<PAGE>
PAGE 1
Coregistrants filing on behalf of:
Registration Nos. 002-67029/811-3055
Registration Nos. 002-87059/811-3872
Registration Nos. 033-49117/811-7051
Registration Nos. 002-57265/811-2684
Registration Nos. 002-94641/811-4163
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 33 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/
Amendment No. 22 /X/
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
-----------------------------------------
Exact Name of Registrant as Specified in Charter
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 26 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/
Amendment No. 20 /X/
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
----------------------------------------------------
Exact Name of Registrant as Specified in Charter
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 8 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/
Amendment No. 8 /X/
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
-----------------------------------------------------------
Exact Name of Registrant as Specified in Charter
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 44 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/
Amendment No. 24 /X/
<PAGE>
PAGE 2
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
----------------------------------------
Exact Name of Registrant as Specified in Charter
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 20 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940/X/
Amendment No. 18 /X/
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
--------------------------------------------
Exact Name of Registrant as Specified in Charter
Fiscal Year Ended February 28, 1998
-----------------------------------
100 East Pratt Street, Baltimore, Maryland 21202
------------------------------------------ -----
Address of Principal Executive Offices Zip Code
410-345-2000
------------
Registrant's Telephone Number, Including Area Code
Henry H. Hopkins
100 East Pratt Street, Baltimore, Maryland 21202
------------------------------------------------
Name and Address of Agent for Service
Approximate Date of Proposed Public Offering July 1, 1998
------------
It is proposed that this filing will become effective (check appropriate
box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on July 1, 1998, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
/ /
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: COMMON STOCK
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
<PAGE>
PAGE 3
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.
The Registration Statement of the T. Rowe Price Tax-Exempt Money Fund, T.
Rowe Price Tax-Free Short-Intermediate Fund, T. Rowe Price Tax-Free Insured
Intermediate Bond Fund, T. Rowe Price Tax-Free Income Fund, and T. Rowe Price
Tax-Free High Yield Fund, hereinafter referred to collectively as the
"Coregistrants," on Form N-1A (File Nos. 002-67029/811-3055, 002-87059/811-3872,
033-49117/811-7051, 002-57265/811-2684, 002-94641/811-4163) is hereby amended
under the Securities Act of 1933 to update the Coregistrants' financial
statements, make other changes in the Coregistrants' Prospectus and Statement of
Additional Information, and to satisfy the annual amendment requirements of Rule
8b-16 under the Investment Company Act of 1940.
This Amendment consists of the following:
Cross Reference Sheet
Part A of Form N-1A, Revised Prospectus
Part B of Form N-1A, Statement of Additional Information
Part C of Form N-1A, Other Information
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET
N-1A ITEM NO. LOCATION
<S> <C> <C>
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Transaction and Fund Expenses
Item 3. Condensed Financial +
Information
Item 4. General Description of About the Fund; Fund, Market, and Risk
Coregistrant Characteristics: What to Expect;
Understanding Fund Performance;
Investment Policies and Practices
Item 5. Management of the Fund Transaction and Fund Expenses;
Organization and Management
Item 6. Capital Stock and Other Useful Information on Distributions and
Securities Taxes; Organization and Management
Item 7. Purchase of Securities Being Pricing Shares and Receiving Sale
Offered Proceeds; Transaction Procedures and
Special Requirements; Account
Requirements and Transaction
Information; Shareholder Services
Item 8. Redemption or Repurchase Pricing Shares and Receiving Sale
Proceeds; Transaction Procedures and
Special Requirements; Shareholder
Services
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and +
History
Item 13. Investment Objectives and Investment Objectives and Policies;
Policies Risk Factors; Investment Program;
Investment Restrictions; Investment
Performance
Item 14. Management of the Management of Fund
Coregistrant
Item 15. Control Persons and Principal Holders of Securities
Principal Holders of
Securities
Item 16. Investment Advisory and Investment Management Services;
Other Services Custodian; Independent Accountants;
Legal Counsel
Item 17. Brokerage Allocation Portfolio Transactions; Code of Ethics
Item 18. Capital Stock and Other Dividends and Distributions; Capital
Securities Stock
Item 19. Purchase, Redemption and Pricing of Securities; Net Asset Value
Pricing of Securities Being Per Share; Redemptions in Kind; Federal
Offered Registration of Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for the Fund
Item 22. Calculation of Yield Yield Information
Quotations of Money Market
Funds
Item 23. Financial Statements +
</TABLE>
<PAGE>
PAGE 4
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement
___________________________________
+ Not applicable or negative answer
<PAGE>
PAGE 5
<PAGE>
PROSPECTUS
July 1, 1998
Tax-Free Funds
A family of municipal bond and money funds for investors seeking income that is
exempt from federal income taxes.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Tax-Free Funds
Investment Goal
The highest possible levels of income exempt from federal income taxes,
consistent with each fund's investment program.
As with all mutual funds, these funds may not meet their goals.
Strategy and Risk/Reward
Tax-Exempt Money Fund/(R)/ Invests in high-quality, short-term municipal
securities; its average maturity will not exceed 90 days. YOUR INVESTMENT IN
THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE IS
NO ASSURANCE THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
Risk/Reward Lowest.
Tax-Free Short-Intermediate Fund/(R)/ Invests primarily in short- and
intermediate-term investment-grade municipal bonds. The fund's average maturity
range is 2-5 years.
Risk/Reward Moderate income level and share price fluctuation.
Tax-Free Insured Intermediate Bond Fund Invests primarily in intermediate-term
municipal bonds whose interest and principal payments are insured by private
insurance companies. Insurance does not apply to the fund's share price, which
will fluctuate. The fund's average maturity range is 5-10 years.
Risk/Reward Somewhat higher income and potential share price fluctuations than
the Short-Intermediate Fund. (See discussion on insurance in the section
entitled Types of Portfolio Securities.)
Tax-Free Income Fund/(R)/ Invests primarily in longer-term, investment-grade
municipal bonds. The fund's average maturity is expected to exceed 15 years.
Risk/Reward Higher income and potential share price fluctuation than the
shorter-term funds.
Tax-Free High Yield Fund/(R)/ CAN INVEST ENTIRELY IN LOWER-QUALITY, LONG-TERM
MUNICIPAL BONDS OFTEN CALLED HIGH-YIELD OR "JUNK" BONDS. THESE BONDS REPRESENT
GREATER DEFAULT RISK THAN HIGHER-RATED BONDS. BEFORE INVESTING, YOU SHOULD
CAREFULLY CONSIDER THE GREATER RISKS OF JUNK BONDS AS EXPLAINED IN INVESTMENT
POLICIES AND PRACTICES. The fund's average maturity is expected to exceed 15
years.
Risk/Reward Highest income, greatest credit risk, and highest potential share
price volatility.
Investor Profile
Investors whose income tax level enables them to benefit from tax-exempt
income. Not appropriate for tax-deferred retirement plans, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $139 billion,
including over $7.1 billion in municipal bond assets, for more than six
million individual and institutional investor accounts as of March 31, 1998.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUNDS
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 4
---------------------------------------------
Fund, Market, and Risk Characteristics 8
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 16
Sale Proceeds
---------------------------------------------
Distributions and Taxes 17
---------------------------------------------
Transaction Procedures and 20
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUNDS
Organization and Management 23
---------------------------------------------
Understanding Performance Information 26
---------------------------------------------
Investment Policies and Practices 27
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 38
and Transaction Information
---------------------------------------------
Opening a New Account 38
---------------------------------------------
Purchasing Additional Shares 39
---------------------------------------------
Exchanging and Redeeming 40
---------------------------------------------
Rights Reserved by the Funds 41
---------------------------------------------
Shareholder Services 42
---------------------------------------------
Discount Brokerage 44
---------------------------------------------
Investment Information 45
---------------------------------------------
</TABLE>
T. Rowe Price Tax-Free Funds
Prospectus
July 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated July 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
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 agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUNDS 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, these funds are 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in a fund goes to work for you, subject to
the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate each fund for a year, based on 1998 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from each fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
Shareholder Transaction Expenses
Short-IntermedInsured
Money Intermediate Income High Yield
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales charge "load" on None None None None None
purchases
------------------------------------------------------------
Sales charge "load" on None None None None None
reinvested distributions
------------------------------------------------------------
Redemption fees None None None None None
------------------------------------------------------------
Exchange fees None None None None None
Percentage of Fiscal 1998 Average Net Assets
Annual Fund Expenses
Management fee 0.42% 0.42% 0.38% 0.47% 0.62%
/a/
------------------------------------------------------------
Marketing fees (12b-1) None None None None None
------------------------------------------------------------
Total other (shareholder
servicing, custodial, auditing, 0.10% 0.12% 0.27% 0.08% 0.10%
etc.)
------------------------------------------------------------
Total fund expenses 0.52% 0.54% 0.65% 0.55% 0.72%
/a/
----------------------------------------------------------------------------------------------------
</TABLE>
/a/To limit the Insured Intermediate Fund's expenses, T. Rowe Price agreed to
waive its fees and bear any expenses from March 1, 1994 through February 29,
1996, which would cause the fund's ratio of expenses to average net assets to
exceed 0.65%. Effective March 1, 1996, T. Rowe Price agreed to extend this
expense limitation of 0.65% for a period of two years through February 28,
1998. Fees waived or expenses paid or assumed under these agreements are
subject to reimbursement to T. Rowe Price by the fund whenever the fund's
expense ratio is below 0.65%. However, no reimbursement will be made after
February 28, 1998 (for the first agreement), or February 29, 2000 (for the
second agreement), or if it would result in the expense ratio exceeding
0.65%. Any amounts reimbursed will have the effect of increasing fees
otherwise paid by the fund.
Note:A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
<PAGE>
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. Each fund's fee comprises both a group fee, described later, and an
individual fund fee, as follows: Money 0.10%; Short-Intermediate 0.10%;
Insured Intermediate 0.05%; Income 0.15%; and High Yield 0.30%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
Fund 1 year 3 years 5 years 10 years
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Money $5 $17 $29 $65
---------------------------------------
Short-Intermediate 6 17 30 68
---------------------------------------
Insured Intermediate 7 21 36 81
---------------------------------------
Income 6 18 31 69
---------------------------------------
High Yield 7 23 40 89
-------------------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the fund's financial statements, which are
included in its annual report and are legally regarded as part of the
Statement of Additional Information (available upon request). The financial
statements in the annual report were audited by Coopers & Lybrand L.L.P., the
funds' independent accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Net Asset Net Net Realized
Value, Investment and Unrealized Total From Net Net
Period Beginning Income Gain (Loss) on Investment Investment Realized Total Net Asset Value,
Ended of Period (Loss) Investments Activities Income Gain Distributions End of Period
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money Fund
1989 $ 1.000 $0.050 - $0.050 $(0.050) - $(0.050) $ 1.000
------------------------------------------------------------------------------------------------------------
1990 1.000 0.057 - 0.057 (0.057) - (0.057) 1.000
------------------------------------------------------------------------------------------------------------
1991 1.000 0.051 - 0.051 (0.051) - (0.051) 1.000
------------------------------------------------------------------------------------------------------------
1992/ //d/ 1.000 0.036 - 0.036 (0.036) - (0.036) 1.000
------------------------------------------------------------------------------------------------------------
1993 1.000 0.023 - 0.023 (0.023) - (0.023) 1.000
------------------------------------------------------------------------------------------------------------
1994 1.000 0.020 - 0.020 (0.020) - (0.020) 1.000
------------------------------------------------------------------------------------------------------------
1995 1.000 0.026 - 0.026 (0.026) - (0.026) 1.000
------------------------------------------------------------------------------------------------------------
1996/ //d/ 1.000 0.033 - 0.033 (0.033) - (0.033) 1.000
------------------------------------------------------------------------------------------------------------
1997 1.000 0.030 - 0.030 (0.030) - (0.030) 1.000
------------------------------------------------------------------------------------------------------------
1998 1.000 0.032 - 0.032 (0.032) - (0.032) 1.000
Tax-Free Short-Intermediate Fund
1989 $ 5.15 $0.28 $(0.12) $0.16 $(0.28) - $(0.28) $ 5.03
------------------------------------------------------------------------------------------------------------
1990 5.03 0.30 0.06 0.36 (0.30) - (0.30) 5.09
------------------------------------------------------------------------------------------------------------
1991 5.09 0.29 0.06 0.35 (0.29) - (0.29) 5.15
------------------------------------------------------------------------------------------------------------
1992/ //d/ 5.15 0.28 0.07 0.35 (0.28) - (0.28) 5.22
------------------------------------------------------------------------------------------------------------
1993 5.22 0.24 0.14 0.38 (0.24) - (0.24) 5.36
------------------------------------------------------------------------------------------------------------
1994 5.36 0.22 (0.04) 0.18 (0.22) - (0.22) 5.32
------------------------------------------------------------------------------------------------------------
1995 5.32 0.22 (0.07) 0.15 (0.22) - (0.22) 5.25
------------------------------------------------------------------------------------------------------------
1996/ //d/ 5.25 0.23 0.12 0.35 (0.23) - (0.23) 5.37
------------------------------------------------------------------------------------------------------------
1997 5.37 0.23 (0.02) 0.21 (0.23) - (0.23) 5.35
------------------------------------------------------------------------------------------------------------
1998 5.35 0.22 0.05 0.27 (0.22) .03) (0.25) 5.37
------------------------------------------------------------------------------------------------------------------------------
(continued on next page)
Footnotes appear at end of table.
Tax-Free Insured Intermediate Bond Fund
1993/ //a/ $10.00 $0.13/b/ $ 0.55 $0.68 .13) - $(0.13) $10.55
------------------------------------------------------------------------------------------------------------
1994 10.55 0.48/b/ 0.09 0.57 .48) $(0.06 ) (0.54) 10.58
------------------------------------------------------------------------------------------------------------
1995 10.58 0.46/b/ (0.20) 0.26 .46) (0.03 ) (0.49) 10.35
------------------------------------------------------------------------------------------------------------
1996/ //d/ 10.35 0.48/b/ 0.49 0.97 .48) - (0.48) 10.84
------------------------------------------------------------------------------------------------------------
1997 10.84 0.48/b/ (0.04) 0.44 .48) - (0.48) 10.80
------------------------------------------------------------------------------------------------------------
1998 10.80 0.48/b/ 0.29 0.77 .48) ) (0.51) 11.06
Tax-Free Income Fund
1989 8.81 0.59 (0.24) 0.35 (0.59) - (0.59) 8.57
------------------------------------------------------------------------------------------------------------
1990 8.57 0.59 0.09 0.68 (0.59) - (0.59) 8.66
------------------------------------------------------------------------------------------------------------
1991 8.66 0.57 0.13 0.70 (0.57) - (0.57) 8.79
------------------------------------------------------------------------------------------------------------
1992 /d/ 8.79 0.57 0.30 0.87 (0.57) - (0.57) 9.09
------------------------------------------------------------------------------------------------------------
1993 9.09 0.56 0.75 1.31 (0.56) - (0.56) 9.84
------------------------------------------------------------------------------------------------------------
1994 9.84 0.54 - 0.54 (0.54) (0.18 ) (0.72) 9.66
------------------------------------------------------------------------------------------------------------
1995 9.66 0.53 (0.37) 0.16 (0.53) (0.04 ) (0.57) 9.25
------------------------------------------------------------------------------------------------------------
1996 /d/ 9.25 0.52 0.41 0.93 (0.52) - (0.52) 9.66
------------------------------------------------------------------------------------------------------------
1997 9.66 0.52 (0.07) 0.45 (0.52) - (0.52) 9.59
1998 9.59 0.52 0.36 0.88 (0.52) - (0.52) 9.95
Tax-Free High Yield Fund
1989 $11.19 $0.83 $ 0.06 $0.89 $(0.83) $(0.83) $11.25
------------------------------------------------------------------------------------------------------------
1990 11.25 0.84 0.20 1.04 (0.84) (0.06 ) (0.90) 11.39
------------------------------------------------------------------------------------------------------------
1991 11.39 0.83 0.04 0.87 (0.83) (0.03 ) (0.86) 11.40
------------------------------------------------------------------------------------------------------------
1992/ //d/ 11.40 0.81 0.35 1.16 (0.81) (0.10 ) (0.91) 11.65
------------------------------------------------------------------------------------------------------------
1993 11.65 0.78 0.78 1.56 (0.78) (0.10 ) (0.88) 12.33
------------------------------------------------------------------------------------------------------------
1994 12.33 0.74 0.16 0.90 (0.74) (0.23 ) (0.97) 12.26
------------------------------------------------------------------------------------------------------------
1995 12.26 0.73 (0.60) 0.13 (0.73) (0.04 ) (0.77) 11.62
------------------------------------------------------------------------------------------------------------
1996/ //d/ 11.62 0.72 0.48 1.20 (0.72) - (0.72) 12.10
------------------------------------------------------------------------------------------------------------
1997 12.10 0.70 0.02 0.72 (0.70) - (0.70) 12.12
------------------------------------------------------------------------------------------------------------
1998 12.12 0.69 0.54 1.23 .69) - (0.69) 12.66
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Footnotes appear at end of table. (continued on next page)
<PAGE>
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Total Return Ratio of
Period (Includes Reinvested Net Assets Ratio of Expenses Net Investment Income Portfolio
Ended Distributions) ($ thousands) to Average Net Assets to Average Net Assets Turnover Rate
-------------
<S> <C> <C> <C> <C> <C> <C>
Tax-Exempt Money Fund
1989 5.08% $1,157,246 0.60% 4.97% -
---------------------------------------------------------------------------------------------------
1990 5.87 1,064,141 0.60 5.75 -
---------------------------------------------------------------------------------------------------
1991 5.22 977,638 0.60 5.12 -
---------------------------------------------------------------------------------------------------
1992/ //d/ 3.69 801,846 0.61 3.65 -
---------------------------------------------------------------------------------------------------
1993 2.36 695,699 0.60 2.35 -
---------------------------------------------------------------------------------------------------
1994 2.05 732,900 0.59 2.04 -
---------------------------------------------------------------------------------------------------
1995 2.63 687,022 0.58 2.59 -
---------------------------------------------------------------------------------------------------
1996/ //d/ 3.38 679,143 0.56 3.33 -
---------------------------------------------------------------------------------------------------
1997 3.05 678,135 0.55 3.00 -
---------------------------------------------------------------------------------------------------
1998 3.24 740,757 0.52 3.20 -
Tax-Free Short-Intermediate Fund
1989 3.14% $ 249,489 0.74% 5.46% 53.4%
---------------------------------------------------------------------------------------------------
1990 7.36 223,180 0.75 5.93 190.8
---------------------------------------------------------------------------------------------------
1991 7.06 232,923 0.74 5.67 190.1
---------------------------------------------------------------------------------------------------
1992/ //d/ 6.94 328,312 0.67 5.34 81.3
---------------------------------------------------------------------------------------------------
1993 7.51 454,162 0.63 4.61 38.5
---------------------------------------------------------------------------------------------------
1994 3.49 540,728 0.60 4.18 51.1
---------------------------------------------------------------------------------------------------
1995 2.91 454,084 0.59 4.19 93.1
---------------------------------------------------------------------------------------------------
1996/ //d/ 6.87 445,228 0.57 4.39 69.9
---------------------------------------------------------------------------------------------------
1997 4.02 443,631 0.56 4.30 84.3
---------------------------------------------------------------------------------------------------
1998 5.28 438,951 0.54 4.23 76.8
Tax-Free Insured Intermediate Bond Fund
1993/ //a/ 6.81%/b/ $ 37,960 -/bc/ 5.08%/bc/ 65.3%/c/
---------------------------------------------------------------------------------------------------
1994 5.49/b/ 99,162 0.33%/b/ 4.45/b/ 74.8
---------------------------------------------------------------------------------------------------
1995 2.65/b/ 83,517 0.65/b/ 4.53/b/ 170.8
---------------------------------------------------------------------------------------------------
1996/ //d/ 9.57/b/ 92,153 0.65/b/ 4.52/b/ 63.8
---------------------------------------------------------------------------------------------------
1997 4.19/b/ 99,176 0.65/b/ 4.47/b/ 76.8
---------------------------------------------------------------------------------------------------
1998 7.31/b/ 108,256 0.65/b/ 4.43/b/ 56.1
---------------------------------------------------------------------------------------------------------------------
(continued on next page)
Footnotes appear at end of table.
