Real Estate Partners,
L.P.; Director and formerly Executive Vice President, JMB Realty Corporation,
a national real estate investment manager and developer; Address: Centaur
Capital Partners, One Westminster Place, Lake Forest, IL 60045
(a) Unless otherwise indicated, the Independent Directors have been at their
respective companies for at least five years.
Inside Directors/Officers
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price
<PAGE>
Services, Inc., and T. Rowe Price Retirement Plan Services, Inc.; Chairman of
the Board, President, and Trust Officer, T. Rowe Price Trust Company;
Director, T. Rowe Price International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board and Director, T.
Rowe Price International; 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
HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, T. Rowe Price
International 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
PATRICIA B. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
JOSEPH A. CARRIER, 12/30/60, Treasurer-Vice President, T. Rowe Price and T.
Rowe Price Investment Services, Inc.
DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price
All Summit Income Funds
EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price, T. Rowe
Price International, and T. Rowe Price Trust Company
CONNICE A. BAVELY, 3/5/51, Executive Vice President-Vice President and Senior
Portfolio Manager, T. Rowe Price; formerly founding partner and Senior Vice
President of Atlantic Asset Management Partners, LLC; Special Partner and
Portfolio Manager at Weiss Peck and Greer
PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
Price
DEBORAH L. BOYER, 1/2/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Assistant Vice President and Government Bond Trader for First
Chicago NBD Corporation
STEVEN G. BROOKS, 8/5/54, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
Price
ROBERT P. CAMPBELL, 1/31/56, Vice President-Vice President, T. Rowe Price and
T. Rowe Price International
PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
DEBRA R. DIES, 5/12/71, Vice President-Credit Analyst, T. Rowe Price;
formerly employed at J.P. Morgan Securities
CHARLES B. HILL, 9/22/61, Vice President-Vice President, T. Rowe Price
ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price;
formerly Senior Vice President and Director of Research at Aubrey G. Lanston
& Co., Inc.
JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price
CHERYL A. MICKEL, 1/11/67, Vice President-Assistant Vice President, T. Rowe
Price
EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price
THEODORE E. ROBSON, 2/10/65, Vice President-Assistant Vice President, T. Rowe
Price
ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price
<PAGE>
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
VIRGINIA A. STIRLING, 9/5/51, Vice President-Vice President, T. Rowe Price
SUSAN G. TROLL, 8/27/66, Vice President-Vice President and Analyst, T. Rowe
Price; formerly Vice President at Merrill Lynch Asset Management; Certified
Public Accountant
MARK J. VASELKIV, 7/22/58, Vice President-Managing Director and Vice
President, T. Rowe Price
All Summit Municipal Funds
MARY J. MILLER, 7/19/55, President-Managing Director, T. Rowe Price
PATRICE BERCHTENBREITER ELY, 1/13/53, Executive Vice President-Vice
President, T. Rowe Price
CHARLES B. HILL, 9/22/61, Executive Vice President-Vice President, T. Rowe
Price
JANET G. ALBRIGHT, 3/31/57, Vice President-Vice President, T. Rowe Price
JEREMY N. BAKER, 2/27/68, Vice President-Employee, T. Rowe Price
PATRICIA S. DEFORD, 9/29/57, Vice President-Vice President, T. Rowe Price
JOSEPH K. LYNAGH, 6/9/58, Vice President-Assistant Vice President, T. Rowe
Price
KONSTANTINE B. MALLAS, 5/26/63, Vice President-Vice President, T. Rowe Price
HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price
JULIE A. SALSBERY, 4/29/70, Vice President-Assistant Vice President and Fixed
Income Trader, T. Rowe Price; (1997) formerly assistant portfolio
manager/trader at Wainwright Asset Management
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
WILLIAM F. SNIDER, 9/16/69, Vice President-Vice President, T. Rowe Price
C. STEPHEN WOLFE II, 4/5/59, Vice President-Vice President, T. Rowe Price
U.S. Bond Index Fund
EDMUND M. NOTZON, 10/1/45, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
Compensation Table
The funds do not pay pension or retirement benefits to their independent
officers or directors. Also, any director of a fund who is an officer or
employee of T. Rowe Price or T. Rowe Price International does not receive any
remuneration from the fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Total Compensation from Fund and
Position Fund(a) Fund Complex Paid to Directors(b)
-------------------------------------- -------------------------------------------- ---------------------------------
<S> <C> <C>
Cash Reserves Fund
Calvin W. Burnett, Ph.D., Director $3,505 $65,000
Anthony W. Deering, Director 2,141 81,000
F. Pierce Linaweaver, Director 3,510 66,000
John G. Schreiber, Director 3,505 65,000
-------------------------------------------------------------------------------------------------------------------------
Limited-Term Bond Fund
Calvin W. Burnett, Ph.D., Director $1,333 $65,000
Anthony W. Deering, Director 1,272 81,000
F. Pierce Linaweaver, Director 1,333 66,000
John G. Schreiber, Director 1,332 65,000
-------------------------------------------------------------------------------------------------------------------------
GNMA Fund
Calvin W. Burnett, Ph.D., Director $1,340 $65,000
Anthony W. Deering, Director 1,267 81,000
F. Pierce Linaweaver, Director 1,340 66,000
John G. Schreiber, Director 1,340 65,000
-------------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund
Calvin W. Burnett, Ph.D., Director $1,468 $65,000
Anthony W. Deering, Director 1,311 81,000
F. Pierce Linaweaver, Director 1,468 66,000
John G. Schreiber, Director 1,469 65,000
-------------------------------------------------------------------------------------------------------------------------
Municipal Intermediate-Term Fund
Calvin W. Burnett, Ph.D., Director $1,372 $65,000
Anthony W. Deering, Director 1,279 81,000
F. Pierce Linaweaver, Director 1,372 66,000
John G. Schreiber, Director 1,372 65,000
-------------------------------------------------------------------------------------------------------------------------
Municipal Income Fund
Calvin W. Burnett, Ph.D., Director $1,360 $65,000
Anthony W. Deering, Director 1,276 81,000
F. Pierce Linaweaver, Director 1,360 66,000
John G. Schreiber, Director 1,360 65,000
-------------------------------------------------------------------------------------------------------------------------
U.S. Bond Index Fund (to be filed by Amendment)
Calvin W. Burnett, Ph.D., Director
Anthony W. Deering, Director
F. Pierce Linaweaver, Director
John G. Schreiber, Director
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Amounts in this column are based on accrued compensation from November
1, 1998 to October 31, 1999.
(b) Amounts in this column are based on compensation received from January
1, 1999, to December 31, 1999. The T. Rowe Price complex included 88 funds
as of December 31, 1999.
All Funds
The fund's Executive Committee, consisting of the fund's interested
directors, has been authorized by its respective Board of Directors to
exercise all powers of the Board to manage the funds in the intervals between
meetings of the Board, except the powers prohibited by statute from being
delegated.