Tax-Free Income Fund
1989 4.11% $1,023,204 0.66% 6.81% 115.9%
---------------------------------------------------------------------------------------------------
1990 8.15 1,123,143 0.64 6.80 140.5
---------------------------------------------------------------------------------------------------
1991 8.40 1,128,635 0.63 6.59 79.7
---------------------------------------------------------------------------------------------------
1992/ //d/ 10.17 1,245,297 0.62 6.34 57.9
---------------------------------------------------------------------------------------------------
1993 14.88 1,441,646 0.61 5.98 76.7
---------------------------------------------------------------------------------------------------
1994 5.50 1,452,581 0.59 5.40 71.2
---------------------------------------------------------------------------------------------------
1995 1.90 1,328,675 0.59 5.80 49.3
---------------------------------------------------------------------------------------------------
1996/ //d/ 10.31 1,375,507 0.58 5.49 48.7
---------------------------------------------------------------------------------------------------
1997 4.81 1,336,626 0.57 5.41 40.7
---------------------------------------------------------------------------------------------------
1998 9.37 1,396,288 0.55 5.31 36.3
Tax-Free High Yield Fund
1989 8.27% $ 331,329 0.92% 7.45% 61.8%
---------------------------------------------------------------------------------------------------
1990 9.54 443,372 0.88 7.38 72.4
---------------------------------------------------------------------------------------------------
1991 7.93 505,025 0.85 7.30 51.2
---------------------------------------------------------------------------------------------------
1992/ //d/ 10.56 623,877 0.83 7.01 51.0
---------------------------------------------------------------------------------------------------
1993 13.94 853,185 0.81 6.58 34.7
---------------------------------------------------------------------------------------------------
1994 7.49 941,295 0.79 5.95 59.3
---------------------------------------------------------------------------------------------------
1995 1.26 873,546 0.79 6.29 59.6
---------------------------------------------------------------------------------------------------
1996/ //d/ 10.62 989,534 0.75 6.07 39.3
---------------------------------------------------------------------------------------------------
1997 6.22 1,053,106 0.74 5.86 37.0
---------------------------------------------------------------------------------------------------
1998 10.42 1,241,990 0.72 5.59 24.4
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
a For the period November 30, 1992 (commencement of operations) to February 28,
1993.
b T. Rowe Price voluntarily agreed to bear all expenses of the fund through
June 30, 1993. Excludes expenses in excess of a 0.20% voluntary expense
limitation in effect July 1, 1993 through July 31, 1993; a 0.30% voluntary
expense limitation in effect August 1, 1993 through August 31, 1993; a 0.40%
voluntary expense limitation in effect September 1, 1993 through September
30, 1993; a 0.50% voluntary expense limitation in effect October 1, 1993
through February 28, 1994; and a 0.65% voluntary expense limitation in effect
March 1, 1994 through February 28, 1998.
c Annualized.
d Year ended February 29.
<PAGE>
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether these funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.
<TABLE>
Table 4 Differences Among Funds
<CAPTION>
Expected Share Expected Average
Fund Credit-Quality Categories Income Price Fluctuation Maturity
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Two highest Low Stable 90 days or less
-----------------------------------------------------------------------------------
Short-Intermediate Predominately four highest Low to moderate Low to moderate 2 to 5 years
-----------------------------------------------------------------------------------
Insured-Intermediate Two highest Moderate Moderate 5 to 10 years
-----------------------------------------------------------------------------------
Income Predominately four highest Moderate Higher Over 15 years
-----------------------------------------------------------------------------------
High Yield Generally upper-medium to High Highest Over 15 years
low quality
---------------------------------------------------------------------------------------------------------------
</TABLE>
What is each fund's objective and investment program?
Tax-Exempt Money Fund
The fund's objective is preservation of capital and liquidity, and,
consistent with these, the highest current income exempt from federal income
taxes. The fund's yield will fluctuate in response to changes in the general
level of interest rates, but the share price is managed to remain stable at
$1.00. Although the fund has maintained a constant share price since its
inception, and fund managers will make every effort to continue to meet this
objective, the price could drop below $1.00 under certain circumstances, such
as a major change in interest rates or default by one or more fund holdings.
Unlike a bank account or certificate of deposit, your investment is not
insured or guaranteed by the U.S. government.
The fund purchases securities with maturities of 397 days or less, and its
dollar-weighted average maturity will not exceed 90 days. Securities
purchased by the fund will generally have ratings in the two highest
categories established by nationally recognized rating agencies, or, if
unrated, will be of equivalent quality as determined by T. Rowe Price
analysts.
o The funds may retain a security whose credit quality is downgraded after
purchase.
Tax-Free Short-Intermediate Fund
The fund's objective is a high level of income exempt from federal income
taxes consistent with modest price fluctuation by investing primarily in
short- and intermediate-term investment-grade municipal securities in the
four highest
<PAGE>
credit categories (AAA, AA, A, BBB). Beginning October 1, 1998, the fund may
invest up to 5% of its assets in below investment-grade securities with
ratings of BB by a national rating agency (or, if unrated, the T. Rowe Price
equivalent).
Investment-grade securities include a range of securities from the highest
rated to medium quality. Securities in the BBB category may be more
susceptible to adverse economic conditions or changing circumstances and
securities at the lower end of the BBB category have certain speculative
characteristics.
This is the most conservative of the four T. Rowe Price tax-free bond funds.
Under normal market conditions, its dollar-weighted average maturity will not
exceed five years and is expected to range between two and five years. As a
result, its price fluctuation should be modest in response to changes in
interest rates. Its interest income should be above the money fund but lower
than the other bond funds.
Tax-Free Insured Intermediate Bond Fund
The fund's objective is a high level of income exempt from federal income
taxes consistent with moderate price fluctuation while minimizing credit risk
by investing primarily in insured municipal securities. The fund is expected
to maintain a dollar-weighted average maturity between five and 10 years.
This fund should provide higher income and volatility than the
Short-Intermediate Fund and lower income and volatility than the other bond
funds.
For extra credit-quality protection, the fund will invest at least 65% of its
total assets in municipals insured by companies carrying the highest credit
rating from a national rating organization, e.g., AAA by Standard & Poor's or
Aaa by Moody's Investors Service. (The insurer's rating determines the rating
of the insured bond.) Up to 35% of assets may also be invested in other
municipals rated at least AA or Aa by rating agencies, or, if unrated,
believed to be of comparable quality at the time of purchase.
Tax-Free Income Fund
The fund's objective is a high level of income exempt from federal income
taxes by investing primarily in long-term, investment-grade municipal
securities. The fund's dollar-weighted average maturity is expected to exceed
15 years. As such, the fund is suitable for more aggressive investors. It
will be managed to seek capital appreciation and cushion losses due to
interest rate movements. From time to time, the fund may purchase
below-investment-grade securities (including those that have received the
lowest rating or, if unrated, are believed by T. Rowe Price to be
noninvestment grade). However, no such purchase will be made if it would
cause the fund's investments in noninvestment-grade bonds to exceed 5% of net
assets.
<PAGE>
Tax-Free High Yield Fund
The fund's objective is a high level of income exempt from federal income tax
by investing primarily in long-term, low- to upper-medium-quality municipal
securities. This is the most aggressive of our bond funds and should provide
the highest income, because the average credit quality of its holdings is
lower than our other funds. Less creditworthy borrowers must offer higher
interest payments to compensate investors for taking greater risk. The fund
may invest a substantial portion of assets in noninvestment-grade municipal
bonds, which have a higher risk of default than investment-grade bonds.
Similar bonds in the taxable bond market are called "junk." The fund may also
purchase bonds that are in default, but such bonds are not expected to exceed
10% of the fund's total assets.
Lower-quality municipals are more vulnerable to real or perceived changes in
the business climate than higher-quality bonds, and they may also be
considerably less liquid and more volatile in price. As a result, we rely
heavily on our proprietary research when selecting investments, and judgment
may play a bigger role in valuing the fund's securities. The fund's
dollar-weighted average maturity is expected to exceed 15 years.
o The combination of long maturity and lower credit quality makes the High
Yield Fund potentially the most risky as well as potentially the most
rewarding of the tax-free funds. (See High-Yield, High-Risk Investing in
Section 3.)
What are the main risks of investing in municipal bond and money market funds?
Since they are managed to maintain a $1.00 share price, money market funds
should have little risk of principal loss. However, the potential for
realizing a loss of principal in a bond or money market fund could derive
from:
. Interest rate or market risk The decline in bond prices that accompanies a
rise in the overall level of interest rates (please see Table 5). A sharp and
unexpected rise in interest rates could cause a money fund's price to drop
below one dollar. However, the very short-term securities held in money
market portfolios - a means of achieving an overall fund objective of
principal stability - reduces their potential for price fluctuation.
. Credit risk The chance that any of a fund's holdings will have its credit
rating downgraded or will default (fail to make scheduled interest and
principal payments), potentially reducing a fund's income level and share
price. Money funds invest in very high-rated securities, thus reducing this
risk.
. Political risk The chance that a significant restructuring of federal income
tax rates, or even serious discussion on the topic in Congress, could cause
municipal bond prices to fall. The demand for municipal bonds is strongly
influenced
<PAGE>
by the value of tax-exempt income to investors. Broadly lower income tax
rates could reduce the advantage of owning municipal bonds.
. Geographical risk The chance of price declines resulting from developments
in a single state.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
How does the portfolio manager try to reduce risk?
Consistent with each fund's objective, the portfolio manager actively seeks
to reduce risk and increase total return. Risk management tools include:
. Diversification of assets to reduce the impact of a single holding on a
fund's net asset value.
. Thorough credit research by our own analysts.
. Adjustment of fund duration to try to reduce the negative impact of rising
interest rates or take advantage of the benefits of falling rates. (Duration
is a more accurate measure than maturity of a fund's sensitivity to interest
rate changes.)
o The yield of each fund will fluctuate with changing market conditions and
interest rate levels. A bond fund's share price will also fluctuate; when
you sell your shares, you may lose money.
What are derivatives and can the funds invest in them?
The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella - from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured notes. While the term "derivative" only
recently became widely known among the investing public, derivatives have in
fact been employed by investment managers for many years.
Each fund will invest in derivatives only if the expected risks and rewards
are consistent with its objective, policies, and overall risk profile as
described in this prospectus. The money fund does not invest in high-risk,
highly leveraged derivatives. The bond funds use derivatives in situations in
which they may enable the fund to accomplish the following: increase yield;
hedge against a decline in principal value; invest in eligible asset classes
with greater efficiency and lower cost than is possible through direct
investment; or adjust portfolio duration.
<PAGE>
The bond funds will not invest in any high-risk, highly leveraged derivative
instrument that is expected to cause the price volatility of the portfolio to
be meaningfully different from that of 1) a five-year investment-grade bond
for the Short-Intermediate Fund; 2) a 5- to 10-year investment-grade bond for
the Insured Intermediate Bond Fund; or, 3) a long-term (over 15-year
maturity) investment-grade bond for the Income and High Yield Funds.
The following are some characteristics of municipal securities.
Who issues municipal securities?
State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.
Who buys municipal securities?
Individuals are the primary investors, and a principal way they invest is
through mutual funds. Prices of municipals may be affected by major changes
in cash flows of money into or out of municipal funds. For example,
substantial and sustained redemptions from municipal bond funds could result
in lower prices for these securities.
What is "tax-free" about municipal bonds and bond funds?
The regular income dividends you receive from the fund should be exempt from
regular federal income taxes. In addition, your state may not tax that
portion of the fund's income earned on the state's own obligations (if any).
However, capital gains distributed by the funds are taxable to you. (See
Useful Information on Distributions and Taxes for details.)
Is interest income from municipal issues always exempt from federal taxes?
No. Since 1986 income from so-called "private activity" municipals has been
subject to the federal alternative minimum tax (AMT). For instance, some
bonds financing airports, stadiums, and student loan programs fall into this
category. Shareholders subject to the AMT must include income derived from
private activity bonds in their AMT calculation. Relatively few taxpayers are
required to pay the tax. Normally, each fund will not purchase any security
if, as a result, more than 20% of the fund's income would be subject to the
AMT. The funds will report annually to shareholders the portion of income, if
any, subject to the AMT. (Please see Distributions and Taxes - Tax
Information.)
o Municipal securities are also called "tax-exempts" because the interest
income they provide is usually exempt from federal income taxes.
<PAGE>
Why are yields on municipals usually below those on otherwise comparable
taxable securities?
Since the income provided by most municipals is exempt from federal taxation,
investors are willing to accept lower yields on a municipal bond than on an
otherwise similar (in quality and maturity) taxable bond.
How can I tell if a tax-free or taxable fund is more suitable for me?
The primary factor is your expected federal income tax rate. The higher your
tax bracket, the more likely tax-frees will be appropriate. If the after-tax
yield on a taxable bond or money market security is less than a municipal
fund's tax-exempt yield, then your income will be higher in the municipal
fund. To find what a taxable fund would have to yield to equal the tax-free
yield on a municipal bond, divide the municipal bond's yield by one minus
your tax rate.
What are the major differences between money market and bond funds?
. Price Bond funds have fluctuating share prices. Money market funds are
managed to maintain a stable share price.
. Maturity Short- and intermediate-term bond funds have longer average
maturities (from one to 10 years) than money market funds (90 days or less).
Longer-term bond funds have the longest average maturities (10 years or
more).
. Income Short- and intermediate-term bond funds typically offer more income
than money market funds and less income than longer-term bond funds.
You may want to review some fundamentals that apply to all fixed income
investments.
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 a fund's "yield" the same thing as the "total return"?
Not for bond funds. The total return reported for a fund is the result of
reinvested distributions (income and capital gains) and the change in share
price for a given time period. Income is always a positive contributor to
total return and can enhance a rise in share price or serve as an offset to a
drop in share price. Since money funds are managed to maintain a stable share
price, their yield and total return should be the same.
<PAGE>
What is "credit quality" and how does it affect a fund's yield?
Credit quality refers to a bond issuer's expected ability to make all
required interest and principal payments in a timely manner. 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-credit-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 before their stated maturity dates 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 such an environment, a bond's
"effective maturity" is calculated using its nearest call date.
A bond mutual fund has no maturity in the strict sense of the word, but it
does have an average maturity and an 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. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity 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 measures bond price
sensitivity to interest rate changes more accurately 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 that is expressed in years, i.e., 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 a fund's share price. Simply multiply the fund's
duration (available for T. Rowe Price bond funds in our shareholder reports)
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.
<PAGE>
How is a municipal'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 interest rates, as shown in Table
5.