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors of the fund, as
a group, owned less than 1% of the outstanding shares of the fund.
As of December 31, 1999, the following shareholders beneficially owned more
than 5% of the outstanding shares of the fund:
Summit Limited-Term Bond Fund: Maryland Higher Education Investment Program,
217 E. Redwood St., Ste. 2050, Baltimore, Maryland 21202-3316;
Summit GNMA Fund: Walnut Street Partners, P.O. Box 6829, c/o Curt Walmer, 850
N. Wyomissing Blvd., Ste. 200, Wyomissing, Pennsylvania 19610-1764;
Summit Municipal Income Fund: US Clearing Corp., FBO 146-20689-15, 26
Broadway, New York, New York 10004-1703.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, T. Rowe Price provides the fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the fund in accordance with
the fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services, T.
Rowe Price provide the fund with certain corporate administrative services,
including: maintaining the fund's corporate existence and corporate records;
registering and qualifying fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the fund; maintaining
liaison with the agents employed by the fund such as the fund's custodian and
transfer agent; assisting the fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors, and committee members of the fund without cost to the fund.
The Management Agreement also provides that T. Rowe Price, its directors,
officers, employees, and certain other persons performing specific functions
for the fund will only be liable to the fund for losses resulting from
willful misfeasance, bad faith, gross negligence, or reckless disregard of
duty.
Management Fee
Each fund pays T. Rowe Price an annual all-inclusive fee (the "Fee") as
follows:
<TABLE>
<CAPTION>
<S> <C>
Cash Reserves 0.45%
GNMA 0.60
Municipal Money Market 0.45
Municipal Intermediate 0.50
Municipal Income 0.50
U.S. Bond Index ____
</TABLE>
The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is the sum of the Daily Fee accruals for
each month. The Daily 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 appropriate Fee and multiplying this product by the net assets of
the fund for that day, as determined in accordance with the funds' prospectus
as of the close of business on the previous business day on which the fund
was open for business.
<PAGE>
The Management Agreement between each fund and T. Rowe Price provides that T.
Rowe Price will pay all expenses of each fund's operations, except interest,
taxes, brokerage commissions, and other charges incident to the purchase,
sale or lending of the fund's portfolio securities, directors' fees and
expenses (including counsel fees and expenses) and such non-recurring or
extraordinary expenses that may arise, including the costs of actions, suits
or proceedings to which the fund is a party and the expenses the fund may
incur as a result of its obligation to provide indemnification to its
officers, directors and agents. However, the Board of Directors for the funds
reserves the right to impose additional fees against shareholder accounts to
defray expenses which would otherwise be paid by T. Rowe Price under the
management agreement. The Board does not anticipate levying such charges;
such a fee, if charged, may be retained by the fund or paid to T. Rowe Price.
The following chart sets forth the total management fees, if any, paid to T.
Rowe Price by each fund during the last three years:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $7,978,000 $5,366,000 $4,707,000
GNMA 130,000 47,000 161,000
Municipal Money Market 564,000 485,000 520,000
Municipal Intermediate 230,000 127,000 185,000
Municipal Income 166,000 47,000 103,000
</TABLE>
DISTRIBUTOR FOR THE FUNDS
-------------------------------------------------------------------------------
Investment Services, a Maryland corporation formed in 1980 as a wholly owned
subsidiary of T. Rowe Price, serves as the fund's distributor. Investment
Services is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. The offering of the fund's shares is continuous.
Investment Services is located at the same address as the fund and T. Rowe
Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
fund will pay all fees and expenses in connection with: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling fundshares, except for those fees and expenses
specifically assumed by the fund. Investment Services' expenses are paid by
T. Rowe Price.
Investment Services acts as the agent of the fund in connection with the sale
of its shares in the various states in which Investment Services is qualified
as a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for fund shares at net asset value. No sales charges are paid
by investors or the fund.
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the fund's
securities and cash, but it does not participate in the fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security
<PAGE>
depository system of the Depository Trust Corporation, or any central
depository system allowed by federal law. In addition, the Summit Municipal
Funds are authorized to maintain certain of its securities, in particular,
variable rate demand note, in uncertificated form, in the proprietary deposit
systems of various dealers in municipal securities. State Street Bank and the
Limited-Term Fund have entered into a Custodian Agreement with The Chase
Manhattan Bank, N.A., London, pursuant to which portfolio securities which
are purchased outside the United States are maintained in the custody of
various foreign branches of The Chase Manhattan Bank and such other
custodians, including foreign banks and foreign securities depositories as
are approved by the fund's Board of Directors in accordance with regulations
under the 1940 Act. The Bank's main office is at 225 Franklin Street, Boston,
Massachusetts 02110. The address for The Chase Manhattan Bank, N.A., London
is Woolgate House, Coleman Street, London, EC2P 2HD, England.
All Funds
SERVICES BY OUTSIDE PARTIES
-------------------------------------------------------------------------------
The shares of some fund shareholders are held in omnibus accounts maintained
by various third parties, including retirement plan sponsors, insurance
companies, banks and broker-dealers. The fund has adopted an administrative
fee payment ("AFP") program that authorizes the fund to make payments to
these third parties. The payments are made for transfer agent, recordkeeping
and other administrative services provided by, or on behalf of, the third
parties with respect to such shareholders and the omnibus accounts.
CODE OF ETHICS
-------------------------------------------------------------------------------
The fund, its investment adviser (T. Rowe Price), and its principal
underwriter (T. Rowe Price Investment Services), have a written Code of
Ethics which requires all Access Persons to obtain prior clearance before
engaging in personal securities transactions. In addition, all Access Persons
must report their personal securities transactions within 10 days of their
execution. Access Persons 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; or the security is
subject to internal trading restrictions. In addition, Access Persons are
prohibited from profiting from short-term trading (e.g., purchases and sales
involving the same security within 60 days). Any person becoming an Access
Person must file a statement of personal securities holdings within 10 days
of this date. All Access Persons are required to file an annual statement
with respect to their personal securities holdings. 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 allocation of portfolio brokerage and principal business.
The fund's purchases and sales of fixed income portfolio 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. However, it is included because T. Rowe
Price does manage a significant number of common stock portfolios 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
fund.
<PAGE>
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.
With respect to equity and fixed income securities, T. Rowe Price may effect
principal transactions on behalf of the fund with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts, or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in fixed price offerings.
How Evaluations Are Made of the Overall Reasonableness of Brokerage Commissions
Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates; (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.
Descriptions of Research Services Received From Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts, and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians,
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently
provided by brokers and dealers. T. Rowe Price pays cash for certain research
services received from external 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.
<PAGE>
Commissions to Brokers Who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would
have charged for effecting the same transaction, if the adviser determines in
good faith that the commission paid is reasonable in relation to the value of
the brokerage and research services provided. The determination may be viewed
in terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the
total brokerage and research services provided by each particular broker. T.
Rowe Price may receive research, as defined in Section 28(e), in connection
with selling concessions and designations in fixed price offerings in which
the funds participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of business
to any broker or dealer over any specific time period. Historically, the
majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion
of its discretionary client brokerage business where special needs do not
exist, or where the business may be allocated among several brokers or
dealers which are able to meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations but
can, and often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above. In no case
is a broker or dealer excluded from receiving business from T. Rowe Price
because it has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the fund.
From time to time, orders for clients may be placed through a computerized
transaction network.
The fund does not allocate business to any broker-dealer on the basis of its
sales of the fund's shares. However, this does not mean that broker-dealers
who purchase fund shares for their clients will not receive business from the
fund.
Some of T. Rowe Price's other clients have investment 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
<PAGE>
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.
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
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 October 31, 1999, 1998, and 1997
are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $12,801,643,000 $13,039,528,000 $10,202,905,000
GNMA 114,383,000 76,167,000 194,894,000
Municipal Money Market 797,210,000 758,579,000 549,381,000
Municipal Intermediate 161,189,000 142,492,000 126,762,000
Municipal Income 253,977,000 176,797,000 61,353,000
</TABLE>
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 October 31, 1999, 1998, and 1997
are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $12,801,643,000 $13,039,528,000 $10,202,905,000
GNMA 114,383,000 76,167,000 194,894,000
Municipal Money Market -- 750,702,000 549,381,000
Municipal Intermediate 149,721,000 128,977,000 114,808,000
Municipal Income 214,219,000 142,293,000 50,664,000
</TABLE>
The following amounts involved trades with brokers acting as agents or
underwriters for the fiscal years ended October 31, 1999, 1998, and 1997 are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves -- -- --
GNMA -- -- --
Municipal Money Market -- 7,877,000 --
Municipal Intermediate 11,468,000 13,515,000 11,954,000
Municipal Income 39,758,000 34,504,000 10,689,000
</TABLE>
<PAGE>
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 October 31, 1999, 1998, and 1997 are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves -- -- --
GNMA -- -- --
Municipal Money Market -- -- --
Municipal Intermediate 47,000 87,000 29,000
Municipal Income 198,000 199,000 50,000
</TABLE>
The percentage of total portfolio transactions placed with firms which
provided research, statistical, or other services to T. Rowe Price in
connection with the management of the fund, or in some cases, to the fund for
the fiscal years ended October 31, 1999, 1998, and 1997 are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves 87% 87% 83%
GNMA 96 98 65
Municipal Money Market -- -- --
Municipal Intermediate -- -- --
Municipal Income -- -- --
</TABLE>
The portfolio turnover rates for the fund (if applicable) for the fiscal
years ended October 31, 1999, 1998, and 1997 were:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
GNMA 89.9% 83.8% 111.8%
Municipal Intermediate 38.5 22.2 53.8
Municipal Income 79.7 48.1 35.7
</TABLE>
PRICING OF SECURITIES
-------------------------------------------------------------------------------
All Funds except Cash Reserves and Municipal Money Market Funds
Fixed income securities are generally traded in the over-the-counter market.
Investments in securities with remaining maturities of one year or more are
stated at fair 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. Investments in mutual funds are valued at the closing net asset
value per share of the mutual fund on the day of valuation. (For the GNMA and
U.S. Bond Index Funds) Domestic securities with remaining maturities less
than one year are stated at fair value which is determined by using a matrix
system that establishes a value for each security based on bid-side money
market yields.
There are a number of pricing services available, and the Board of Directors,
on the basis of an ongoing evaluation of these services, may use or may
discontinue the use of any pricing service in whole or part.
Securities or other assets for which the above valuation procedures 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.
Cash Reserves and Municipal Money Market Funds
Securities are valued at amortized cost.
<PAGE>
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 1940 Act. 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; 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 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.
NET ASSET VALUE PER SHARE
-------------------------------------------------------------------------------
The purchase and redemption price of the fund's shares is equal to the fund's
net asset value per share or share price. The fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the fund is normally
calculated as of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the fund may by order permit such
a suspension for the protection of the fund's shareholders; provided that
applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c),
or (d) exist.
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, dividends and capital gain distributions, 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 one day,
although the exact timing is subject to change and can be as great as 10
days.
TAX STATUS
-------------------------------------------------------------------------------
The fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.
All Summit Income Funds and U.S. Bond Index Fund
A portion of the dividends paid by certain funds may be eligible for the
dividends-received deduction applicable to corporate shareholders. Long-term
capital gain distributions paid from these funds are never eligible for the
dividend received deduction. 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 dividends by December 31 of
each year equal to at least 98% of ordinary income (as of December 31) and
capital gains (as of October 31) in order to avoid a federal excise tax and
distribute within 12 months 100% of ordinary income and capital gains as of
to avoid a federal income tax.
All Summit Municipal Funds
Generally, dividends paid by the funds are not eligible for the
dividends-received deduction applicable to 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. Each fund must also declare dividends by December 31 of each
year equal to at least 98% of capital gains (as of October 31) in order to
avoid a federal excise tax, and distribute within 12 months 100% of taxable
income, if any, and capital gains (as of its tax year-end) to avoid federal
income tax.
All Funds
At the time of your purchase, the fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held
by the fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, the fund is permitted to carry
forward its net realized capital losses, if any, for eight years and realize
net capital gains up to the amount of such losses without being required to
pay taxes on, or distribute, such gains.
If, in any taxable year, the fund should not qualify as a regulated
investment company under the code: (i) the fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
fund's distributions to the extent made out of the fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
<PAGE>
YIELD INFORMATION
-------------------------------------------------------------------------------
Cash Reserves and Municipal Money Market Funds
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.
U.S. Bond Index, Municipal Intermediate-Term, and Municipal Income Funds
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 SEC. The income factors are
then totaled for all securities in the portfolio. Next, expenses of the fund
for the period, net of 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.
If applicable, a taxable-equivalent yield is calculated by dividing this
yield by one minus the effective federal, state, and/or city or local income
tax rates. 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.
GNMA Fund
In conformity with regulations of the SEC, an income factor is calculated for
each security in the portfolio based upon the security's coupon rate. The
income factors are then adjusted for any gains or losses which have resulted
from prepayments of principal during the period. The income factors are then
totaled for all securities in the portfolio. Next, expenses of the fund for
the period, net of 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.