<TABLE>
Table 5 How Interest Rates Affect Bond Prices
<CAPTION>
Price per $1,000 of a Municipal Bond if Interest Rates:
Bond Maturity Coupon Increase Decrease
1% 2% 1% 2%
<S> <S> <S> <C> <C> <C> <C>
1 year 1999 3.70% $990 $981 $1,010 $1,020
------------------------------------------------------------
3 years 2001 3.95 972 946 1,029 1,058
------------------------------------------------------------
5 years 2003 4.10 956 915 1,046 1,094
------------------------------------------------------------
10 years 2008 4.40 924 854 1,084 1,177
------------------------------------------------------------
20 years 2018 5.00 884 786 1,137 1,299
------------------------------------------------------------
30 years 2028 5.05 862 752 1,173 1,391
-----------------------------------------------------------------------------------------------
</TABLE>
Coupons reflect yields on AAA-rated municipals as of May 31, 1998. This is an
illustration and does not represent expected yields or share price changes of
any T. Rowe Price fund.
Do money market securities react to changes in interest rates?
Yes. As interest rates change, the prices of money market securities
fluctuate, but changes are usually small because of their very short
maturities. Investments are typically held until maturity in a money fund to
help the fund maintain a $1.00 share price.
How can I decide which fund is most appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. Use Table 4, which summarizes each fund's main
characteristics, to help choose a fund (or funds) for your particular needs.
For example, only the money fund is designed to provide principal stability,
which makes it a good choice for money you may need for near-term or
unexpected expenses. However, if you are investing for the highest possible
income and can tolerate some price fluctuation, you should consider a
longer-term bond fund.
o The fund or funds you select should not represent your complete investment
program nor be used for short-term trading purposes.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the funds may
purchase as well as the types of management practices that the funds may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fund.
How and when shares are priced
Bond and money funds
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding. Amortized cost is used to value money fund
securities.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ from institutional
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
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an
<PAGE>
automated method of initiating payments from, and receiving payments in, your
financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. Proceeds sent by bank wire should be
credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in each fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. 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.
. Money funds declare income dividends daily to shareholders of record as of
12 noon ET on that day. Wire purchase orders received before 12 noon ET
receive the dividend for that day. Other purchase orders receive the dividend
on the next business day after payment has been received.
<PAGE>
. Bond and money funds pay dividends on the first business day of each month.
. Bond and money 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.
Capital gains
o Since money funds are managed to maintain a constant share price, they are
not expected to make capital gain distributions.
. 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
o You will be sent timely information for your tax filing needs.
Although the regular monthly income dividends you receive from each fund are
expected to be exempt from federal and state and local (if any) income taxes,
you need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Note: You must report your total tax-exempt income on IRS Form 1040. The IRS
uses this information to help determine the tax status of any Social Security
payments you may have received during the year. For shareholders who receive
Social Security benefits, the receipt of tax-exempt interest may increase the
portion of benefits that are subject to tax.
If a fund invests in certain "private activity" bonds, shareholders who are
subject to the alternative minimum tax (AMT) must include income generated by
these bonds in their AMT computation. The portion of your fund's income that
should be included in your AMT calculation, if any, will be reported to you
in January.
<PAGE>
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes. If you realize a
loss on the sale or exchange of fund shares held six months or less, your
capital loss is reduced by the tax-exempt dividends received on those shares.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 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
capital gain distributions made to you. This information will also be
reported to the IRS. A fund's capital gain distributions are generally
taxable to you for the year in which they were paid. Dividends are expected
to be tax-exempt.
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. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realized a loss on the sale
or exchange of fund shares which you held six months or less, your short-term
loss will be reclassified to a long-term loss to the extent you received a
long-term capital gain distribution during the period you held the shares.
A portion of the capital gains realized on the sale of market discount bonds
with maturities beyond one year may be treated as ordinary income and cannot
be offset by other capital losses. Therefore, to the extent each fund invests
in these securities, the likelihood of a taxable gain distribution will be
increased.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
<PAGE>
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 distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by each fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. Each fund and its agents have the right to
reject or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the funds 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 against your bond or money market
account, it will be returned marked "uncollected." (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions
<PAGE>
must be authorized separately. T. Rowe Price funds and their agents use
reasonable procedures (including shareholder identity verification) to
confirm that instructions given by telephone are genuine and are not liable
for acting on these instructions. If these procedures are not followed, it is
the opinion of certain regulatory agencies that the funds and their agents
may be liable for any losses that may result from acting on the instructions
given. A confirmation is sent promptly after a transaction. 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
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
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 or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our 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.
<PAGE>
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 funds' transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. 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.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUNDS 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How are the funds organized?
The funds are "diversified, open-end investment companies," or mutual funds,
and were incorporated in Maryland as follows: 1) Tax-Exempt Money Fund, 1980;
2) Tax-Free Short-Intermediate Fund, 1983; 3) Tax-Free Insured Intermediate
Bond Fund, 1992; 4) Tax-Free Income Fund, 1976; and 5) Tax-Free High Yield
Fund, 1984. Mutual funds pool money received from shareholders and invest it
to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 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 intend to do so except when certain
matters, such as a change in a fund's 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 a voting
card for you to mail back.
Who runs the funds?
General Oversight
Each 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 funds is that the
majority of Board members are independent of T. Rowe Price.
<PAGE>
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by each fund's portfolio managers.
Portfolio Management
Each fund has an Investment Advisory Committee whose chairman has day-to-day
responsibility for managing the portfolio and works with the committee in
developing and executing each fund's investment program. The Investment
Advisory Committees comprise the following members:
Tax-Exempt Money Fund Patrice Berchtenbreiter Ely, Chairman, Jeremy N. Baker,
Patricia S. Deford, Joseph K. Lynagh, Mary J. Miller, William T. Reynolds,
and Edward A. Wiese. Ms. Berchtenbreiter Ely has been chairman of the fund
since 1992. She joined T. Rowe Price in 1972 and has been managing
investments since 1987.
Tax-Free Short-Intermediate Bond Fund Charles B. Hill, Chairman, Janet G.
Albright, Patricia S. Deford, Joseph K. Lynagh, Konstantine B. Mallas, Mary
J. Miller, and Arthur S. Varnado. Mr. Hill was appointed chairman of the
fund's committee in 1996. He joined T. Rowe Price in 1991 and has been
managing investments since 1986.
Tax-Free Insured Intermediate Bond Fund Charles B. Hill, Chairman, Janet G.
Albright, Patricia S. Deford, Robert A. Donahue, Konstantine B. Mallas, Mary
J. Miller, Julie A. Salsbery, and Arthur S. Varnado. Mr. Hill was appointed
chairman of the fund in 1996. He joined T. Rowe Price in 1991 and has been
managing investments since 1986.
Tax-Free Income Fund Mary J. Miller, Chairman, Patricia S. Deford, Marcy M.
Lash, Konstantine B. Mallas, Hugh D. McGuirk, William T. Reynolds, William F.
Snider, and Arthur S. Varnado. Ms. Miller was appointed chairman of the
committee in 1997. She joined T. Rowe Price in 1983 and has been managing
investments since 1987.
Tax-Free High Yield Fund C. Stephen Wolfe II, Chairman, A. Gene Caponi,
Patricia S. Deford, Konstantine B. Mallas, Mary J. Miller, William T.
Reynolds, William F. Snider, and Arthur S. Varnado. Mr. Wolfe has been
chairman of the fund since 1994. He joined T. Rowe Price in 1985 and has been
managing investments since 1991.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of these and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as each
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. The address for each is 100 East Pratt St.,
Baltimore, MD 21202.
<PAGE>
How are fund expenses determined?
The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, the funds pay for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
The funds paid the expenses shown in Table 6 for the fiscal year ended
February 28, 1998.
<TABLE>
Table 6 Services Fees Paid
<CAPTION>
Fund Transfer Agent and Shareholder Services Accounting Services
<S> <C> <C> <C>
Money $329,000 $ 93,000
--------------------------------------------------------------
Short-Intermediate 201,000 91,000
--------------------------------------------------------------
Insured Intermediate 84,000 66,000
--------------------------------------------------------------
Income 527,000 111,000
--------------------------------------------------------------
High Yield 516,000 111,000
------------------------------------------------------------------------------------------
</TABLE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C>
0.334% First $50 billion/a/
----------------------------------------------------------------------
0.305% Next $30 billion
----------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
Each fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $85 billion
at March 31, 1998, the group fee was 0.32%.
<PAGE>
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
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, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
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 fund's net
asset value. 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.
For bond funds, the advertised or "SEC" yield is found by determining the net
income per share (as defined by the SEC) 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 may differ from the dividend yield.
The money fund may advertise a current yield, reflecting the latest seven-day
income annualized, or an "effective" yield, which assumes the income has been
reinvested in the fund.
<PAGE>
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment
practices that may be used in day-to-day portfolio management. Each fund's
investment program is subject to further restrictions and risks described in
the Statement of Additional Information.
Shareholder approval is required to substantively change a fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating
policies," which can be changed without shareholder approval. However,
significant changes are discussed with shareholders in fund reports. Each
fund adheres to applicable investment restrictions and policies at the time
it makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The funds' holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, the bond funds are not permitted to invest more than 10% of total
assets in residual interest bonds. While these restrictions provide a useful
level of detail about the funds' investment programs, investors should not
view them as an accurate gauge of the potential risk of such investments. For
example, in a given period, a 5% investment in residual interest bonds could
have significantly more of an impact on a fund's share price than its
weighting in the portfolio. The net effect of a particular investment depends
on its volatility and the size of its overall return in relation to the
performance of all the funds' other investments.
Changes in the funds' holdings, the funds' performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help each fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, each fund may invest in any type
of municipal 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 the
principal types of portfolio securities and investment management practices
of the funds.
Fundamental policy Each 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
<PAGE>
voting securities of the issuer would be held by each fund. These limitations
do not apply to a fund's purchase of securities issued or guaranteed by the
U.S. government, its agencies, or instrumentalities.
Operating policy (money fund only) Except as permitted by Rule 2a-7 under the
Investment Company Act of 1940, the money fund will not purchase a security
if, as a result, more than 5% of its total assets would be invested in
securities of a single issuer. Under Rule 2a-7, the 5% limit, among other
things, does not apply to purchases of U.S. government securities or
securities subject to certain types of guarantees. Additionally, the fund may
invest up to 25% of its total assets in the first tier securities (as defined
by Rule 2a-7) of a single issuer for a period of up to three business days.
Municipal Securities
Each fund's assets are invested primarily in various tax-free municipal debt
securities. The issuers have a contractual obligation to pay interest at a
stated rate on specific dates and to repay principal (the bond's face value)
on a specified date or dates. An issuer may have the right to redeem or
"call" a bond before maturity, and the funds may have to reinvest the
proceeds at lower rates.
There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as charges for water and sewer service, to
generate money for debt service.
o In purchasing municipals, the funds rely on the opinion of the issuer's
bond counsel regarding the tax-exempt status of the investment.
Private Activity Bonds and Taxable Securities
While income from most municipals is exempt from federal income taxes, the
income from certain types of so-called private activity bonds (a type of
revenue bond) may be subject to the alternative minimum tax (AMT). However,
only persons subject to the AMT pay this tax. Private activity bonds may be
issued for purposes such as housing or airports or to benefit a private
company. (Being subject to the AMT does not mean the investor necessarily
pays this tax. For further information, please see Distributions and Taxes.)
Fundamental policy Under normal market conditions, the funds will not
purchase any security if, as a result, less than 80% of the funds' income
would be exempt from federal income taxes. The income included under the 80%
test does not include income from securities subject to the alternative
minimum tax.
<PAGE>
Operating policy During periods of abnormal market conditions, for temporary
defensive purposes, the funds may invest without limit in high-quality,
short-term securities whose income is subject to federal income tax.
In addition to general obligation and revenue bonds, the funds' investments
may include, but are not limited to, the following types of securities:
Municipal Lease Obligations
A lease is not a full faith and credit obligation of the issuer and is
usually backed only by the borrowing government's unsecured pledge to make
annual appropriations for lease payments. There have been challenges to the
legality of lease financing in numerous states and, from time to time,
certain municipalities have considered not appropriating money for lease
payments. In deciding whether to purchase a lease obligation, the funds would
assess the financial condition of the borrower, the merits of the project,
the level of public support for the project, and the legislative history of
lease financing in the state. These securities may be less readily marketable
than other municipals. The funds may also purchase unrated lease obligations.
Municipal Warrants (bond funds)
Municipal warrants are essentially call options on municipal bonds. In
exchange for a premium, they give the purchaser the right, but not the
obligation, to purchase a municipal bond in the future. The bond funds might
purchase a warrant to lock in forward supply in an environment where the
current issuance of bonds is sharply reduced. Like options, warrants may
expire worthless and they may have reduced liquidity.
Operating policy Each bond fund may invest up to 2% of its total assets in
municipal warrants.
Securities With "Puts" or Other Demand Features
Some longer-term municipals give the investor the right to "put" or sell the
security at par (face value) within a specified number of days following the
investor's request - usually one to seven days. This demand feature enhances
a security's liquidity by shortening its effective maturity and enables it to
trade at a price equal to or very close to par. The money fund typically
purchases a significant number of these securities. If a demand feature
terminates prior to being exercised, the funds may be forced to hold the
longer-term security, which could experience substantially more volatility.
Securities With Credit Enhancements
. Letters of credit Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying municipal security should default.
o T. Rowe Price periodically reviews the credit quality of the insurer.
<PAGE>
. Municipal Bond Insurance This insurance, which is usually purchased by the
bond issuer from a private, nongovernmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond's principal and
interest will be paid when due. Insurance does not guarantee the price of the
bond or the share price of any fund. The credit rating of an insured bond
reflects the credit rating of the insurer, based on its claims-paying
ability.
The obligation of a municipal bond insurance company to pay a claim extends
over the life of each insured bond. Although defaults on insured municipal
bonds have been low to date and municipal bond insurers have met their
claims, there is no assurance this will continue. A higher-than-expected
default rate could strain the insurer's loss reserves and adversely affect
its ability to pay claims to bondholders, such as the funds. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating.
While all funds may buy insured bonds from time to time, such bonds will
compose at least 65% of the total assets of the Insured Intermediate Fund.
The Insured Intermediate Fund's purchase of insured bonds will be limited to
those which, at the time of purchase, have the highest credit rating from a
national rating agency. There is no guarantee that this rating will be
maintained.
. Standby Purchase Agreements A Standby Bond Purchase Agreement (SBPA) is a
liquidity facility provided to pay the purchase price of bonds that cannot be
remarketed. The obligation of the liquidity provider (usually a bank) is only
to advance funds to purchase tendered bonds that cannot be remarketed and
does not cover principal or interest under any other circumstances. The
liquidity provider's obligations under the SBPA are usually subject to
numerous conditions, including the continued creditworthiness of the
underlying borrower.
Synthetic or Derivative Securities
These securities are created from existing municipal bonds:
. Residual Interest Bonds (bond funds) (These are a type of potentially
high-risk derivative.) The income stream provided by an underlying bond is
divided to create two securities, one short term and one long term. The
interest rate on the short-term component is reset by an index or auction
process normally every seven to 35 days. After income is paid on the
short-term securities at current rates, the residual income goes to the
long-term securities. Therefore, rising short-term interest rates result in
lower income for the longer-term portion, and vice versa. The longer-term
bonds can be very volatile and may be less liquid than other municipals of
comparable maturity. The funds will invest only in securities deemed
tax-exempt by a nationally recognized bond counsel, but there is no guarantee
the interest will be exempt because the IRS has not issued a definitive
ruling on the matter.
<PAGE>
Operating policy Each bond fund may invest up to 10% of its total assets in
residual interest bonds.
. Participation Interests This term covers various types of securities created
by converting fixed rate bonds into short-term, variable rate certificates.
These securities have been developed in the secondary market to meet the
demand for short-term, tax-exempt securities. The funds will invest only in
securities deemed tax-exempt by a nationally recognized bond counsel, but
there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter.
. Embedded Interest Rate Swaps and Caps (bond funds) In a fixed rate,
long-term municipal bond with an interest rate swap attached to it, the
bondholder usually receives the bond's fixed coupon payment as well as a
variable rate payment that represents the difference between a fixed rate for
the term of the swap (which is typically shorter than the bond it is attached
to) 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.
An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates.
Both instruments may be volatile and of limited liquidity, and their use may
adversely affect a fund's total return.
Operating policy Each bond fund may invest up to 10% of its total assets in
embedded interest rate swaps and caps.
Private Placements
Each fund may seek to enhance its yield through the purchase of private
placements. These securities are sold through private negotiations, usually
to institutions or mutual funds, and may have resale restrictions. Their
yields are usually higher than comparable public securities to compensate the
investor for their limited marketability.
Operating policy The bond funds may invest up to 15% (10% for the money fund)
of fund net assets in illiquid securities, including unmarketable private
placements.
<PAGE>
Types of Management Practices
Reserve Position (bond funds)
Each fund will hold a portion of its assets in short-term, tax-exempt money
market securities maturing in one year or less. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments; can help in structuring each fund's weighted average maturity;
and serves as a short-term defense during periods of unusual market
volatility. Each fund's reserve position can consist of shares of one or more
T. Rowe Price internal money market funds as well as short-term,
investment-grade securities, including tax-exempt commercial paper, municipal
notes, and short-term maturity bonds. Some of these securities may have
adjustable, variable, or floating rates. For temporary, defensive purposes,
each fund may invest without limitation in money market reserves (which may
not be tax-exempt).