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 methods for the
month ended October 31, 1999, was:
<TABLE>
<CAPTION>
Fund Yield
---- -----
<S> <C>
Cash Reserves 5.24 % (7-day yield)
GNMA 6.42
Municipal Money Market 3.10 (7-day yield)
Municipal Intermediate 4.67
Municipal Income 5.07
</TABLE>
The taxable equivalent yields for the municipal funds for the same period
based on federal income tax brackets of 28% and 31% are shown below:
<TABLE>
<CAPTION>
Federal Income Tax Bracket
Fund -28%-------------------31%
---- --- ---
<S> <C> <C>
Municipal Money Market 4.07% 4.25%
Municipal Intermediate 5.44 5.68
Municipal Income 6.13 6.39
</TABLE>
<PAGE>
All Summit Municipal Funds
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:
<TABLE>
<CAPTION>
Your Taxable Income(2000)(a) A Tax-Exempt Yield Of:(c)
2% 3% 4% 5% 6%
Federal Tax Is Equivalent to a
Joint Return Single Return Rates(b) Taxable Yield of:
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$
2
6,251
-$
$43,851-$105,950 63,550 28.0% 2.78 4.17 5.56 6.94 8.33
105,951-161,450 63,551-132,600 31.0 2.90 4.35 5.80 7.25 8.70
161,451-288,350 132,601-288,350 36.0 3.13 4.69 6.25 7.81 9.38
2
8
288,351 and above 8,351 39.6 3.31 4.97 6.62 8.28 9.93
and above
-----------------------------------------------------------------------------------------------
A Tax-Exempt Yield Of:
Your Taxable Income(2000)(a)
1
7 8 9 0
% % % %
Federal Tax Is Equivalent to a
Joint Return Single Return Rates(b) Taxable Yield of:
-----------------------------------------------------------------------------------------------
$
2
6,251
-$
$43,851-$105,950 63,550 28.0% 9.72 11.11 12.50 13.89
105,951-161,450 63,551-132,600 31.0 10.14 11.59 13.04 14.49
161,451-288,350 132,601-288,350 36.0 10.94 12.50 14.06 15.63
2
8
288,351 and above 8,351 39.6 11.59 13.25 14.90 16.56
and above
-----------------------------------------------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size and nature and amount of
itemized deductions.
INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------
Total Return Performance
The fund's calculation of total return performance includes the reinvestment
of all capital gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a shareholder in the
fund. Total return is calculated as the percentage change between the
beginning value of a static account in the fund and the ending value of that
account measured by the then current net asset value, including all shares
acquired through reinvestment of income and capital gain 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.
<PAGE>
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 3 Yrs. 5 Yrs. % Since Inception
Fund ----- ------ ------ ------- ---------
---- Ended Ended Ended Inception Date
----- ----- ----- --------- ----
10/31/99 10/31/99 10/31/99 10/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
Cash Reserves 4.87% 16.37% 29.41% 34.07% 10/29/93
GNMA 1.39 18.55 44.33 41.92 10/29/93
Municipal Money Market 2.90 9.85 17.46 20.22 10/29/93
Municipal Intermediate -0.96 14.10 33.96 34.20 10/29/93
Municipal Income -3.58 15.58 41.88 35.67 10/29/93
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 3 Yrs. 5 Yrs. % Since Inception
Fund ----- ------ ------ ------- ---------
---- Ended Ended Ended Inception Date
----- ----- ----- --------- ----
10/31/99 10/31/99 10/31/99 10/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
Cash Reserves 4.87% 5.18% 5.29% 5.00% 10/29/93
GNMA 1.39 5.84 7.61 6.00 10/29/93
Municipal Money Market 2.90 3.18 3.27 3.11 10/29/93
Municipal Intermediate -0.96 4.50 6.02 5.02 10/29/93
Municipal Income -3.58 4.95 7.25 5.21 10/29/93
-----------------------------------------------------------------------------
</TABLE>
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: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities 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 nonqualified 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 Investment
Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
financial, and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the fund;
individual securities within the fund's portfolio; and their philosophy
regarding the selection of individual stocks, including why specific stocks
have been added, removed, or excluded from the fund's portfolio.
Other Features and Benefits
The fund is a member of the T. Rowe Price family of funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the fund could be used to
assist investors in
<PAGE>
planning for these goals and to illustrate basic principles of investing,
various worksheets and guides prepared by T. Rowe Price and/or Investment
Services may be made available.
No-Load Versus Load and 12b-1 Funds
Many mutual funds charge sales fees to investors or use fund assets to
finance distribution activities. These fees are in addition to the normal
advisory fees and expenses charged by all mutual funds. There are several
types of fees charged which vary in magnitude and which may often be used in
combination. A sales charge (or "load") can be charged at the time the fund
is purchased (front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested. Back-end loads or
"redemption fees" are charged either on the amount originally invested or on
the amount redeemed. 12b-1 plans allow for the payment of marketing and sales
expenses from fund assets. These expenses are usually computed daily as a
fixed percentage of assets.
The fund is a no-load fund which imposes no sales charges or 12b-1 fees.
No-load funds are generally sold directly to the public without the use of
commissioned sales representatives. This means that 100% of your purchase is
invested for you.
Redemptions in Kind
The fund has filed a notice of election under Rule 18f-1 of the 1940 Act.
This permits the fund to effect redemptions in kind as set forth in its
prospectus.
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the fund, it would be the responsibility of the
shareholder to dispose of the securities. The shareholder would be at risk
that the value of the securities would decline prior to their sale, that it
would be difficult to sell the securities and that brokerage fees could be
incurred.
Issuance of Fund Shares for Securities
Transactions involving issuance of fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
CAPITAL STOCK
-------------------------------------------------------------------------------
The fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the 1940 Act and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and might thus
be superior or inferior to the capital stock or to other classes or series in
various characteristics. The Board of Directors may increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any
class or series that the fund has authorized to issue without shareholder
approval.
Except to the extent that the fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class
vote unless and to the extent that such a right might be construed to exist
under Maryland law. The Charter contains no provision entitling the holders
of the present class of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics attaching to
any class of shares, including the present class of capital stock,
<PAGE>
might be altered or eliminated, or the class might be combined with another
class or classes, by action approved by the vote of the holders of a majority
of all the shares of all classes entitled to be voted on the proposal,
without any additional right to vote as a class by the holders of the capital
stock or of another affected class or classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the fund, a special meeting of
shareholders of the fund shall be called by the Secretary of the fund on the
written request of shareholders entitled to cast at least 10% of all the
votes of the fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of the fund to the extent required by
Section 16(c) of the 1940 Act.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The fund's shares are registered for sale under the 1933 Act. 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
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is The Chrysler Building,
405 Lexington Avenue, New York, New York 10174, is legal counsel to the fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the funds.
The financial statements of the funds for the year ended October 31, 1999,
and the report of independent accountants are included in each fund's Annual
Report for the year ended October 31, 1999. 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 year ended October 31, 1999, are incorporated into this
Statement of Additional Information by reference:
<PAGE>
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CASH
RESERVES
--------
<S> <C>
Financial Highlights 14
Statement of Net Assets, October 31, 1999 17-24
Statement of Operations, year ended October 31, 1999 35
Statement of Changes in Net Assets, years ended
October 31, 1999 and October 31, 1998 36
Notes to Financial Statements, October 31, 1999 39-42
Report of Independent Accountants 43
</TABLE>
<TABLE>
<CAPTION>
GNMA
----
<S> <C>
Financial Highlights 16
Portfolio of Investments 31-33
Statement of Assets and Liabilities, October 31, 1999 34
Statement of Operations, year ended October 31, 1999 35
Statement of Changes in Net Assets, years ended
October 31, 1999 and October 31, 1998 38
Notes to Financial Statements, October 31, 1999 39-42
Report of Independent Accountants 43
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET INTERMEDIATE INCOME
------------ ------------ ------
<S> <C> <C> <C>
Financial Highlights 16 17 18
Statement of Net Assets, October 31,
1999 19-29 30-39 40-51
Statement of Operations, year ended
October 31, 1999 52 52 52
Statement of Changes in Net Assets,
years ended
October 31, 1999 and October 31, 1998 53 53 53
Notes to Financial Statements, October
31, 1999 54-57 54-57 54-57
Report of Independent Accountants 58 58 58
</TABLE>
RATINGS OF COMMERCIAL PAPER
-------------------------------------------------------------------------------
All Summit Income Funds and U.S. Bond Index Fund
Moody's Investors Service, Inc. The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning rating are the following: valuation of the management of
the issuer; economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of
earnings over a period of 10 years; financial strength of the parent company
and the relationships which exist with the issuer; and recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is
rated P1, P2, or P3.
Standard & Poor's Corporation Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least
two additional
<PAGE>
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry.
The reliability and quality of management are unquestioned. The relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated A1, A2, or A3.
Fitch IBCA, Inc. Fitch 1-Highest grade Commercial paper assigned this rating
is regarded as having the strongest degree of assurance for timely payment.
Fitch 2-Very good grade Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
All Summit Municipal Funds
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 IBCA, 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.
All Summit Income Funds and U.S. Bond Index Fund
RATINGS OF CORPORATE 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 know 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>
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-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of 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, B, CCC, CC, C-Bonds rated BB, B, CCC, CC, and C 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 C 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 IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to slight market fluctuation other than
through changes in the money rate. The prime feature of a "AAA" bond is the
showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase are often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
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.
<PAGE>
All Summit Municipal Funds
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 know as high-grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations.
Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of 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, B, CCC, CC, C-Bonds rated BB, B, CCC, CC, and C 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 C 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.
<PAGE>
Fitch IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to slight market fluctuation other than
through changes in the money rate. The prime feature of a "AAA" bond is the
showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase are often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
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 RATE SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Service, Inc. VMIG1/MIG-1 the best quality. VMIG2/MIG-2
high quality, with margins of protection ample though not so large as in the
preceding group. VMIG3/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. VMIG4/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 interest and principal. SP-3 speculative
capacity to pay principal and interest.
Fitch IBCA, 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.
<PAGE>
PART C
OTHER INFORMATION
ITEM 22. FINANCIAL STATEMENTS (TO BE FILED BY AMENDMENT)
A Statement of Assets and Liabilities, Statement of Operations, and Notes to
Financial Statements of Registrant as of ____________, 2000, appears in the
Statement of Additional Information. Such Statement has been examined by
PricewaterhouseCoopers LLP, 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.
ITEM 23. EXHIBITS
(a) Articles of Incorporation of Registrant, dated July 14, 2000
(b) By-Laws of Registrant
(c) Inapplicable
(d) Investment Management Agreement between Registrant and T. Rowe Price
Associates, Inc.
(e) Underwriting Agreement between Registrant and T. Rowe Price Investment
Services, Inc.
(f) Inapplicable
(g) Custody Agreements
(g)(i) Custodian Agreement between T. Rowe Price Funds and State Street Bank
and Trust Company, dated January 28, 1998, as amended November 4, 1998,
April 21, 1999, February 9, 2000, April 19, 2000, and July 18, 2000
(g)(ii) 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,
July 31, 1996, July 23, 1997, September 3, 1997, October 29, 1997,
December 15, 1998, October 6, 1999, and February 9, 2000 (to be filed
by Amendment)
<PAGE>
(h) Other Agreements
(h)(i) Transfer Agency and Service Agreement between T. Rowe Price Services,
Inc. and T. Rowe Price Funds, dated January 1, 2000, as amended
February 9, 2000, April 19, 2000, and July 18, 2000
(h)(ii) Agreement between T. Rowe Price Associates, Inc. and T. Rowe Price
Funds for Fund Accounting Services, dated January 1, 2000, as amended
February 9, 2000, April 19, 2000, and July 18, 2000
(h)(iii) Agreement between T. Rowe Price Retirement Plan Services, Inc. and the
Taxable Funds, dated January 1, 2000, as amended February 9, 2000,
April 19, 2000, and July 18, 2000
(i) Opinion of Counsel
(j) Consent of Independent Accountants
(k) Inapplicable
(l) To be filed by Amendment
(m) Inapplicable
(n) Inapplicable
(p) Code of Ethics, dated March 1, 2000
(q) Inapplicable
(r) Financial Data Schedule
(s) Inapplicable
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 25. INDEMNIFICATION
The Registrant maintains comprehensive Errors and Omissions and
Officers and Directors insurance policies written by the Evanston Insurance
Company and ICI Mutual. These policies provide coverage for T. Rowe Price
Associates, Inc. ("Manager"), and its subsidiaries and affiliates as listed in
Item 26 of this Registration Statement (with the exception of the T. Rowe Price
<PAGE>
Associates Foundation, Inc.), and all other investment companies in the T. Rowe
Price family of mutual funds. In addition to the corporate insureds, the
policies also cover the officers, directors, and employees of the Manager, its
subsidiaries, and affiliates. 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.
GENERAL. The Charter of the Corporation provides that to the fullest extent
permitted by Maryland or federal law, no director or officer of the Corporation
shall be personally liable to the Corporation or the holders of Shares for money
damages and each director and officer shall be indemnified by the Corporation;
PROVIDED, HOWEVER, that nothing therein shall be deemed to protect any director
or officer of the Corporation against any liability to the Corporation of the
holders of Shares to which such director or officer 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 or her office.
Article X, Section 10.01 of the Registrant's By-Laws provides as
follows:
SECTION 10.01. INDEMNIFICATION AND PAYMENT OF EXPENSES IN ADVANCE. The
Corporation shall indemnify any individual ("Indemnitee") who is a present or
former director, officer, employee, or agent of the Corporation, or who is or
has been serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, who, by reason of his position was, is, or is threatened to be
made, a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any judgments,
penalties, fines, settlements, and reasonable expenses (including attorneys'
fees) incurred by such Indemnitee in connection with any Proceeding, to the
fullest extent that such indemnification may be lawful under applicable Maryland
law, as from time to time amended. The Corporation shall pay any reasonable
expenses so incurred by such Indemnitee in defending a 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
<PAGE>
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office ("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other body before
whom the Proceeding was brought that the Indemnitee was not liable by
reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a reasonable determination,
based upon a review of the facts, that the Indemnitee was not liable by
reason of Disabling Conduct, which determination shall be made by:
(i) the vote of a majority of a quorum of directors who are neither
"interested persons" of the Corporation, as defined in Section 2(a)(19)
of the Investment Company Act of 1940, nor parties to the Proceeding;
or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking; or
(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.