When-Issued Securities (all funds) and Forwards (bond funds)
New issues of municipals are often sold on a "when-issued" basis, that is,
delivery and payment take place 15 - 45 days after the buyer has agreed to
the purchase. Some bonds, called "forwards," have longer-than-standard
settlement dates, typically six to 24 months. When buying these securities,
each fund will maintain cash or high-grade marketable securities held by its
custodian equal in value to its commitment for these securities. Each fund
does not earn interest on when-issued and forward securities until
settlement, and the value of the securities may fluctuate between purchase
and settlement. Municipal "forwards" typically carry a substantial yield
premium to compensate the buyer for their greater interest rate, credit, and
liquidity risks.
Interest Rate Futures (bond funds)
Futures (a type of potentially high-risk derivative) are often used to manage
risk because they enable the investor to buy or sell an asset in the future
at an agreed-upon price. Specifically, the funds may use futures (and options
on futures) for any number of reasons, including: to hedge against a
potentially unfavorable change in interest rates and to adjust their exposure
to the municipal bond market; to protect portfolio value; in an effort to
enhance income; and to adjust portfolio duration. The use of futures for
hedging and non-hedging purposes may not always be successful. Their prices
can be highly volatile, using them could lower a fund's total return, and the
potential loss from their use could exceed a fund's initial exposure to such
contracts.
Operating policy Initial margin deposits on futures and premiums on options
used for non-hedging purposes may equal up to 5% of a bond fund's net asset
value.
<PAGE>
Borrowing Money and Transferring Assets
Each fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with each fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33 1/3% of total fund
assets.
Operating policy Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the
fund's total assets. Each fund may not purchase additional securities when
borrowings exceed 5% of total assets.
Portfolio Turnover (bond funds)
Each fund generally purchases securities with the intention of holding them
for investment; however, when market conditions or other circumstances
warrant, securities may be purchased and sold without regard to the length of
time held. Due to the nature of each fund's investment program, a fund's
portfolio turnover rate may exceed 100%. Although the funds do not expect to
generate any taxable income, a high turnover rate may increase transaction
costs and may affect taxes paid by shareholders to the extent capital gains
are distributed. The funds' portfolio turnover rates for the previous three
fiscal years are shown in Table 7.
<TABLE>
Table 7 Portfolio Turnover Rates
<CAPTION>
Fund 1996 1997 1998
<S> <C> <C> <C>
Short-Intermediate 69.9% 84.3% 76.8%
------------------------------
Insured Intermediate 63.8 76.8 56.1
------------------------------
Income 48.7 40.7 36.3
------------------------------
High YIeld 39.3 37.0 24.4
-----------------------------------------------------------
</TABLE>
Sector Concentration
It is possible that each fund could have a considerable amount of assets (25%
or more) in securities that would tend to respond similarly to particular
economic or political developments. An example would be securities of issuers
related to a single industry, such as health care or nuclear energy.
Operating policy Each fund may invest up to 25% of total assets in industrial
development bonds of projects in the same industry (such as solid waste,
nuclear utility, or airlines). Bonds which are refunded with escrowed U.S.
government securities are not subject to the 25% limitation.
<PAGE>
High-Yield, High-Risk Investing (High Yield, Income, and Short-Intermediate
Funds)
The total return and yield of lower-quality (high-yield, high-risk) bonds,
commonly referred to as "junk," can be expected to fluctuate more than the
total return and yield of higher-quality bonds. Junk bonds (those rated below
BBB or in default) are regarded as predominantly speculative with respect to
the issuer's ability to meet principal and interest payments. Successful
investment in lower-medium- and low-quality bonds involves greater investment
risk and is highly dependent on T. Rowe Price's credit analysis. A real or
perceived economic downturn, or rising interest rates, could cause a decline
in high-yield bond prices by lessening the ability of issuers to make
principal and interest payments. These bonds are often thinly traded and can
be more difficult to sell and value accurately than high-quality bonds.
Because objective pricing data may be less available, judgment may play a
greater role in the valuation process.
Operating policy The Tax-Free High Yield Fund may invest without limit in
below investment-grade securities. The Tax-Free Income Fund may invest up to
5% of its total assets in below investment-grade securities. The Tax-Free
Short-Intermediate Fund (effective October 1, 1998) may invest up to 5% of
its total assets in below investment-grade securities with ratings of BB by a
national rating agency (or, if unrated, the T. Rowe Price equivalent).
Credit-Quality Considerations
The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's on the basis of the issuer's ability to meet
all required interest and principal payments. The highest ratings are
assigned to issuers perceived to be the best credit risks. T. Rowe Price
research analysts also evaluate all portfolio holdings of each fund,
including those rated by outside agencies. Other things being equal,
lower-rated bonds have higher yields due to greater risk.
<PAGE>
Table 8 shows the rating scale used by the major rating agencies, and Table 9
provides an explanation of quality ratings. T. Rowe Price considers publicly
available ratings but emphasizes its own credit analysis when selecting
investments.
<TABLE>
Table 8 Ratings of Municipal Debt Securities
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Moody's Standard Fitch
Investors & Poor's Investors
Service, Inc. Corporation Service, Inc. Definition
Long Term Aaa AAA AAA Highest quality
-------------------------------------------------------------------------------------------------------------
Aa AA AA High quality
-------------------------------------------------------------------------------------------------------------
A A A Upper medium grade
-------------------------------------------------------------------------------------------------------------
Baa BBB BBB Medium grade
-------------------------------------------------------------------------------------------------------------
Ba BB BB Speculative
-------------------------------------------------------------------------------------------------------------
B B B Highly speculative
-------------------------------------------------------------------------------------------------------------
Caa CCC, CC CCC, CC Vulnerable to default
-------------------------------------------------------------------------------------------------------------
Ca C C Default is imminent
-------------------------------------------------------------------------------------------------------------
C D DDD, DD, D Probably in default
Moody's S&P Fitch
Short Term MIG1/VMIG1 Best quality SP1+ Very strong quality F-1+ Exceptionally strong quality
SP1 Strong grade F-1 Very strong quality
-------------------------------------------------------------------------------------------------------------
MIG2/VMIG2 High quality SP2 Satisfactory grade F-2 Good credit quality
-------------------------------------------------------------------------------------------------------------
MIG3/VMIG3 Favorable quality F-3 Fair credit quality
-------------------------------------------------------------------------------------------------------------
MIG4/VMIG4 Adequate quality
-------------------------------------------------------------------------------------------------------------
SG Speculative SP3 Speculative grade F-5 Weak credit quality
quality
-------------------------------------------------------------------------------------------------------------
Commercial P-1 Superior A-1+ Extremely strong quality F-1+ Exceptionally strong quality
Paper quality A-1 Strong quality F-1 Very strong quality
-------------------------------------------------------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
-------------------------------------------------------------------------------------------------------------
P-3 Acceptable quality A-3 Adequate quality F-3 Fair credit quality
B Speculative quality F-5 Weak credit quality
C Doubtful quality
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Table 9 Explanation of Quality Ratings
<CAPTION>
<S> <C> <C>
Bond
Rating Explanation
Moody's Investors Aaa Highest quality, smallest degree of
Service, Inc. investment risk.
-----------------------------------------------------
Aa High quality; together with Aaa bonds,
they compose the high-grade bond group.
-----------------------------------------------------
A Upper-medium-grade obligations; many
favorable investment attributes.
-----------------------------------------------------
Baa Medium-grade obligations; neither highly
protected nor poorly secured. Interest and
principal appear adequate for the present,
but certain protective elements may be
lacking or may be unreliable over any
great length of time.
-----------------------------------------------------
Ba More uncertain with speculative elements.
Protection of interest and principal
payments not well safeguarded in good and
bad times.
-----------------------------------------------------
B Lack characteristics of desirable
investment; potentially low assurance of
timely interest and principal payments or
maintenance of other contract terms over
time.
-----------------------------------------------------
Caa Poor standing, may be in default; elements
of danger with respect to principal or
interest payments.
-----------------------------------------------------
Ca Speculative in high degree; could be in
default or have other marked
shortcomings.
-----------------------------------------------------
C Lowest rated. Extremely poor prospects of
ever attaining investment standing.
-----------------------------------------------------
Standard & Poor's AAA Highest rating; extremely strong capacity
Corporation to pay principal and interest.
-----------------------------------------------------
AA High quality; very strong capacity to pay
principal and interest.
-----------------------------------------------------
A Strong capacity to pay principal and
interest; somewhat more susceptible to the
adverse effects of changing circumstances
and economic conditions.
-----------------------------------------------------
BBB Adequate capacity to pay principal and
interest; normally exhibit adequate
protection parameters, but adverse
economic conditions or changing
circumstances more likely to lead to
weakened capacity to pay principal and
interest than for higher-rated bonds.
-----------------------------------------------------
BB, B, Predominantly speculative with respect to
CCC, CC the issuer's capacity to meet required
interest and principal payments. BB -
lowest degree of speculation;
CC - the highest degree of speculation.
Quality and protective characteristics
outweighed by large uncertainties or major
risk exposure to adverse conditions.
-----------------------------------------------------
D In default.
-----------------------------------------------------
Fitch Investors AAA Highest quality; obligor has exceptionally
Service, Inc. strong ability to pay interest and repay
principal, which is unlikely to be
affected by reasonably foreseeable events.
-----------------------------------------------------
AA Very high quality; obligor's ability to
pay interest and repay principal is very
strong. Because bonds rated in the AAA and
AA categories are not significantly
vulnerable to foreseeable future
developments, short-term debt of these
issuers is generally rated F-1+.
-----------------------------------------------------
A High quality; 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 higher-rated bonds.
-----------------------------------------------------
BBB Satisfactory credit quality; obligor's
ability to pay interest and repay
principal is considered adequate.
Unfavorable changes in economic conditions
and circumstances are more likely to
adversely affect these bonds and impair
timely payment. The likelihood that the
ratings of these bonds will fall below
investment grade is higher than for
higher-rated bonds.
-----------------------------------------------------
BB, Not investment grade; predominantly
CCC, speculative with respect to the issuer's
CC, C capacity to repay interest and repay
principal in accordance with the terms of
the obligation for bond issues not in
default. BB is the least speculative. C is
the most speculative.
------------------------------------------------------------------------------
</TABLE>
<PAGE>
Credit Quality and the High Yield Fund
In seeking its primary objective of high income, the Tax-Free High Yield Fund
invests a portion of its assets in bonds rated below investment grade (BB or
lower). Such bonds are regarded as speculative with respect to the issuer's
ability to meet interest and principal payments.
For the fiscal year ended February 28, 1998, the Tax-Free High Yield Fund's
assets were invested in the credit categories shown in Table 10. Percentages
are computed on a dollar-weighted basis and are an average of 12 monthly
calculations.
<TABLE>
Table 10 Tax-Free High Yield Fund: Asset
Composition
<CAPTION>
TRPA's Assessment of
Standard & Poor's Rating /a/ Percentage of Total Assets Unrated Securities
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
AAA 19.8% 2.5%
---------------------------------------------------------------------------------
AA 10.2 1.5
---------------------------------------------------------------------------------
A 7.7 1.0
---------------------------------------------------------------------------------
BBB 26.7 5.7
---------------------------------------------------------------------------------
BB 8.0 7.0
---------------------------------------------------------------------------------
B 0.1 4.2
---------------------------------------------------------------------------------
CCC - D - 0.3 (CCC)
---------------------------------------------------------------------------------
Not rated 22.2 -
---------------------------------------------------------------------------------
Reserves 5.3 -
---------------------------------------------------------------------------------
100.0% 22.2%
-------------------------------------------------------------------------------------------
</TABLE>
/a /Equivalent ratings by Moody's used in the absence of a S&P rating.
Year 2000 Processing Issue
Many computer programs use two digits rather than four to identify the year.
These programs, if not adapted, will not correctly handle the change from
"99" to "00" on January 1, 2000, and will not be able to perform necessary
functions. The Year 2000 issue affects virtually all companies and
organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies, organizations, or governmental entities in which T. Rowe Price
funds invest could be affected by the Year 2000 issue, but at this time the
funds cannot predict the degree of impact. To the extent the effect on a
portfolio holding is negative, a fund's returns could be reduced.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Institutional Accounts
Transaction procedures in the following sections may not apply to institutional
accounts. For institutional account procedures, please call your designated
account manager or service representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for gifts or transfers to minors
(UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
<PAGE>
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 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 a signed New Account Form is received.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Shareholder Services). The new account will have the
same registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for Automatic Asset Builder and gifts or
transfers to minors (UGMA/ UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
<PAGE>
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the 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.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
(For mailgrams, express, registered, or certified mail, see previous section.)
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
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.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements
- -Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address in the next paragraph. T. Rowe Price requires the
signatures of all owners exactly as registered, and possibly a signature
guarantee (see Transaction Procedures and Special Requirements - Signature
Guarantees).
Regular Mail
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
<PAGE>
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed 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), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers on the next page).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
<PAGE>
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
<PAGE>
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - 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 trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for stock trades when
you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except stock trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
Discount Brokerage is a division of T. Rowe Price Investment Services, Inc.,
Member NASD/SIPC.
<PAGE>
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
T. Rowe Price
Invest With Confidence
Ram Logo
C03-040 7/1/98
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is July 1, 1998.
- ----
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
(the "Trust")
CALIFORNIA TAX-FREE BOND FUND
CALIFORNIA TAX-FREE MONEY FUND
and
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
(the "Trust")
FLORIDA INSURED INTERMEDIATE TAX-FREE FUND
GEORGIA TAX-FREE BOND FUND
MARYLAND SHORT-TERM TAX-FREE BOND FUND
MARYLAND TAX-FREE BOND FUND
NEW JERSEY TAX-FREE BOND FUND
NEW YORK TAX-FREE BOND FUND
NEW YORK TAX-FREE MONEY FUND
VIRGINIA SHORT-TERM TAX-FREE BOND FUND
VIRGINIA TAX-FREE BOND FUND
and
T. ROWE PRICE TAX-EFFICIENT BALANCED FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE 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 July 1, 1998,
which may be obtained from T. Rowe Price Investment Services, Inc.
If you would like a prospectus for a Fund of which you are not a shareholder,
please call 1-800-638-5660. A prospectus with more complete information,
including management fees and expenses, will be sent to you. Please read it
carefully.
C03-043 7/1/98
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock Pricing of Securities
- ------------------------------ ---------------------------------------------------------------
Code of Ethics Principal Holders of Securities
- ------------------------------ ---------------------------------------------------------------
Custodian Ratings of Commercial Paper
- ------------------------------ ---------------------------------------------------------------
Distributor for Fund Ratings of Municipal Debt Securities
- ------------------------------ ---------------------------------------------------------------
Dividends and Ratings of Municipal Notes and Variable Rate Securities
Distributions
- ------------------------------ ---------------------------------------------------------------
Federal Registration Risk Factors
of Shares
- ------------------------------ ---------------------------------------------------------------
Independent Risks Factors Associated with a California Portfolio
Accountants
- ------------------------------ ---------------------------------------------------------------
Investment Management Risks Factors Associated with a Florida Portfolio
Services
- ------------------------------ ---------------------------------------------------------------
Investment Objectives Risks Factors Associated with a Georgia Portfolio
and Policies
- ------------------------------ ---------------------------------------------------------------
Investment Performance Risks Factors Associated with a Maryland Portfolio
- ------------------------------ ---------------------------------------------------------------
Investment Program Risks Factors Associated with a New Jersey Portfolio
- ------------------------------ ---------------------------------------------------------------
Investment Risks Factors Associated with a New York Portfolio
Restrictions
- ------------------------------ ---------------------------------------------------------------
Legal Counsel Risks Factors Associated with a Virginia Portfolio
- ------------------------------ ---------------------------------------------------------------
Management of Funds Shareholder Services
- ------------------------------ ---------------------------------------------------------------
Net Asset Value Per Tax-Exempt vs. Taxable Yields
Share
- ------------------------------ ---------------------------------------------------------------
Organization of the Tax Status
Funds
- ------------------------------ ---------------------------------------------------------------
Portfolio Management Yield Information
Practices
- ------------------------------ ---------------------------------------------------------------
Portfolio Transactions
- ------------------------------ ---------------------------------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in the Funds' prospectus.
The Funds will not make a material change in their investment objectives
without obtaining shareholder approval. Unless otherwise specified, the
investment programs and restrictions of the Funds are not fundamental
policies. Each Fund's operating policies are subject to change by each Board
of Directors/ Trustees without shareholder approval. However, shareholders
will be notified of a material change in an operating policy. Each Fund's
fundamental policies may not be changed without the approval of at least a
majority of the outstanding shares of the Fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the holders of 50%
or more of the shares are represented.
Throughout this Statement of Additional Information, "the Fund" is intended
to refer to each Fund listed on the cover page, unless otherwise indicated.
RISK FACTORS
-------------------------------------------------------------------------------
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.
50
<PAGE>
All Funds
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.
Because of their investment policies, the Funds may or may not be suitable or
appropriate for all investors. The Funds (except for the Money Funds) are not
an appropriate investment for those whose primary objective is principal
stability. The value of the portfolio securities of the Fund will fluctuate
based upon market conditions. The Tax-Efficient Balanced Fund will normally
have 40-50% of its assets in equity securities. This portion of the
Tax-Efficient Balanced Fund's assets will be subject to all of the risks of
investing in the stock market. There can, of course, be no assurance that the
Funds will achieve their investment objective.
All Funds
Municipal Securities
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 Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), and Fitch Investors
Service, 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, 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 securities.
After purchase by a Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. For the Money
Fund, the procedures set forth in Rule 2a-7, under the Investment Company Act
of 1940, may require the prompt sale of any such security. For the other
Funds,
<PAGE>
neither event would require a sale of such security by the Fund. However, T.