<PAGE>
Section 10.02 of the Registrant's By-Laws provides as follows:
SECTION 10.02. INSURANCE OF OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS.
To the fullest extent permitted by applicable Maryland law and by Section 17(h)
of the Investment Company Act of 1940, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is or
was serving at the request of the Corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise, against any liability asserted against him and incurred by him in or
arising out of his position, whether or not the Corporation would have the power
to indemnify him against such liability.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
T. Rowe Price International, Inc. (formerly Rowe-Price Fleming
International, Inc.), a Maryland corporation, is a wholly owned subsidiary of T.
Rowe Price Associates, Inc. T. Rowe Price International, Inc. ("T. ROWE PRICE
INTERNATIONAL") was incorporated in Maryland in 2000 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,
T. Rowe Price International also sponsors registered investment companies which
invest in foreign securities, serves as general partner of T. Rowe Price
International Partners, Limited Partnership, and provides investment advice to
the T. Rowe Price Trust Company, trustee of the International Common Trust Fund.
<PAGE>
T. Rowe Price Investment Services, Inc. ("INVESTMENT SERVICES"), a
wholly owned subsidiary of T. Rowe Price Associates, Inc., was incorporated in
Maryland in 1980 for the specific purpose of acting as principal underwriter and
distributor for the Investment Companies which T. Rowe Price Associates, Inc.
sponsors and serves as investment adviser (the "PRICE FUNDS"). Investment
Services also serves as distributor for any proprietary variable annuity
products. 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 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 and T. Rowe Price Retirement Plan Services.
T. Rowe Price Associates Foundation, Inc. (the "FOUNDATION"), was
incorporated in 1981 (and is not a subsidiary of T. Rowe Price Associates,
Inc.). 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 T. Rowe Price Associates, Inc., 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 T. Rowe Price Associates, Inc., 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 T. Rowe Price Associates, Inc., is a Maryland-chartered
limited-service trust company, organized in 1983 for the purpose of providing
fiduciary services. The Trust Company serves as trustee and/or custodian of
certain qualified and non-qualified employee benefit plans, individual
retirement accounts, and common trust funds.
<PAGE>
T. Rowe Price Investment Technologies, Inc. was incorporated in
Maryland in 1996. A wholly owned subsidiary of T. Rowe Price Associates, Inc.,
it owns the technology rights, hardware, and software of T. Rowe Price
Associates, Inc. and affiliated companies and provides technology services to
them.
TRPH Corporation, a wholly owned subsidiary of T. Rowe Price
Associates, Inc., was organized in 1997 to acquire an interest in a UK-based
corporate finance advisory firm.
T. Rowe Price Threshold Fund Associates, Inc., a wholly owned
subsidiary of T. Rowe Price Associates, Inc., 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.
T. Rowe Price Threshold Fund III, L.P., a Delaware limited partnership,
was organized in 1994 by T. Rowe Price Associates, Inc. and invests in private
financings of small companies with high growth potential; Threshold Fund
Associates, Inc. is the General Partner of the partnership.
T. Rowe Price Stable Asset Management, Inc. ("STABLE ASSET
MANAGEMENT"), was incorporated in Maryland in 1988 as a wholly owned subsidiary
of T. Rowe Price Associates, Inc. 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 investment returns
through the use of guaranteed investment contracts, bank investment contracts,
structured investment contracts issued by insurance companies and banks, as well
as short-term fixed income securities.
T. Rowe Price Recovery Fund Associates, Inc., a Maryland corporation,
is a wholly owned subsidiary of T. Rowe Price Associates, Inc. organized in 1988
for the purpose of serving as General Partner of T. Rowe Price Recovery Fund,
L.P., a Delaware limited partnership which invests in financially distressed
companies.
T. Rowe Price Recovery Fund II Associates, L.L.C., is a Maryland
limited liability company (with T. Rowe Price Associates, Inc. and T. Rowe Price
Trust Company as its members) organized in 1996 to serve as 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 T. Rowe Price Associates, Inc.
This entity is registered as an investment adviser under the Investment Advisers
Act of 1940 as
<PAGE>
well as with the Ontario Securities Commission to provide advisory services to
individual and institutional clients residing in Canada.
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 a distributor of proprietary
variable annuity products.
Since 1983, T. Rowe Price Associates, Inc. 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 T. Rowe Price Associates, Inc. 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
T. Rowe Price Associates' 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 T. Rowe Price
Associates, Inc., 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. ("STRATEGIC PARTNERS
FUND") 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 T. Rowe Price
Strategic Partners Fund II, L.P. is T. Rowe Price Strategic Partners II, L.P., a
Delaware limited partnership whose general partner is T. Rowe Price Strategic
Partners Associates, Inc.
T. Rowe Fleming Asset Management Limited ("T. ROWE FLEMING"), an
English corporation, is an investment adviser under the Investment Advisers Act
of 1940. T. Rowe Fleming will provide investment management services to Japanese
investment trusts and other institutional investors in Japan pursuant to one or
more delegation agreements entered into between Daiwa SB Investments, Ltd. and
T. Rowe Fleming. T. Rowe Fleming is a corporate joint venture owned 50% by T.
Rowe Price Associates, Inc. and 50% by Robert Fleming Asset Management Limited,
a wholly-owned subsidiary
<PAGE>
of Robert Fleming Holdings Limited. Formerly known as Fleming International
Asset Management Limited ("FIAM"), the company changed its name to T. Rowe
Fleming Asset Management Limited on June 8, 1999, following the formation of the
joint venture.
Listed below are the directors, executive officers and managing
directors of T. Rowe Price Associates, Inc. who have other substantial
businesses, professions, vocations, or employment aside from their association
with T. Rowe Price Associates, Inc.:
DIRECTORS
JAMES E. HALBKAT, JR., Director of T. Rowe Price Associates, Inc. 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.
DONALD B. HEBB, JR., Director of T. Rowe Price Associates, Inc. Mr. Hebb is the
managing general partner of ABS Capital Partners. Mr. Hebb's address is One
South Street, 25th Floor, Baltimore, Maryland 21202.
RICHARD L. MENSCHEL, Director of T. Rowe Price Associates, Inc. Mr. Menschel is
a limited partner of The Goldman Sachs Group, L.P., an investment banking firm.
Mr. Menschel's address is: 85 Broad Street, 2nd Floor, New York, New York 10004.
ROBERT L. STRICKLAND, Director of T. Rowe Price Associates, Inc. Mr. Strickland
retired as Chairman of Lowe's Companies, Inc., a retailer of specialty home
supplies, as of January 31, 1998 and continues to serve as a Director. He is a
Director of Hannaford Bros., Co., a food retailer; and Krispy Kreme Doughnuts,
Inc. Mr. Strickland's address is: 2000 W. First Street, Suite 604,
Winston-Salem, North Carolina 27104.
PHILIP C. WALSH, Director of T. Rowe Price Associates, Inc. Mr. Walsh is a
retired mining industry executive. Mr. Walsh's address is: Pleasant Valley,
Peapack, New Jersey 07977.
ANNE MARIE WHITTEMORE, Director of T. Rowe Price Associates, Inc. Mrs.
Whittemore is a partner of the law firm of McGuire, Woods, Battle & Boothe
L.L.P. and a Director of Owens & Minor, Inc.; Fort James Corporation; and
Albemarle Corporation. Mrs. Whittemore's address is: One James Center, Richmond,
Virginia 23219.
All of the following directors of T. Rowe Price Associates, Inc. are employees
of T. Rowe Price Associates, Inc.
EDWARD C. BERNARD, Director and Managing Director of T. Rowe Price Associates,
Inc.; Director and President of T. Rowe Price Insurance Agency, Inc. and T. Rowe
Price Investment Services,
<PAGE>
Inc.; Director of T. Rowe Price Services, Inc.; Vice President of TRP
Distribution, Inc.
HENRY H. HOPKINS, Director and Managing Director of T. Rowe Price Associates,
Inc.; Director of T. Rowe Price Insurance Agency, Inc.; Vice President and
Director of T. Rowe Price (Canada), Inc., T. Rowe Price Investment Services,
Inc., T. Rowe Price Services, Inc., T. Rowe Price Threshold Fund Associates,
Inc., T. Rowe Price Trust Company, TRP Distribution, Inc., and TRPH Corporation;
Director of T. Rowe Price Insurance Agency, Inc.; Vice President of T. Rowe
Price International, T. Rowe Price Real Estate Group, Inc., T. Rowe Price
Retirement Plan Services, Inc., T. Rowe Price Stable Asset Management, Inc., and
T. Rowe Price Strategic Partners Associates, Inc.
JAMES A.C. KENNEDY, Director and Managing Director of T. Rowe Price Associates,
Inc.; President and Director of T. Rowe Price Strategic Partners Associates,
Inc.; Director and Vice President of T. Rowe Price Threshold Fund Associates,
Inc.
JOHN H. LAPORTE, JR., Director and Managing Director of T. Rowe Price
Associates, Inc.
WILLIAM T. REYNOLDS, Director and Managing Director of T. Rowe Price Associates,
Inc.; Chairman of the Board of T. Rowe Price Stable Asset Management, Inc.;
Director of TRP Finance, Inc.
JAMES S. RIEPE, Vice-Chairman of the Board, Director, and Managing Director of
T. Rowe Price Associates, Inc.; Chairman of the Board and President of T. Rowe
Price Trust Company; Chairman of the Board of T. Rowe Price (Canada), Inc., T.
Rowe Price Investment Services, Inc., T. Rowe Price Investment Technologies,
Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Services,
Inc.; Director of T. Rowe Price International, T. Rowe Price Insurance Agency,
Inc., and TRPH Corporation; Director and President of TRP Distribution, Inc.,
TRP Suburban Second, Inc., and TRP Suburban, Inc.; and Director and Vice
President of T. Rowe Price Stable Asset Management, Inc.
GEORGE A. ROCHE, Chairman of the Board, President, and Managing Director of T.
Rowe Price Associates, Inc.; Chairman of the Board of TRP Finance, Inc.;
Director of T. Rowe Price International, T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Strategic Partners, Inc., and Director and Vice
President of T. Rowe Price Threshold Fund Associates, Inc., TRP Suburban Second,
Inc., and TRP Suburban, Inc.
BRIAN C. ROGERS, Director and Managing Director of T. Rowe Price Associates,
Inc.; Vice President of T. Rowe Price Trust Company.
<PAGE>
M. DAVID TESTA, Vice-Chairman of the Board, Director, Chief Investment Officer,
and Managing Director of T. Rowe Price Associates, Inc.; Director, T. Rowe Price
International; President and Director of T. Rowe Price (Canada), Inc.; Director
and Vice President of T. Rowe Price Trust Company; and Director of TRPH
Corporation.
MARTIN G. WADE, Director of T. Rowe Price Associates, Inc.; Chairman, T. Rowe
Price International.
ADDITIONAL EXECUTIVE OFFICERS
MICHAEL A. GOFF, Managing Director of T. Rowe Price Associates, Inc.; Director
and the President of T. Rowe Price Investment Technologies, Inc.
CHARLES E. VIETH, Managing Director of T. Rowe Price Associates, Inc.; Director
and President of T. Rowe Price Retirement Plan Services, Inc.; Director and Vice
President of T. Rowe Price Investment Services, Inc. and T. Rowe Price Services,
Inc.; Vice President of T. Rowe Price (Canada), Inc., T. Rowe Price Trust
Company, and TRP Distribution, Inc.
ADDITIONAL MANAGING DIRECTORS
PRESTON G. ATHEY, Managing Director of T. Rowe Price Associates, Inc.
BRIAN W.H. BERGHUIS, Managing Director of T. Rowe Price Associates, Inc.
STEPHEN W. BOESEL, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price Trust Company.
JOHN H. CAMMACK, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price Investment Services, Inc. and T. Rowe Price Trust
Company.
GREGORY A. McCRICKARD, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price Trust Company.
MARY J. MILLER, Managing Director of T. Rowe Price Associates, Inc.
CHARLES A. MORRIS, Managing Director of T. Rowe Price Associates, Inc.
NANCY M. MORRIS, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price International, T. Rowe Price Investment Services,
Inc., and T. Rowe Price Stable Asset Management, Inc.; Director and Vice
President of T. Rowe Price Savings Bank and T. Rowe Price Trust Company.
<PAGE>
GEORGE A. MURNAGHAN, Managing Director of T. Rowe Price Associates, Inc.;
Executive Vice President of T. Rowe Price International; Vice President of T.
Rowe Price Investment Services, Inc. and T. Rowe Price Trust Company.
MARIA NALYWAYKO, Managing Director of T. Rowe Price Associates, Inc.
EDMUND M. NOTZON III, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price Trust Company.
WAYNE D. O'MELIA, Managing Director of T. Rowe Price Associates, Inc.; Director
and President of T. Rowe Price Services, Inc.; Vice President of T. Rowe Price
Trust Company.
LARRY J. PUGLIA, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price (Canada), Inc.
JOHN R. ROCKWELL, Managing Director of T. Rowe Price Associates, Inc.; Director
and Senior Vice President of T. Rowe Price Retirement Plan Services, Inc.;
Director and Vice President of T. Rowe Price Stable Asset Management, Inc. and
T. Rowe Price Trust Company; Vice President of T. Rowe Price Investment
Services, Inc.