Rowe Price Associates, Inc. ("T. Rowe Price") will consider such event in its
determination of whether the Fund should continue to hold the security. To
the extent that the ratings given by Moody's, S&P, or Fitch may change as a
result of changes in such organizations or their rating systems, the Fund
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the prospectus. When
purchasing unrated securities, T. Rowe Price, under the supervision of the
Fund's Board of Directors/Trustees, determines whether the unrated security
is of a quality comparable to that which the Fund is allowed to purchase.
Municipal Bond Insurance All of the Funds may purchase insured bonds from
time to time. The Tax-Free Insured Intermediate and Florida Insured
Intermediate Tax-Free Funds must purchase such bonds. Municipal bond
insurance provides an unconditional and irrevocable guarantee that the
insured bond's principal and interest will be paid when due. The guarantee is
purchased from a private, non-governmental insurance company.
There are two types of insured securities that may be purchased by the 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.
Money Funds
The Money Fund will limit its purchases of portfolio instruments to those
U.S. dollar-denominated securities which the Fund's Board of
Directors/Trustees determines present minimal credit risk, and which are
Eligible Securities as defined in Rule 2a-7 under the Investment Company Act
of 1940 ("1940 Act"). Eligible Securities are generally securities which have
been rated (or whose issuer has been rated or whose issuer has comparable
securities rated) in one of the two highest short-term rating 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/Trustees. 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 Money Fund will achieve its investment
objectives or be able to maintain its net asset value per share at $1.00. The
price stability and liquidity of the Money Fund may not be equal to that of a
taxable money market Fund which exclusively invests in short-term taxable
money market securities. The taxable money market is a broader and more
liquid market with a greater number of investors, issuers, and market makers
than the short-term municipal securities market. The weighted average
maturity of the Fund varies (subject to a 90 day maximum under Rule 2a-7):
the shorter the average maturity of a portfolio, the less its price will be
impacted by interest rate fluctuations.
50
<PAGE>
Bond and Balanced Funds
Because of their investment policies, the Bond and Balanced Funds may not be
suitable or appropriate for all investors. The Funds are designed for
investors who wish to invest in non-money market funds for income, and who
would benefit, because of their tax bracket, from receiving income that is
exempt from federal income taxes. The Bond and Balanced Funds' investment
programs permit the purchase of investment grade securities that do not meet
the high quality standards of the Money Funds. 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 Bond
and Balanced Funds will fluctuate based upon market conditions. Although
these Funds seek to reduce credit risk by investing in a diversified
portfolio, such diversification does not eliminate all risk. These Funds are
also not intended to provide a vehicle for short-term trading purposes.
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.
RISK FACTORS ASSOCIATED WITH THE EQUITY PORTION OF TAX-EFFICIENT BALANCED FUND
Foreign Securities
The Fund may invest in U.S. dollar-denominated and non-U.S.
dollar-denominated securities of foreign issuers.
Risk Factors of Foreign Investing There are special risks in foreign
investing. Certain of these risks are inherent in any mutual fund investing
in foreign securities while others relate more to the countries in which the
Fund will invest. Many of the risks are more pronounced for investments in
developing or emerging market countries, such as many of the countries of
Asia, Latin America, Eastern Europe, Russia, Africa and the Middle East.
Although there is no universally accepted definition, a developing country is
generally considered to be a country which is in the initial stages of its
industrialization cycle with a per capita gross national product of less than
$8,000.
. Political and Economic Factors Individual foreign economies of certain
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. For example, in 1991, the existing government in Thailand was
overthrown in a military coup. In 1992, there were two military coup attempts
in Venezuela and in 1992 the President of Brazil was impeached. In 1994-1995,
the Mexican peso plunged in value setting off a severe crisis in the Mexican
economy. Asia is still coming to terms with its own crisis and recessionary
conditions sparked off by widespread currency weakness in late 1997. In
addition, significant
<PAGE>
external political risks currently affect some foreign countries. Both Taiwan
and China still claim sovereignty of one another and there is a demilitarized
border and hostile relations between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
. Currency Fluctuations The Fund invests in securities denominated in various
currencies. Accordingly, a change in the value of any such currency against
the U.S. dollar will result in a corresponding change in the U. S. dollar
value of the Fund's assets denominated in that currency. Such changes will
also affect the Fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of the Fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens) the value of the Fund's
securities denominated in that currency would be expected to decline.
. Investment and Repatriation of Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the Fund.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by
these or other countries in which the Funds invest. In addition, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including
in some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on stock exchanges located in the
countries in which the respective principal offices of the issuers of the
various securities are located, if that is the best available market.
Investments in certain markets may be made through ADRs traded in the United
States. Foreign stock markets are generally not as developed or efficient as,
and more volatile than, those in the United States. While growing in volume,
they usually have substantially less volume than U.S. markets and the Fund's
portfolio securities may be less liquid and subject to more rapid and erratic
price movements than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable
United States securities and such levels may not be sustainable. Commissions
on foreign stocks are generally higher than commissions on United States
exchanges, and while there is an increasing number of overseas stock markets
that have adopted a system of negotiated rates, a number are still subject to
an established schedule of minimum commission rates. There is generally less
government supervision and regulation of foreign stock exchanges, brokers,
and listed companies than in the United States. Moreover, settlement
practices for transactions in foreign markets may differ from those in United
States markets. Such differences include delays beyond periods customary in
the United States and practices, such as delivery of securities prior to
receipt of payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to the Fund.
. Investment Funds The Fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Fund's investment in these funds
is subject to the provisions of the 1940 Act. If the Fund invests in such
investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
50
<PAGE>
. Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also is often more difficult to
keep currently informed of corporate actions which affect the prices of
portfolio securities.
. Taxes The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
. Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of Funds or other assets of the Funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
. Eastern Europe and Russia Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs,
growing consumer spending, and substantial economic growth. However,
investment in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too recent to
establish a definite trend away from centrally planned economies and
state-owned industries. In many of the countries of Eastern Europe and
Russia, there is no stock exchange or formal market for securities. Such
countries may also have government exchange controls, currencies with no
recognizable market value relative to the established currencies of western
market economies, little or no experience in trading in securities, no
financial reporting standards, a lack of a banking and securities
infrastructure to handle such trading, and a legal tradition which does not
recognize rights in private property. In addition, these countries may have
national policies which restrict investments in companies deemed sensitive to
the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as
custodian of the Fund's assets invested in such countries, and these
authorities may not qualify as a foreign custodian under the Investment
Company Act of 1940 and exemptive relief from such Act may be required. All
of these considerations are among the factors which could cause significant
risks and uncertainties to investment in Eastern Europe and Russia. The Fund
will only invest in a company located in, or a government of, Eastern Europe
and Russia, if it believes the potential return justifies the risk.
. Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U. S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. Certain Latin American countries also restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is
no significant foreign exchange market for many currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency transactions
designed to protect the value of the Fund's interests in securities
denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
<PAGE>
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
RISK FACTORS ASSOCIATED WITH A CALIFORNIA PORTFOLIO
The Funds' concentration in debt obligations of one state carries a higher
risk than a portfolio that is geographically diversified. In addition to
State general obligations and notes, the Funds will invest in local bond
issues, lease obligations and revenue bonds, the credit quality and risk of
which will vary according to each security's own structure and underlying
economics.
Debt The State, its agencies and local governmental entities issued $27.9
billion in debt in 1997. Approximately 27% was general obligation debt,
backed by the taxing power of the issuer, and 73% were revenue bonds and
lease backed obligations, issued for a wide variety of purposes, including
transportation, housing, education and healthcare.
As of April 1, 1998, the State of California had approximately $18.3 billion
outstanding general obligation bonds secured by the State's revenue and
taxing power. An additional $4.2 billion in authorized but unissued state
general obligation debt remains to be issued to comply with voter initiatives
and legislative mandates. Debt service on roughly 21% of the State's
outstanding debt is met from revenue producing projects such as water,
harbor, and housing facilities. As part of its cash management program, the
State regularly issues short-term notes to meet its disbursement requirements
in advance of revenue collections. During fiscal 1998, the State issued $3.0
billion in short-term notes for this purpose. California also operates a
commercial paper program which it uses to finance construction projects. $1.2
billion of commercial paper was outstanding as of April 1, 1998.
The State supports $6.5 billion in lease-purchase obligations attributable to
the State Public Works Board and other issuers. These obligations are not
backed by the full faith and credit of the State but instead, are subject to
annual appropriations from the State's General Fund.
In addition to the State obligations described above, bonds have been issued
by special public authorities in California that are not obligations of the
State. These include bonds issued by the California Housing Finance Agency,
the Department of Water Resources, the Department of Veterans Affairs,
California State University and the California Transportation Commission.
Lease finance continues to be an area of controversy in the state. The
California Supreme Court has agreed to review a case which challenges the use
of joint power authorities to issue lease-backed debt. The outcome will have
broad implications for this important market segment. Another court challenge
surrounds the use of transfers from county transportation agencies in Orange
and Los Angeles Counties to address fiscal pressures several years ago. This
case was decided in favor of the counties, but is now on appeal.
Economy California's economy is the largest among the 50 states and one of
the largest in the world. The 1997 population of 33 million represents 12% of
the U.S. total. The State's per capita personal income in 1996 exceeded the
U.S. average by 4%. Weakness in Asian markets could influence California's
future economic momentum; California ranks first in the nation in exports,
with 50% of its exports going to Asia.
California's economy suffered through a severe recession during the early
1990's as the effects of a slowdown in the national economy were compounded
by federal defense spending cuts and military base closings. Since 1994, the
State has been in a steady recovery, positing significant job growth and
gains in personal income. The level of economic activity within the State is
important as it influences the growth or contraction of State and local
government revenues available for operations and debt service.
Recessionary influences and the effects of overbuilding in selected areas
have resulted in a contraction in real estate values in many regions of the
State in prior years. Most areas have begun to show improvement corresponding
to gains in the general economic level. Future declines in property values
could have a negative effect on the ability of certain local governments to
meet their obligations.
50
<PAGE>
As a state, California is more prone to earthquakes than most other states in
the country, creating potential economic losses from damages. On January 17,
1994, a major earthquake, measuring 6.8 on the Richter scale, hit Southern
California centered in the area of Northridge. Total damage has been
estimated at $20 billion. Significant federal aid has been received.
Legislative Due to the Funds' concentration in California state and its
municipal issuers, the Funds may be affected by certain amendments to the
California constitution and state statutes which limit the taxing and
spending authority of California governmental entities and may affect their
ability to meet their debt service obligations.
In 1978, California voters approved "Proposition 13" adding Article XIIIA, to
the state constitution which limits ad valorem taxes on real property to 1%
of "full cash value" and restricts the ability of taxing entities to increase
real property taxes. In subsequent actions, the State substantially increased
its expenditures to provide assistance to its local governments to offset the
losses in revenues and to maintain essential local services; later the State
phased out most local aid in response to its own fiscal pressures.
Another constitutional amendment, Article XIIIB, was passed by voters in 1979
prohibiting the State from spending revenues beyond its annually adjusted
"appropriations limit". Any revenues exceeding this limit must be returned to
the taxpayers as a revision in the tax rate or fee schedule over the
following two years. Such a refund, in the amount of $1.1 billion, occurred
in fiscal year 1987.
Proposition 218, the "Right to Vote on Taxes Act", was approved by the voters
in 1996. It further restricts the ability of local governments to levy and
collect both existing and future taxes, assessments and fees. In addition to
further limiting the financial flexibility of local governments in the state,
it also increases the possibility of voter determined tax rollbacks and
repeals. The interpretation and application of this proposition will
ultimately be determined by the courts.
An effect of the tax and spending limitations in California has been a broad
scale shift by local governments away from general obligation debt that
requires voter approval and pledging future tax revenues, towards lease
revenue financing that is subject to abatement and does not require voter
approval. Lease backed debt is generally viewed as a less secure form of
borrowing and therefore entails greater credit risk. Local governments also
raise capital through the use of Mello-Roos, 1915 Act, and Tax Increment
Bonds, all of which are generally riskier than general obligation debt as
they often rely on tax revenues to be generated by future development for
their support.
Proposition 98, enacted in 1988, changed the State's method of funding
education for grades below the university level. Under this constitutional
amendment, the schools are guaranteed a minimum share of State General Fund
revenues. The major effect of Proposition 98 has been to restrict the State's
flexibility to respond to fiscal stress.
Future initiatives, if proposed and adopted or future court decisions could
create renewed pressure on California governments and their ability to raise
revenues. The State and its underlying localities have displayed flexibility,
however, in overcoming the negative effects of past initiatives.
Financial The recession of the early 1990's placed California's finances
under pressure. From 1991 through 1995, accumulated deficits were carried
over into the following years and the State's general obligation bonds were
downgraded from AAA to A.
Reflecting the recent trend of economic recovery, the state's financial
condition has improved considerably. Fiscal 1998 is expected to close with a
reserve balance of $2.0 billion. Much of this cushion is the result of
explosive growth in capital gains tax collections triggered by a federal tax
rate cut. The Governor has proposed a budget for fiscal 1999 which features
continued growth in capital gains tax collections, offset by a cut in the
vehicle license fee. The State's reserve is projected to be $1.6 billion at
the end of fiscal 1999 (2.8% of revenues.) This reserve will be dedicated to
balance the ongoing costs of reductions in the vehicle license fee. We are
unable to predict the outcome of the budget package. As of June 1, 1998, the
State's general obligation bonds are rated A1 by Moody's, A+ by S&P and AA-
by Fitch. The consequences of the State's fiscal actions reach beyond its own
general obligation bond ratings. Many state agencies and local
<PAGE>
governments which depend upon state appropriations realized significant
cutbacks in funding during the last recession. Entities which have been
forced to make program reductions or to increase fees or raise special taxes
to cover their debt service and lease obligations may recover somewhat during
periods of economic prosperity.
On December 6, 1994, Orange County filed for protection under Chapter 9 of
the U.S. Bankruptcy Code after reports of significant losses in its
investment pool. Upon restructuring, the realized losses in the pool were
$1.6 billion or 21% of assets. More than 200 public entities, most of which,
but not all, are located in Orange County were also depositors in the pool.
The County defaulted on a number of its debt obligations. The County emerged
from bankruptcy on June 12, 1996. Through a series of long-term financings,
it repaid most of its obligations to pool depositors and has become current
on its public debt obligations. The balance of claims against the County are
payable from any proceeds received from litigation against securities dealers
and other parties. The County's ratings were restored to investment grade in
1998.
Sectors Certain areas of potential investment concentration present unique
risks. In 1997, $1.9 billion of tax-exempt debt issued in California was for
public or non-profit hospitals. A significant portion of the Funds' assets
may be invested in health care issues. For over a decade, the hospital
industry has been under significant pressure to reduce expenses and shorten
length of stay, a phenomenon which has negatively affected the financial
health of many hospitals. All hospitals are dependent on third party
reimbursement sources such as the federal Medicare and state MediCal programs
or private insurers. To the extent these third party payers reduce
reimbursement levels, the individual hospitals may be affected. In the face
of these pressures, the trend of hospital mergers and acquisitions has
accelerated in recent years. These organizational changes present both risks
and opportunities for the institutions involved.
The Funds may from time to time invest in electric revenue issues. The
financial performance of these utilities may be impacted as the industry
moves toward deregulation and increased competition. California's electric
utility restructuring plan, Assembly Bill 1890, permits direct competition to
be phased in between 1998 and 2002. Municipal utilities, while not subject to
the legislation, are being faced with competitive market forces and must use
the transition period wisely to proactively prepare for deregulation. They
are under pressure to reduce rates and cut costs in order to maintain their
customer bases. In addition, some electric revenue issues have exposure to or
participate in nuclear power plants which could affect the issuer's financial
performance. Risks include unexpected outages or plant shutdowns, increased
Nuclear Regulatory Commission surveillance or inadequate rate relief.
The Funds may invest in private activity bond issues for corporate and
non-profit borrowers. These issues sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrower corporations. No governmental support is implied.
RISK FACTORS ASSOCIATED WITH A FLORIDA PORTFOLIO
The Fund's program of investing primarily in insured, AAA-rated Florida
municipal bonds should significantly lessen the credit risks which would be
associated with a portfolio of uninsured Florida bonds. Nevertheless, to a
certain degree, the Fund's concentration in securities issued by the State of
Florida and its political subdivisions involves greater risk than a fund
broadly invested in insured bonds across many states and municipalities. The
credit quality of the Fund will depend upon the continued financial strength
of the insurance companies insuring the bonds purchased by the Fund as well
as the State of Florida and the numerous public bodies, municipalities and
other issuers of debt securities in Florida.
Debt The State of Florida and its local governments issue three basic types
of debt, with varying degrees of credit risk: general obligation bonds backed
by the unlimited taxing power of the issuer, revenue bonds secured by
specific pledged funds or charges for a related project, and tax-exempt lease
obligations, supported by annual appropriations from the issuer, usually with
no implied tax or specific revenue pledge. During 1997, $10.2 billion in
state and local debt was issued in Florida, a 17% increase from the previous
year. Of this total debt amount, approximately 14% represented general
obligation debt and 86% represented
50
<PAGE>
revenue bonds and lease-backed obligations. Debt issued in 1997 was for a
wide variety of public purposes, including transportation, housing,
education, health care and utilities.
As of May 10, 1998, the State of Florida had $9.2 billion outstanding general
obligation bonds secured by the State's full faith and credit and taxing
power. General bonded debt service accounted for a modest 2.4% of all
governmental expenditures in fiscal year 1997. An additional $4 billion in
outstanding bonds have been issued by the State and secured by limited state
tax and revenue sources. General obligation debt of the State of Florida is
rated Aa2 by Moody's, AA+ by S&P and AA by Fitch as of June 1, 1998. State
debt may only be used to fund capital outlay projects; Florida is not
authorized to issue obligations to fund operations.