R. TODD RUPPERT, Managing Director of T. Rowe Price Associates, Inc.; President
and Director of TRPH Corporation; Vice President of T. Rowe Price Retirement
Plan Services, Inc. and T. Rowe Price Trust Company.
ROBERT W. SMITH, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price International.
WILLIAM J. STROMBERG, Managing Director of T. Rowe Price Associates, Inc.
MARK J. VASELKIV, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price Recovery Fund Associates, Inc. and T. Rowe Price
Recovery Fund II Associates, L.L.C.
RICHARD T. WHITNEY, Managing Director of T. Rowe Price Associates, Inc.; Vice
President of T. Rowe Price International and T. Rowe Price Trust Company.
Certain directors and officers of T. Rowe Price Associates, Inc. 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.
<PAGE>
See also "Management of Fund," in Registrant's Statement of Additional
Information.
ITEM 27. PRINCIPAL UNDERWRITERS
a) The principal underwriter for the Registrant is Investment Services.
Investment Services acts as the principal underwriter for the T. Rowe
Price family of mutual funds, including the following investment
companies: 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 Price GNMA Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe
Price California Tax-Free Income Trust, T. Rowe Price State 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 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., T. Rowe Price Financial Services Fund, Inc., T. Rowe Price
Diversified Small-Cap Growth Fund, Inc., T. Rowe Price Tax-Efficient
Funds, Inc., Reserve Investment Funds, Inc., T. Rowe Price Media &
Telecommunications Fund, Inc., T. Rowe Price Real Estate Fund, Inc., T.
Rowe Price Developing Technologies Fund, Inc., and T. Rowe Price Global
Technology Fund, Inc.
<PAGE>
Investment Services is a wholly owned subsidiary of T. Rowe Price
Associates, Inc., 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
commissions 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.
<TABLE>
<CAPTION>
NAME POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
UNDERWRITER REGISTRANT
<C> <S> <S>
James S. Riepe Chairman of the Board Director
and Director
Edward C. Bernard President and Director None
Henry H. Hopkins Vice President and Director Vice President
Charles E. Vieth Vice President and Director None
Patricia M. Archer Vice President None
Steven J. Banks Vice President None
John T. Bielski Vice President None
Darrell N. Braman Vice President None
Ronae M. Brock Vice President None
Meredith C. Callanan Vice President None
John H. Cammack Vice President None
Ann R. Campbell Vice President None
Christine M. Carolan Vice President None
Joseph A. Carrier Vice President None
Laura H. Chasney Vice President None
Renee M. Christoff Vice President None
Christopher W. Dyer Vice President None
Christine S. Fahlund Vice President None
Forrest R. Foss Vice President None
Thomas A. Gannon Vice President None
Andrea G. Griffin Vice President None
Douglas E. Harrison Vice President None
David J. Healy Vice President None
Joanne M. Healey Vice President None
Joseph P. Healy Vice President None
Walter J. Helmlinger Vice President None
Valerie King-Calloway Vice President None
Eric G. Knauss Vice President None
Sharon R. Krieger Vice President None
Steven A. Larson Vice President None
Jeanette M. LeBlanc Vice President None
Keith W. Lewis Vice President None
Gayle A. Lomax Vice President None
Sarah McCafferty Vice President None
Mark J. Mitchell 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
Barbara A. O'Connor Vice President None
Wayne D. O'Melia Vice President None
David Oestreicher Vice President None
Robert Petrow Vice President None
Pamela D. Preston Vice President None
George D. Riedel Vice President None
John R. Rockwell Vice President None
Kenneth J. Rutherford Vice President None
Alexander Savich Vice President None
Kristin E. Seeberger Vice President None
Donna B. Singer Vice President None
Bruce D. Stewart Vice President None
William W. Strickland, Jr. Vice President None
Jerome Tuccille Vice President None
Walter Wdowiak Vice President None
William F. Wendler II Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Barbara A. O'Connor Controller None
Theodore J. Zamerski III Assistant Vice President and None
Assistant Controller
Matthew B. Alsted Assistant Vice President None
Kimberly B. Andersen Assistant Vice President None
Richard J. Barna Assistant Vice President None
Catherine L.Berkenkemper Assistant Vice President None
Edwin J. Brooks III Assistant Vice President None
Carl A. Cox Assistant Vice President None
Charles R. Dicken Assistant Vice President None
Cheryl L. Emory Assistant Vice President None
John A. Galateria Assistant Vice President None
Jason L. Gounaris Assistant Vice President None
Janelyn A. Healey Assistant Vice President None
Sandra J. Kiefler Assistant Vice President None
Suzanne M. Knoll Assistant Vice President None
Patricia B. Lippert Assistant Vice President Secretary
Teresa M. Loeffert Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Janice D. McCrory Assistant Vice President None
Danielle Nicholson Smith Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Kylelane Purcell Assistant Vice President None
David A. Roscum Assistant Vice President None
Matthew A. Scher Assistant Vice President None
Carole H. Smith Assistant Vice President None
John A. Stranovsky Assistant Vice President None
Nolan L. North Assistant Treasurer None
Barbara A. Van Horn Secretary None
</TABLE>
<PAGE>
<PAGE>
(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 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained by the
Registrant under Section 31(a) of the Investment Company Act of 1940 and the
rules thereunder will be maintained by the Registrant 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
4515 Painters Mill Road, Owings Mills, Maryland 21117. Custodian activities for
the Registrant are performed at State Street Bank and Trust Company's Service
Center (State Street South), 1776 Heritage Drive, Quincy, Massachusetts 02171.
Custody of Registrant's portfolio securities which are purchased
outside the United States is maintained by The Chase Manhattan Bank, N.A.,
London, in its foreign branches or with other U.S. banks. The Chase Manhattan
Bank, N.A., London, is located at Woolgate House, Coleman Street, London EC2P
2HD England.
ITEM 29. MANAGEMENT SERVICES
Registrant is not a party to any management-related service contract,
other than as set forth in the Prospectus or Statement of Additional
Information.
ITEM 30. UNDERTAKINGS
(a) Not applicable
<PAGE>
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, duly authorized, in the City of Baltimore, State of Maryland, this
September 1, 2000.
T. Rowe Price U.S. Bond Index Fund, Inc.
/s/William T. Reynolds
By: William T. Reynolds
Chairman of the Board
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/William T. Reynolds Chairman of the Board September 1, 2000
William T. Reynolds (Chief Executive Officer)
/s/Joseph A. Carrier Treasurer (Chief September 1, 2000
Joseph A. Carrier Financial Officer)
/s/Calvin W. Burnett Director September 1, 2000
Calvin W. Burnett
/s/Anthony W. Deering Director September 1, 2000
Anthony W. Deering
/s/James S. Riepe Director and September 1, 2000
James S. Riepe Vice President
/s/John G. Schreiber Director September 1, 2000
John G. Schreiber
/s/M. David Testa Director September 1, 2000
M. David Testa