Several agencies of the State are also authorized to issue debt which does
not represent a pledge of the state's credit. The Florida Housing Finance
Authority and Florida Board of Regents are the largest issuers of this type.
The principal and interest on bonds issued by these bodies are payable solely
from specified sources such as mortgage repayments and university tuition and
fees.
Economy The State of Florida has a population of approximately 14.4 million,
making it the fourth largest state. Due to immigration, the State's
population has grown at a rate exceeding the nation for four decades.
Florida's economy is broadly based with a large concentration in the service
and trade sectors. Tourism is one of Florida's most important industries.
Rebounding from a decline in 1994, visitor traffic grew by 5.6% in 1996 and
reached an all-time high of 43.2 million visitors in 1997.
During most of the 1980's, as Florida's population and employment base grew,
its job growth rate was double that of the nation. However, beginning in
1988, job growth slowed and unemployment rates began trending above national
levels for a number of years. During 1995, Florida's unemployment rate was
8.2% versus 7.4% nationally. Florida's rapid non-farm job growth since 1996
has reversed this trend and the state's February 1998 unemployment rate
stands at 4.8% versus the national average of 4.9%. State per capita income
is 99% of the national average, well above norms for the Southeast.
Legislative The State of Florida does not have a personal income tax. A
constitutional amendment would be required in order to implement such a tax.
Although the probability appears very low, the Fund cannot rule out the
possibility that a personal income tax may be implemented at some time in the
future. If such a tax were to be imposed, there is no assurance that interest
earned on Florida Municipal Obligations would be exempt from this tax.
Under current Florida law, shares of the Fund will be exempt from the State's
intangible personal property tax to the extent that on the annual assessment
date (January 1) its assets are solely invested in Florida Municipal
Obligations and U.S. government securities, certain short-term cash
investments, or other exempt securities. There can be no assurance that this
exemption for Florida securities will be maintained. Also, the
constitutionality of the intangibles tax has been challenged in court.
The Florida Constitution limits the total ad valorem property tax that may be
levied by each county, municipality and school district to ten mills (1.0% of
value). The limit applies only to taxes levied for operating purposes and
excludes taxes levied for the payment of bonds. This restricts the operating
flexibility of local governments in the State and may result from time to
time in budget deficits for some local units.
Financial The Florida Constitution and Statutes mandate that the State budget
as a whole, and each separate fund within the State budget, be kept in
balance from currently available revenues each State fiscal year (July 1-June
30.) The Governor and Comptroller are responsible for insuring that
sufficient revenues are collected to meet appropriations and that no deficit
occurs in any State fund.
The State's revenue structure is narrowly based, relying on the sales and use
tax for 70% of its general revenues. This structure, combined with the
effects of the recession and heavy spending demands, created budget
shortfalls in fiscal years 1991 and 1992. Through mid-year spending
adjustments and a draw upon its reserves, the State was able to achieve
budget balance for both fiscal years. The State's finances received a
substantial boost in fiscal 1993 as a result of increased economic activity
associated with rebuilding efforts after Hurricane Andrew, which hit south
Florida on August 24, 1992. Additionally, Florida recently settled a lawsuit
with the tobacco industry where the state sought to recover the costs
associated with tobacco usage by
<PAGE>
Floridians. This settlement resulted in a $750 million payment to the state
in 1997 and future payments that will accumulate to about $10.5 billion over
the next 25 years. At the end of 1997, the State had reserves of $1.2 billion
in the General Revenue Fund (7.8% of revenues).
In November 1994, State voters passed a proposal to limit State revenue
growth to the average annual growth in personal income over the previous five
years. The cap excludes revenue to pay certain expenditures, including debt
service. The limitation should not pose an onerous burden on State finance.
However, the demand for governmental services continues to grow because of
above average population growth and demographics.
Sectors Certain areas of potential investment concentration present unique
risks. In 1997, $1.3 billion of tax-exempt debt issued in Florida was for
public or non-profit hospitals. A significant portion of the Fund's assets
may be invested in health care issues.
For over a decade, the hospital industry has been under significant pressure
to reduce expenses and shorten length of stay, a phenomenon which has
negatively affected the financial health of many hospitals. All hospitals are
dependent on third party reimbursement sources such as the federal Medicare
and state Medicaid programs or private insurers. To the extent these payors
reduce reimbursement levels, the individual hospitals may be affected. In the
face of these pressures, the trend of hospital mergers and acquisitions has
accelerated in recent years. These organizational changes present both risks
and opportunities for the institutions involved. Due to the high proportion
of elderly residents, Florida hospitals tend to be highly dependent on
Medicare. In addition to the regulations imposed by Medicare, the State also
regulates healthcare. A State board must approve the budgets of all Florida
hospitals; certificates of need are required for all significant capital
expenditures. The primary management objective is cost control. The inability
of some hospitals to achieve adequate cost control while operating in a
competitive environment has led to a number of hospital bond defaults.
The Fund may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission surveillance or
inadequate rate relief. In addition, the financial performance of electric
utilities may be impacted by increased competition and deregulation in the
electric utility industry.
The Fund may invest in private activity bond issues for corporate and
non-profit borrowers. These issues, sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrowing corporations. No government support is implied.
RISK FACTORS ASSOCIATED WITH A GEORGIA PORTFOLIO
The Fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to State of Georgia general obligations and state agency issues, the Fund
will invest in local bond issues, lease obligations and revenue bonds, the
credit quality and risk of which will vary according to each security's own
structure and underlying economics.
Debt The State of Georgia and its local governments issued $4.6 billion in
municipal bonds in 1997, a 29% increase from the previous year. Of this total
debt amount, approximately 29% was general obligation debt backed by the
unlimited taxing power of the issuer and 71% was revenue bond debt secured by
specific pledged fees or charges for an enterprise or project. As of June 1,
1998, the State was rated Aaa by Moody's, AAA by S&P and AAA by Fitch.
The State of Georgia currently has net direct obligations of approximately
$4.8 billion. Since 1973, when a Constitutional Amendment authorizing the
issuance of state general obligation (GO) bonds was implemented, the State
has funded most of its capital needs through the issuance of GO bonds.
Previously, capital requirements were funded through the issuance of bonds by
ten separate authorities and secured by lease rental agreements and annual
state appropriations. Its Constitution permits the State to issue bonds for
two
50
<PAGE>
types of public purposes: (1) general obligation debt and (2) guaranteed
revenue debt. The Constitution imposes certain debt limits and controls. GO
debt service cannot exceed 10% of total revenue receipts less refunds of the
state treasury. GO bonds have a maximum maturity of 25 years. Currently,
maximum GO debt service requirements are well below the legal limit at 5.3%
of Fiscal Year 1997 treasury receipts.
In addition to the general obligation and lease backed debt described above,
$301 million bonds have been issued and are outstanding by the Georgia World
Congress Authority and $754 million bonds have been issued and are
outstanding by the Georgia Housing and Finance Authority, none of which
represent direct obligations of the State.
Economy The State of Georgia has a population of approximately 7.4 million,
making it the 10th largest state. Since the 1960s, the State's population has
grown at a rate exceeding the national average, with the growth rate during
the 1980s nearly twice that of the entire country. Stable to strong economic
growth during the 1980s was led by the Atlanta metropolitan statistical area,
where approximately 45% of the State's population is located. This area
includes the capital city of Atlanta, and 18 surrounding counties. The next
largest metropolitan area is the Columbus-Muscogee area followed by the Macon
area.
The State's economy is well diversified. The current labor force of 3.7
million is largely concentrated in service and wholesale/retail trade jobs,
followed by lesser amounts in manufacturing and government. Employment gains
have substantially exceeded the region and the U.S. since 1980. Georgia's one
year employment growth (February 1997 to February 1998) stood at 3.8%
compared to the national rate of 2.9%. The State's economy continues to
outperform the nation, despite a slowing after the high level of economic
activity resulting from the 1996 Olympic Games. Georgia's per capita income
has steadily improved against the national average since the 1960s and
currently is 94% of the U.S., ranking it 25th among the states.
Financial To a large degree, the creditworthiness of the portfolio is
dependent on the financial strength of the State of Georgia and its
localities. During the 1980s, the State's strong economic performance
translated into solid financial performance and the accumulation of
substantial reserves.
During fiscal 1989 to 1991, the State's financial condition was affected by
three years of revenue shortfalls brought on by recession. During these
periods, the Governor called special legislative sessions to enact sizable
spending cuts to achieve budget balance. Economic conditions improved in
1992, allowing the State to restore its financial cushion. Results for fiscal
1997 showed a continuation of this positive trend with an ending unreserved
general fund balance of $969 million, or 8% of revenues.
A significant portion of the portfolio's assets is expected to be invested in
the debt obligations of local governments and public authorities with
investment grade ratings of BBB or higher. While local governments in Georgia
are primarily reliant on independent revenue sources, such as property taxes,
they are not immune to budget shortfalls caused by cutbacks in State aid. The
Fund may purchase obligations issued by public authorities in Georgia which
are not backed by the full faith and credit of the State and may or may not
be subject to annual appropriations from the State's General Fund. Likewise,
certain enterprises such as water and sewer systems or hospitals may be
affected by changes in economic activity.
Sectors Certain areas of potential investment concentration present unique
risks. In 1997, $276 million of tax-exempt debt issued in Georgia was for
public or non-profit hospitals. A significant portion of the Fund's assets
may be invested in health care issues. For over a decade, the hospital
industry has been under significant pressure to reduce expenses and shorten
length of stay, a phenomenon which has negatively affected the financial
health of many hospitals. All hospitals are dependent on third party
reimbursement sources such as the federal Medicare and state Medicaid
programs or private insurers. To the extent these payors reduce reimbursement
levels, the individual hospitals may be affected. In the face of these
pressures, the trend of hospital mergers and acquisitions has accelerated in
recent years. These organizational changes present both risks and
opportunities for the institutions involved.
The Fund may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
<PAGE>
In addition, the financial performance of electric utilities may be impacted
by increased competition and deregulation of the electric utility industry.
The Fund may invest in private activity bond issues for corporate and
non-profit borrowers. These issues sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrowing corporations. No governmental support is implied.
RISK FACTORS ASSOCIATED WITH A MARYLAND PORTFOLIO
Each Fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to State of Maryland general obligations and state agency issues, the Fund
will invest in local bond issues, lease obligations and revenue bonds, the
credit quality and risk of which will vary according to each security's own
structure and underlying economics.
Debt The State of Maryland and its local governments issue three basic types
of debt, with varying degrees of credit risk: general obligation bonds backed
by the unlimited taxing power of the issuer, revenue bonds secured by
specific pledged fees or charges for a related project, and tax-exempt lease
obligations, secured by annual appropriations by the issuer, usually with no
implied tax or specific revenue appropriations by the issuer. In 1997, $2.8
billion in state and local debt was issued in Maryland, with approximately
41% representing general obligation debt and 59% revenue bonds and lease
backed debt.
The State of Maryland had $3.0 billion in general obligation bonds
outstanding as of December 31, 1997 along with an additional $1.3 billion in
other tax-supported debt. General obligation debt of the State of Maryland is
rated Triple-A by Moody's, S&P and Fitch. There is no general debt limit
imposed by the State Constitution or public general laws. The State
Constitution imposes a 15 year maturity limit on State general obligation
bonds. Although voters approved a constitutional amendment in 1982 permitting
the State to borrow up to $100 million in short-term notes in anticipation of
taxes and revenues, the State has not made use of this authority.
Many agencies and other instrumentalities of the State government are
authorized to borrow money under legislation which expressly provides that
the loan obligations shall not be deemed to constitute a debt or a pledge of
the faith and credit of the State. The Community Development Administration
of the Department of Housing and Community Development, the Maryland Stadium
Authority, the Board of Trustees of St. Mary's College of Maryland, the
Maryland Environmental Service, the Board of Regents of the University of
Maryland System, the Board of Regents of Morgan State University, the
Maryland Food Center Authority, and the Maryland Water Quality Financing
Administration have issued and have outstanding bonds of this type. The
principal of and interest on bonds issued by these bodies are payable solely
from pledged revenues, principally fees generated from use of the facilities,
enterprises financed by the bonds, or other dedicated fees.
Economy The economy of the State of Maryland generally demonstrates strong
performance relative to the nation. Per capita income is 13% above the U.S.
average. Unemployment in March of 1998 was 4.6%, compared to a national
average of 4.7%. The State's population in 1997 was 5 million, with 87%
concentrated in the Baltimore-Washington corridor.
Financial To a large degree, the risk of the Funds is dependent upon the
financial strength of the State of Maryland and its localities. Over the long
term, Maryland's financial condition has been strong; however, in fiscal
1992, the State experienced unanticipated shortfalls in revenues, as
collections of major taxes fell during the recession. To address this loss,
the governor enacted a series of mid-year reductions in expenditures,
primarily cuts in local aid.
Balancing the state budget for fiscal year 1993 involved a variety of
additional taxes, including a higher income tax on upper income households
and an expanded sales tax. The legislature also adopted further cuts in State
aid to localities, but this action was offset by the ability of localities to
increase the local "piggyback" tax from 50 percent to 60 percent of the State
rate. These actions were successful in restoring the State's financial
condition and replenishing reserves. In fiscal 1994 Maryland's economy began
to improve, allowing
50
<PAGE>
the state to continue to strengthen its financial condition. The results of
fiscal year 1998 are projected to show a general fund balance of $318 million
and a Budget Stabilization Account balance of $616 million, together
representing 11.4% of expenditures. The fiscal 1999 incorporates the first
full year of a 10% reduction in the personal income tax rate, to be phased in
over five years. Funding the final years of this plan is expected to require
a draw down of the reserve position.
Many local Maryland governments also suffered from fiscal stress and general
declines in financial performance during the last recession. Downturns in
real estate related receipts, declines in the growth of income tax revenues,
lower cash positions and reduced interest income were common problems. State
aid to local governments was also reduced during that period. Local
governments closed these gaps by increasing property and local income tax
rates, implementing program cuts, and curtailing pay raises. Certain counties
in Maryland are subject to voter approval limitations on property tax levy
increases or on governmental spending which limits their flexibility in
responding to external changes.
Future voter initiatives, if proposed and adopted, could create pressure on
the counties and other local governments and their ability to raise revenues.
The Funds cannot predict the impact of any such future tax limitations on
debt quality.
Sectors Certain areas of potential investment concentration present unique
risks. In 1997 $767 million of tax-exempt debt issued in Maryland was for
public or non-profit hospitals. A significant portion of the Funds' assets
may be invested in health care issues. For over a decade, the hospital
industry has been under significant pressure to reduce expenses and shorten
length of stay, a phenomenon which has negatively affected the financial
health of some hospitals. All hospitals are dependent on third party
reimbursement mechanisms. At the present time Maryland hospitals operate
under a system which reimburses hospitals according to a State administered
set of rates and charges for all payers rather than the Federal Diagnosis
Related Group (DRG's) system which applies to Medicare payments. Since 1983,
Maryland hospitals, on average over the trailing three year period, have
increased hospital charges at a level below the national average in terms of
Medicare cost increases, allowing them to continue operating under a Medicare
waiver. Any loss of this waiver in the future may have an adverse impact upon
the credit quality of Maryland hospitals.
The Funds may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission surveillance or
inadequate rate relief. In addition, the financial performance of electric
utilities may be impacted by increased competition and deregulation in the
industry.
The Funds may invest in private activity bond issues for corporate and
non-profit borrowers. These issues sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrowing corporations. No governmental support is implied.
RISK FACTORS ASSOCIATED WITH A NEW JERSEY PORTFOLIO
The Fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to State of New Jersey general obligation bonds, notes and state agency
issues, the Fund will invest in local bond issues, lease obligations and
revenue bonds, the credit quality and risk of which will vary according to
each security's own structure and underlying economics.
Debt The State of New Jersey and its local governments issued $9.0 billion of
municipal bonds in 1997. Of this amount, approximately 29% was general
obligation debt backed by the unlimited taxing power of the issuer and 71%
were revenue bonds secured by specific pledged fees or charges for an
enterprise or project. Included within the revenue bond sector are tax-exempt
lease obligations that are subject to annual appropriations of a governmental
body, usually with no implied tax or specific revenue pledge. Debt issued in
<PAGE>
1997 was for a wide array of public purposes, including water and sewer
projects, health care, housing, education, transportation, and pollution
control.
The State of New Jersey has approximately $3.4 billion outstanding general
obligation bonds secured by the State's revenue and taxing power. As of June
1, 1998, its general obligation bonds were rated Aa1 by Moody's, AA+ by S&P
and AA+ by Fitch. In addition to the State's direct debt, it is obligated for
certain lease backed debt issued through the Mercer County Improvement
Authority, the New Jersey Economic Development Authority, the New Jersey
Building Authority, the Educational Facilities Authority and the
Transportation Trust Fund Authority. Under State law, the obligations of
certain local school districts and county college districts have been
supported by State appropriations. The State has also entered into a "moral
obligation" (as opposed to a legal commitment) to make up debt service
shortfalls for the New Jersey Housing and Mortgage Finance Agency as well as
the South Jersey Port Corporation. While no assistance has ever been required
for the New Jersey Housing and Mortgage Finance Agency, from time to time,
the State has supported the operations and debt service of the South Jersey
Port Corporation. The State has also guaranteed bonds issued by the Sports
and Exposition Authority. The related obligations of the State described in
this paragraph total an additional $9.0 billion.
A number of other state-created agencies issue tax-exempt revenue bonds that
are not a debt or liability of the State. The largest such entities include
the New Jersey Turnpike Authority, the New Jersey Educational Facilities
Authority and the New Jersey Health Care Facilities Financing Authority.
A significant portion of the portfolio's assets is expected to be invested in
the debt obligations of local governments and public authorities with
investment grade ratings of BBB or higher. While local governments in New
Jersey are primarily reliant on independent revenue sources, such as property
taxes, they are not immune to budget shortfalls caused by economic downturns
or cutbacks in State aid. Likewise, certain enterprises such as toll roads or
hospitals may be affected by changes in economic activity. Under the New
Jersey Local Budget Law, the State oversees the budget preparation of local
governments and has certain powers to enforce balanced budgets, limit short
term borrowing and regulate overall debt limits.
Economy New Jersey is the ninth largest and most densely populated state with
7.9 million residents. The economic base is diversified among manufacturing,
construction, services, and agricultural uses. The per capita personal income
of $32,654 ranks the State as the second highest in the United States. Over
the long term, the State's economy has been a strong performer, with
unemployment levels generally below national averages; however, since the
recession of 1991-92, the State's growth rate has lagged the nation.
Financial To a large degree, the risk of the portfolio is dependent on the
financial strength of the State of New Jersey and its localities.
Characteristically, the State has demonstrated solid financial performance,
but operations suffered as the State's economy stagnated during the recession
of the early 1990's. In fiscal 1990 through 1994 New Jersey utilized
non-recurring revenues and expenditure deferrals and a tax increase to
achieve balance. An environment of cost controls and a slightly improved
economy allowed the State to conclude fiscal year 1997 with an unreserved
general fund balance of $870 million (5.3% of general revenues). Effective
January 1996, the State completed the last stage of a 30% reduction in
personal income tax rates which was accommodated for in the budget for fiscal
year 1997. The budget for fiscal 1998 is expected to end with a large
surplus, reflecting an improving economy and cost control.
Sectors Certain areas of potential investment concentration present unique
risks. In 1996, 10.8% of tax-exempt debt issued in New Jersey was for public
or non-profit hospitals. A significant portion of the Fund's assets may be
invested in health care issues. For over a decade, the hospital industry has
been under significant pressure to reduce expenses and shorten length of
stay, a phenomenon which has negatively affected the financial health of many
hospitals. While each hospital bond issue is separately secured by the
individual hospital's revenues, third party reimbursement sources such as the
federal Medicare and state Medicaid programs or private insurers are common
to all hospitals. To the extent these payors reduce reimbursement levels, the
individual hospitals may be affected. In the face of these pressures, the
trend of hospital mergers and a acquisitions has accelerated in recent years.
These organizational changes present both risks and opportunities for the
institutions involved. In late 1997 the State of New Jersey reauthorized the
50
<PAGE>
funding of charity care subsidies to eligible hospitals. The failure of the
State to renew this program or put in place a permanent funding mechanism may
affect the financial performance of certain New Jersey hospitals in future
years.
The Fund may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include delay in construction and
operation due to increased regulation, unexpected outages or plant shutdowns,
increased Nuclear Regulatory Commission surveillance or inadequate rate
relief. In addition, the financial performance of electric utilities may be
impacted by increased competition and deregulation in the industry.
The Fund may invest in private activity bond issues for corporate and
non-profit borrowers. These issues sold through governmental conduits, such
as the New Jersey Economic Development Authority and various local issuers,
are backed solely by the revenues pledged by the respective borrowing
corporations. No governmental support is implied. This category accounted for
5.6% of the tax-exempt debt issued in New Jersey during 1996. In the past, a
number of New Jersey Economic Development Authority issues have defaulted as
a result of borrower financial difficulties. A number of counties and utility
authorities in the state have issued several billion dollars of bonds to fund
incinerator projects and solid waste projects. A federal court decision
striking down New Jersey's system of solid waste flow control increases the
potential risk of default absent a legislative solution, or some form of
subsidy by local or State governments.
RISK FACTORS ASSOCIATED WITH A NEW YORK PORTFOLIO
The Funds' concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to state general obligation bonds and notes and the debt of various state
agencies, the Fund will invest in local bond issues, lease obligations and
revenue bonds, the credit quality and risk of which will vary according to
each security's own structure and underlying economics.
The Funds' ability to maintain a high level of "triple-exempt" income is
primarily dependent upon the ability of New York issuers to continue to meet
debt service obligations in a timely fashion. In 1975 the State, New York
City, and other related issuers experienced serious financial difficulties
that ultimately resulted in much lower credit ratings and loss of access to
the public debt markets. A series of fiscal reforms and an improved economic
climate allowed these entities to return to financial stability by the early
1980s. Credit ratings were reinstated or raised and access to the public
credit markets was restored. During the early 1990s, the State and City
confronted renewed fiscal pressure, as the region suffered moderate economic
decline. Conditions began to improve in 1993, though below average economic
performance and tight budgetary conditions persisted. Both entities
experienced financial relief in fiscal 1997 because of the strong national
economy, a robust financial services sector, and vigilant spending control.
The State and City continue to face challenging budgets while they attempt to
adjust spending levels and priorities.
New York State
The State, its agencies, and local governments issued $27.9 billion in
long-term municipal bonds in 1997, a 31% increase from the previous year. As
of March 31, 1998, total State-related bonded debt was projected to be $33.7
billion, of which $5.0 billion was general obligation debt and $28.7 billion
was financed under lease-purchase or other contractual obligations. In
addition, the State had $293 million in bond anticipation notes outstanding.
Since 1993, the State has not issued Tax and Revenue Anticipation Notes
(TRANs) terminating the practice of annual seasonal borrowing which had
occurred since 1952. As of June 1, 1998, the State's general obligation bonds
were rated A2 by Moody's, A by S&P and A+ by Fitch. All general obligation
bonds must be approved by the voters prior to issuance.
The fiscal stability of the State is also important for numerous authorities
which have responsibilities for financing, constructing, and operating
revenue-producing public benefit facilities. As of September 30, 1995 there
were 17 authorities that had aggregate debt outstanding, including refunding
bonds, of $73 billion.
<PAGE>
The authorities most reliant upon annual direct State support include the
Metropolitan Transit Authority (MTA), the Urban Development Authority (UDC),
and the New York Housing Finance Agency (HFA). In February 1975, the UDC
defaulted on approximately $1.0 billion of short-term notes. The default was
ultimately cured by the creation of the Project Finance Authority (PFA),
through which the State provided assistance to the UDC, including support for
debt service. Since then, there have been no additional defaults by State
authorities although substantial annual assistance is required by the MTA and
the HFA in particular.
Subsequent to the fiscal crisis of the mid-70's, New York State maintained
balanced operations on a cash basis, although by 1992 it had built up an
accumulated general fund deficit of over $6 billion on a "Generally Accepted
Accounting Principles" (GAAP) basis. This deficit consisted mainly of overdue
tax refunds and payments due localities.
To resolve its accumulated general fund deficit the State established the
Local Government Assistance Corporation (LGAC) in 1990. A total of $5.2
billion in LGAC bonds have been issued. The proceeds of these bonds were used
to provide the State's assistance to localities and school districts,
enabling the State to reduce its accumulated general fund deficit. State
short-term borrowing requirements, which peaked at a record $5.9 billion in
fiscal 1991, have been reduced to zero. Nonetheless, the State ended fiscal
1997 with a General Fund unreserved deficit balance of $1.7 billion. The
adopted budget for fiscal 1996 included a multi-year tax reduction plan which
lowers the maximum personal income tax rate from 7.875 to 6.85%. The original
budget proposal for the fiscal year ended March 31,1997 included a multi-year
personal income tax rate cut and emphasized cost control to balance against
the effects of a weak economy. Because of strong growth in personal income
and business taxes, fiscal year 1997 ended with an operating surplus of $1.9
billion, which will helped smooth budget balancing efforts for fiscal year
1998. Fiscal year 1998 is estimated to have ended with another large
operating surplus.
New York State has a large, diversified economy which has witnessed a basic
shift away from manufacturing toward service sector employment. In 1997, per
capita income in New York State was $30,752, 20% above the national average.
Like most northeastern states, New York suffered a population loss during the
1970s. However, during the 1980s that trend reversed and population increased
slightly, standing at 18,137,000 in 1997. During 1990-1992, the State
experienced a slowing of economic growth evidenced by the loss of 425,000
jobs. Conditions have improved with non-farm employment growing by an average
of 0.9% between 1994 and 1997, well below the national average. Such economic
trends are important as they influence the growth or contraction of State
revenues available for operations and debt service.
New York City
The financial problems of New York City were acute between 1975 and 1979,
highlighted by a payment moratorium on the City's short-term obligations. In
the subsequent decade, the City made a significant recovery. The most
important contribution to the City's fiscal recovery was the creation of the
Municipal Assistance Corporation for the City of New York (MAC). Backed by
sales, use, stock transfer, and other taxes, MAC issued bonds and used the
proceeds to purchase City bonds and notes. Although the MAC bonds met with
reluctance by investors at first, the program has proven to be very
successful.
Much progress has been made since the fiscal crisis of 1975. By 1981, the
City achieved a budget balanced in accordance with Generally Accepted
Accounting Principles (GAAP) and has continued to generate small surpluses on
an operating basis. By 1983, the City eliminated its accumulated General Fund
deficit and as of the fiscal year ending June 30, 1997, had a total General
Fund balance of $373 million. Although the City continues to finance its
seasonal cash flow needs through public borrowings, the total amount of these
borrowings has not exceeded 10% of any year's revenues and all have been
repaid by the end of the fiscal year.
As of June 1, 1997 the City's general obligation bonds are rated A3 by
Moody's, BBB+ by S&P and A- by Fitch. S&P has listed the City's rating on
positive credit watch.
While New York City sustained a decade long record of relative financial
stability, during the 1990's budgetary pressures have been evident. Its major
revenue sources, income and sales taxes, were slowed and a downturn in the
real estate market reduced property tax revenues. Nonetheless, the City
concluded the 1997
50
<PAGE>
fiscal year with an operating surplus of $1.3 billion. The City's finances
have been bolstered by strong tax receipts growth, fueled by strong financial
markets over the last several years. Revenues and expenditures for the 1997
fiscal year were balanced in accordance with GAAP for the seventeenth
consecutive year. New York City remains exposed to future budget pressure
should there be a sharp down turn in the financial services sector, though it
has established a budget stabilization account for contingency.
Long Island and LILCO
The Long Island Lighting Company (LILCO) was the single largest property
taxpayer in both Nassau and Suffolk Counties. LILCO experienced substantial
financial difficulty primarily arising from problems related to its completed
but unlicensed 809 megawatt Shoreham Nuclear Power Facility located in
Suffolk County. In 1986, the State Legislature created the Long Island Power
Authority (LIPA) and ownership of the Shoreham Plant was subsequently
transferred to LIPA for one dollar in exchange for certain rate benefits to
LILCO.
As requested by the Governor, LIPA proposed a plan to restructure LILCO,
reduce rates on Long Island and provide a framework for long-term competition
in power production. Included in the plan would be a settlement of the
Suffolk County tax liability. With the issuance of $7 billion in debt, LIPA
will purchase LILCO common stock, acquire or redeem certain preferred stock
and outstanding debt, and fund the cost of certain rebates and credits to
LIPA's customers. With these purchases, LIPA would acquire LILCO's electric
transmission and distribution system, its 18% ownership interest in the Nine
Mile Point 2 nuclear plant and the regulatory asset of Shoreham. In May 1998,
LIPA sold its first two series of bonds amounting to $4.9 billion. This
allowed for the acquisition of LILCO by LIPA and a merger of the remaining
portions of the former LILCO business with Keyspan Energy to form Marketspan
Corp. LIPA will now be the provider of retail electric service throughout
most of Long Island.
Sectors Certain areas of potential investment concentration present unique
risks. In 1997, $1.9 billion of tax-exempt debt issued in New York was for
public or non-profit hospitals. A significant portion of the Fund's assets
may be invested in health care issues. For over a decade, the hospital
industry has been under significant pressure to reduce expenses and shorten
length of stay, a phenomenon which has negatively affected the financial
health of many hospitals. While each hospital bond issue is separately
secured by the individual hospital's revenues, third party reimbursement
sources such as the federal Medicare and state Medicaid programs or private
insurers are common to all hospitals. To the extent these third party payors
reduce reimbursement levels, the individual hospitals may be affected. The
state's support for Medicaid and health services has slowed over the last
several years. In 1997 health care reform was implemented. Under the new
system, hospitals are permitted to negotiate inpatient payment rates with
private payors. In addition, the federal balanced budget act of 1997 contains
provisions to reduce Medicare expenditures. In the face of these pressures,
the trend of hospital mergers and acquisitions has accelerated in recent
years. These organizational changes present both risks and opportunities for
the institutions.
The Funds may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or plan
shutdowns, increased Nuclear Regulatory Commission surveillance or inadequate
rate relief. In addition, the financial performance of electric utilities may
be impacted by increased competition and deregulation in the industry.
The Funds may invest in private activity bond issues for corporate and
non-profit borrowers. These issues sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrowing corporations. No governmental support is implied. This category
accounted for 9.8% of the tax-exempt debt issued in New York during 1997.
RISK FACTORS ASSOCIATED WITH A VIRGINIA PORTFOLIO
The Funds' concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to State of Virginia general obligations and state agency issues, the
<PAGE>
Fund will invest in local bond issues, lease obligations and revenue bonds,
the credit quality and risk of which will vary according to each security's
own structure and underlying economics.
Debt The State of Virginia and its local governments issued $3.8 billion
municipal bonds in 1997, including general obligation debt backed by the
unlimited taxing power of the issuer and revenue bonds secured by specific
pledged fees or charges for an enterprise or project. Included within the
revenue bond category are tax-exempt lease obligations that are subject to
annual appropriations of a governmental body to meet debt service, usually
with no implied tax or specific revenue pledge. Debt issued in 1997 was for a
wide variety of public purposes, including transportation, housing,
education, health care, and industrial development.
As of June 30, 1997 the State of Virginia had $1.1 billion outstanding
general obligation bonds secured by the State's revenue and taxing power, a
modest amount compared to many other states. Under state law, general
obligation debt is limited to 1.15 times the average of the preceding three
years' income tax and sales and use tax collections. The State's outstanding
general obligation debt is well below that limit and over 90% of the debt
service is actually met from revenue producing capital projects such as
universities and toll roads.
The State also supports $1.9 billion in debt issued by the Virginia Public
Building Authority, the Virginia College Building Authority, the Virginia
Port Authority, the Innovative Technology Authority and for transportation
purposes. These bonds are not backed by the full faith and credit of the
State but instead, are subject to annual appropriations from the State's
General Fund.
In addition to the State and public authorities described above, an
additional $7.3 billion bonds have been issued by special public authorities
in Virginia that are not obligations of the State. These bonds include debt
issued by the Virginia Education Loan Authority, the Virginia Public School
Authority, the Virginia Resources Authority, and the Virginia Housing
Development Authority.
Economy The State of Virginia has a population of approximately 6.7 million,
making it the twelfth largest state. Since the 1930s the State's population
has grown at a rate near or exceeding the national average. Stable to strong
economic growth during the 1980s was led by the northern Virginia area
outside of Washington, D.C. where approximately 25% of the State's population
is concentrated. The next largest metropolitan area is the Norfolk-Virginia
Beach-Newport News area, followed by the Richmond-Petersburg area, including
the State's capital of Richmond. The State's economy is broadly based, with a
large concentration in service and governmental jobs, followed by
manufacturing. Virginia has significant concentrations of high technology
employers, with nearly 150,000 people employed in 3,900 establishments. Per
capita income exceeds national averages while unemployment figures have
consistently tracked below national averages.
Financial To a large degree, the risk of the portfolio is dependent on the
financial strength of the State of Virginia and its localities. As of June 1,
1998, the State was rated Triple-A by Moody's, S&P and Fitch. The State's
budget is prepared on a biennial basis. From 1970 through 1996 the State's
General Fund showed a positive balance for all of its two year budgetary
periods. The national recession and its negative effects on State personal
income tax collections did, however, force the State to draw down its General
Fund balances to a deficit position in 1992. Spending cuts and improved
economic conditions allowed for positive operations in 1993-1997. The State
posted a budgetary surplus for fiscal years 1995 to 1997 despite federal
retiree settlements and other transfers. On June 30, 1997, the unreserved
general fund balance, including a revenue stabilization account, totaled $435
million.
A significant portion of the Funds' assets is expected to be invested in the
debt obligations of local governments and public authorities with investment
grade ratings of BBB or higher. While local governments in Virginia are
primarily reliant on independent revenue sources, such as property taxes,
they are not immune to budget shortfalls caused by cutbacks in State aid.
Likewise, certain enterprises such as toll roads or hospitals may be affected
by changes in economic activity.
Sectors Certain areas of potential investment concentration present unique
risks. A significant portion of the Fund's assets may be invested in health
care issues. For over a decade, the hospital industry has been under
significant pressure to reduce expenses and shorten length of stay, a
phenomenon which has negatively affected the financial health of many
hospitals. While each hospital bond issue is separately secured by the
50
<PAGE>
individual hospital's revenues, third party reimbursement sources such as the
federal Medicare and state Medicaid programs or private insurers are common
to all hospitals. To the extent these payors reduce reimbursement levels, the
individual hospitals may be affected. In the face of these pressures, the
trend of hospital mergers and acquisitions has accelerated in recent years.
These organizational changes present both risks and opportunities for the
institutions involved.
The Funds may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
The Funds may invest in private activity bond issues for corporate and
non-profit borrowers. These issues sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrowing corporations. No governmental support is implied.
All State Funds
Puerto Rico From time to time the State Funds invests in obligations of the
Commonwealth of Puerto Rico and its public corporations which are exempt from
federal, state and city or local income taxes. The majority of the
Commonwealth's debt is issued by the major public agencies that are
responsible for many of the islands' public functions, such as water,
wastewater, highways, telecommunications, education, and public construction.
As of January 31, 1998, public sector debt issued by the Commonwealth and its
public corporations totaled $20.6 billion.
Since the 1980s, Puerto Rico's economy and financial operations have
paralleled the economic cycles of the United States. The island's economy,
particularly the manufacturing sector, has experienced substantial gains in
employment. Much of these economic gains are attributable in part to
favorable treatment under Section 936 of the Federal Internal Revenue Code
for United States corporations doing business in Puerto Rico. The number of
persons employed in Puerto Rico during fiscal 1997 averaged 1.1 million
persons--a record level. Unemployment, however, still remains high at 13.1
percent.
Debt ratios for the Commonwealth are high as it assumes much of the
responsibility for local infrastructure. Sizable infrastructure programs are
ongoing to upgrade the island's water, sewer, and road systems. The
Commonwealth's general obligation debt is secured by a first lien on all
available revenues. The Commonwealth has maintained a fiscal policy which
seeks to correlate the growth in public sector debt to the growth of the
economic base available to service that debt. Between fiscal years 1993 and
1997, however, debt increased 37% while gross product rose 27.7%. Short term
debt remains a modest 10.6% of total debt outstanding as of January 31, 1998.
The maximum annual debt service requirement on Commonwealth general
obligation debt totals 9.5% of governmental revenues for fiscal 1997. This is
well below the 15% limit imposed by the Constitution of Puerto Rico.
The fiscal year 1994 budget was balanced with an increase in the "tollgate"
tax on Section 936 companies and improved revenue collections, which enabled
the Commonwealth to record a strong turnaround in the General Fund balance to
$309 million (6.8% of general fund expenses). A General Fund balance of $304
million was recorded for the end of fiscal year 1997.
The Commonwealth's economy remains vulnerable to changes in oil prices,
American trade, foreign policy, and levels of federal assistance. Per capita
income levels, while being the highest in the Caribbean, lag far behind the
United States. In November 1993, the voters of Puerto Rico were asked in a
non-binding referendum to consider the options of statehood, continued
Commonwealth status, or independence. 48.4% of the voters favored
continuation of Commonwealth status, 46.2% were for statehood, and 4.4% were
for independence. In 1997 legislation was introduced in Congress proposing a
mechanism to permanently settle the political relationship with the United
States. In March 1998, the U.S. House of Representatives voted in favor of a
political status act that includes a referendum to be held in 1998 and a ten
year transition plan. It is not certain whether a bill will eventually be
signed into law.
For many years U.S. companies operating in Puerto Rico were eligible to
receive a special tax credit available under Section 936 of the federal tax
code, which helped spur significant expansion in capital intensive
<PAGE>
manufacturing activity. Federal tax legislation was passed in 1993 which
revised the tax benefits received by U.S. corporations (Section 936 firms)
that operate manufacturing facilities in Puerto Rico. The legislation
provides these firms with two options: a 5 year phased reduction of the
income based tax credit to 40% of the previously allowable credit or the
conversion to a wage based standard, allowing a tax credit for the first 60%
of qualified compensation paid to employees as defined in the IRS Code.
Studies indicate that there have been no reductions in the economic growth
rate or employment in industries which were expected to be impacted by the
1993 amendments. In 1996, amendments were signed into law to phase out the
tax credit over a ten year period for existing claimants and to eliminate it
for corporations without established operations after October 1995. At
present, it is difficult to forecast what the short and long term effects of
a phase-out of the Section 936 credit would have on the economy of Puerto
Rico.
A final risk factor with the Commonwealth is the large amount of unfunded
pension liabilities. The two main public pension systems are largely
underfunded. The employees retirement system has an unfunded liability of
$5.5 billion and the teachers retirement system has an unfunded liability of
$1 billion. A measure enacted by the legislature in 1990 is designed to
address the solvency of the plans over a 50 year period.
INVESTMENT PROGRAM
-------------------------------------------------------------------------------
Types of Securities
Set forth below is additional information about certain of the investments
described in the Fund's prospectus.
Municipal Securities
Subject to the investment objectives and programs described in the prospectus
and the additional investment restrictions described in this Statement of
Additional Information, 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, state, and/or city or local, if applicable, 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.
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 other types of revenue, such as federal or state
revenues available under the revenue sharing or grant programs.
. Bond Anticipation Notes Bond anticipation notes are issued to provide
interim financing until long-term financing can be arranged. In most cases,
the long-term bonds then provide the money for the repayment of the notes.
50
<PAGE>
. 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
need 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.
. Pre-refunded/Escrowed to Maturity Bonds Certain municipal bonds have been
refunded with a later bond issue from the same issuer. The proceeds from the
later issue are used to defease the original issue. In many cases the
original issue cannot be redeemed or repaid until the first call date or
original maturity date. In these cases, the refunding bond proceeds typically
are used to buy U.S. Treasury securities that are held in an escrow account
until the original call date or maturity date. The original bonds then become
"pre-refunded" or "escrowed to maturity" and are considered as high quality
investments. While still tax-exempt, the security is the proceeds of the
escrow account. To the extent permitted by the Securities and Exchange
Commission and the Internal Revenue Service, a Fund's investment in such
securities refunded with U.S. Treasury securities will, for purposes of
diversification rules applicable to the Fund, be considered as an investment
in the U. S. Treasury securities.
<PAGE>
. 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
Municipal securities may be issued with adjustable interest rates that are
reset periodically by pre-determined formulas or indexes in order to minimize
movements in the principal value of the investment. Such securities may have
long-term maturities, but may be treated as a short-term investment under
certain conditions. Generally, as interest rates decrease or increase, the
potential for capital appreciation or depreciation on these securities is
less than for fixed-rate obligations. These securities may take the following
forms:
. Variable Rate Securities Variable rate instruments are those whose terms
provide for the adjustment of their interest rates on set dates and which,
upon such adjustment, can reasonably be expected to have a market value that
approximates its par value. Subject to the provisions of Rule 2a-7 under the
Investment Company Act of 1940, (1) a variable rate instrument, the principal
amount of which is scheduled to be paid in 397 days or less, is deemed to
have a maturity equal to the period remaining until the next readjustment of
the interest; (2) a variable rate instrument which is subject to a demand
feature which entitles the purchaser to receive the principal amount of the
underlying security or securities either (i) upon notice of usually 30 days,
or (ii) at specified intervals not exceeding 397 days and upon no more than
30 days notice is deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; and (3)
an instrument that is issued or guaranteed by the U.S. government or any
agency thereof which has a variable rate of interest readjusted no less
frequently than every 762 days may be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate. Should the
provisions of Rule 2a-7 change, the funds will determine the maturity of
these securities in accordance with the amended provisions of such rule.
. Floating Rate Securities Floating rate instruments are those whose terms
provide for the adjustment of their interest rates whenever a specified
interest rate changes and which, at any time, can reasonably be expected to
have a market value that approximates its par value. Subject to the
provisions of Rule 2a-7 under the Investment Company Act of 1940, (1) the
maturity of a floating rate instrument 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; and (2) floating rate
instruments with demand features are deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through demand.
Should the provisions of Rule 2a-7 change, the funds will determine the
maturity of these securities in accordance with the amended provisions or
such rule.
. Put Option Bonds Long-term obligations with maturities longer than one year
may provide purchasers an optional or mandatory tender of the security at par
value at predetermined intervals, often ranging from one month to several
years (e.g., a 30-year bond with a five-year tender period). These
instruments are deemed to have a maturity equal to the period remaining to
the put date.
50
<PAGE>
. 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
holds 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.
Bond and Balanced 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
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 saps 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. Each Fund will not invest
more than 5% of its total assets in these instruments.
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.
<PAGE>
All Funds
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 Fund, this could increase the possibility that the
market value of the Fund's assets could vary from $1.00 per share. In
addition, there will be a greater potential for the realization of capital
gains, which are not exempt from federal income tax. When the time comes to
pay for when-issued securities, a Fund will meet its obligations from
then-available cash flow, sale of securities or, although it would not
normally expect to do so, from sale of the when-issued securities themselves
(which may have a value greater or less than the payment obligation). The
policies described in this paragraph are not Fundamental and may be changed
by a Fund upon notice to its shareholders.
Bond and Balanced 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.
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 below (without limitation) when such action is
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
50
<PAGE>
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 Short-term corporate debt securities
rated at least AA by S&P, Moody's or Fitch.
. Commercial Paper Paper rate A-2 or better by S&P, Prime-2 or better by
Moody's, or F-2 or better by Fitch, or, if not rated, is issued by a
corporation having an outstanding debt issue rated A or better by Moody's,
S&P or Fitch and, with respect to the Money Fund, is of equivalent investment
quality as determined by the Board of Directors/Trustees.
. 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 Investment Company Act of
1940.
Tax-Efficient Balanced Fund
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.
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
<PAGE>
are not associated with a similar investment in a traditional debt instrument
that has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party of 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).
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/Trustees. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should
be in a position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
50
<PAGE>
Notwithstanding the above, the Fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the Fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price, under the
supervision of the Fund's Board of Directors/Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
Fund's restriction of investing no more than 15% of its net assets in
illiquid securities. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this determination, T. Rowe
Price will consider the trading markets for the specific security taking into
account the unregistered nature of a Rule 144A security. In addition, T. Rowe
Price could consider the (1) frequency of trades and quotes, (2) number of
dealers and potential purchases, (3) dealer undertakings to make a market,
and (4) the nature of the security and of marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer). The liquidity of Rule 144A securities would be
monitored and, if as a result of changed conditions it is determined that a
Rule 144A security is no longer liquid, the Fund's holdings of illiquid
securities would be reviewed to determine what, if any, steps are required to
assure that the Fund does not invest more than 15% of its net assets in
illiquid securities. Investing in Rule 144A securities could have the effect
of increasing the amount of the Fund's assets invested in illiquid securities
if qualified institutional buyers are unwilling to purchase such securities.
Warrants
The Fund may acquire warrants. Warrants are pure speculation in that they
have no voting rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. Warrants basically are options to
purchase equity securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but only the right
to buy them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do
not necessarily move parallel to the prices of the underlying securities.
PORTFOLIO MANAGEMENT PRACTICES
-------------------------------------------------------------------------------
Bond Funds
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The Fund may enter into financial futures contracts including stock index,
interest rate, and currency futures ("futures" or "futures contracts");
however, the Funds have no current intention of entering into stock index
futures. The Funds, however, reserve the right to trade in financial futures
of any kind.
Tax-Efficient Balanced Fund
The Tax-Efficient Balanced Fund may enter into futures contracts including
stock index, interest rate, and currency futures ("futures or futures
contracts"). The nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to provide a hedge for a portion of
the Fund's portfolio, as a cash management tool, or as an efficient way for
T. Rowe Price to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Fund's portfolio successfully, the Fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Fund's portfolio securities.
<PAGE>
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
All Funds
The Fund will enter into futures contracts which are traded on national (and
for the Tax-Efficient Balanced Fund, foreign) futures exchanges, and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under the Commodity
Exchange Act by the CFTC. Futures for the Tax-Efficient Balanced Fund may
also be traded in London, at the London International Financial Futures
Exchange, in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts
could be used for the above-referenced purposes, futures contracts offer an
effective and relatively low cost means of implementing the Fund's objectives
in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options thereon only for bona
fide hedging, yield enhancement, and risk management purposes, in each case
in accordance with rules and regulations of the CFTC.
The Fund may not purchase or sell futures contracts or related options if,
with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits and
premium paid on those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized losses on
any such contracts it has entered into; provided, however, that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. For purposes of this
policy, options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Board of Directors/Trustees without a shareholder vote and
does not limit the percentage of the Fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S. government
securities, other liquid, high-grade debt obligations, or other suitable
cover as determined 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
50
<PAGE>
positions in futures contracts, the Fund would be required to deposit with
its custodian in a segregated account in the name of the futures broker an
amount of cash, U.S. government securities, suitable money market
instruments, liquid, high-grade debt securities, or other suitable cover as
determined by the SEC, known as "initial margin." The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
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.
Tax-Efficient Balanced Fund
For example, the Standard & Poor's 500 Stock Index is made up of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
S&P 500 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of
those common stocks. In the case of the S&P 500 Index, contracts are to buy
or sell 250 units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $37,500 (250 units x $150). The stock index futures
contract specifies that no delivery of the actual stock making up the index
will take place. Instead, settlement in cash occurs. Over the life of the
contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into a futures
contract to buy 250 units of the S&P 500 Index at a specified future date at
a contract price of $150 and the S&P 500 Index is at $154 on that future
date, the Fund will gain $1,000 (250 units x gain of $4). If the Fund enters
into a futures contract to sell 250 units of the stock index at a specified
future date at a contract price of $150 and the S&P 500 Index is at $152 on
that future date, the Fund will lose $500 (250 units x loss of $2).
<PAGE>
Special Risks of Transactions in Futures Contracts
. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
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.
However, the Fund would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after decline. Furthermore, in the case of a futures
contract purchase, in order to be certain that the Fund has sufficient assets
to satisfy its obligations under a futures contract, the Fund earmarks to the
futures contract money market instruments equal in value to the current value
of the underlying instrument less the margin deposit.
. Liquidity The Fund may elect to close some or all of its futures positions
at any time prior to their expiration. The Fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The Fund may close its positions by taking opposite positions which would
operate to terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the Fund, and the Fund would realize
a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the Fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described below, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the Fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the Fund's underlying
instruments sought to be hedged.
50
<PAGE>
Successful use of futures contracts by the Fund for hedging purposes is also
subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might decline. If this
were to occur, the Fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, T. Rowe Price believes that over time
the value of the Fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that if
the Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the Fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The Fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The Fund 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.
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.
<PAGE>
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.
Tax-Efficient Balanced Fund
As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on stock
indices. Such options would be used in a manner similar to the use of options
on futures contracts.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. In addition, where the Fund seeks to close out an option position by
writing or buying an offsetting option covering the same index, underlying
instrument or contract and having the same exercise price and expiration
date, its ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market. Reasons for the
absence of a liquid secondary market on an exchange include the following:
(i) there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options, or
underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
or a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange (or in the class or series of
options) would cease to exist, although outstanding options on the exchange
that had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of
any of the clearing corporations inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
In 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 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
50
<PAGE>
are appreciating, the Fund may experience poorer overall performance than if
it had not entered into any options on futures contracts.
General Considerations Transactions by the Fund in options on futures will be
subject to limitations established by each of the exchanges, boards of trade
or other trading facilities governing the maximum number of options in each
class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written on
the same or different exchanges, boards of trade or other trading facilities
or are held or written in one or more accounts or through one or more
brokers. Thus, the number of contracts which the Fund may write or purchase
may be affected by contracts written or purchased by other investment
advisory clients of T. Rowe Price. An exchange, board of trade or other
trading facility may order the liquidations of positions found to be in
excess of these limits, and it may impose certain other sanctions.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
Tax-Efficient Balanced Fund
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the Fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the Fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time the Fund's order is placed and the time it is liquidated,
offset or exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from
<PAGE>
an adverse change in the relationship between the U.S. dollar and the subject
foreign currency during the period between the date the security is purchased
or sold and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount
of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under normal circumstances, consideration of
the prospect for currency parties will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, T. Rowe Price believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best
interests of the Fund will be served.
The Fund may enter into forward contacts for any other purpose consistent
with the Fund's investment objective and program. However, the Fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the Fund's holdings of liquid, high-grade debt securities, currency
available for cover of the forward contract(s) or other suitable cover as
determined by the SEC. In determining the amount to be delivered under a
contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for
50
<PAGE>
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell
that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts
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.
Options on Securities
Options are another type of potentially high-risk derivative.
Bond and Money Funds
The Funds have no current intention of investing in options on securities,
although they reserve the right to do so. Appropriate disclosure would be
added to the Funds' prospectus and Statement of Additional Information when
and if the Funds decide to invest in options.
Tax-Efficient Balanced Fund
Writing Covered Call Options
The Fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by 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
<PAGE>
price increases or moves in the near future but which, over the long term,
are deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a security or
currency at a specified price (the exercise price) at expiration of the
option (European style) or at any time until a certain date (the expiration
date) (American style). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at
which the writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his obligation to deliver
the underlying security or currency in the case of a call option, a writer is
required to deposit in escrow the underlying security or currency or other
assets in accordance with the rules of a clearing corporation.
The Fund will write only covered call options. This means that the Fund will
own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to
or less than the exercise price of the "covered" option, or will establish
and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities, other liquid high-grade debt
obligations, or other suitable cover as determined by the SEC having a value
equal to the fluctuating market value of the optioned securities or
currencies.
Portfolio securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund
will not do), but capable of enhancing the Fund's total return. When writing
a covered call option, a Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security or currency during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security or currency. The Fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, T. Rowe Price, in
determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Fund is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of
50
<PAGE>
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
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
<PAGE>
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.
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 below.
Call options may be purchased by the Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost
50
<PAGE>
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 closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the Fund may be unable to
liquidate a dealer option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses
to the Fund. For example, since the Fund must maintain a secured position
with respect to any call option on a security it writes, the Fund may not
sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair a Fund's ability to
sell portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The Fund may treat the cover used for written OTC options as liquid if the
dealer agrees that the Fund may repurchase the OTC option it has written for
a maximum price to be calculated by a predetermined formula. In such cases,
the OTC option would be considered illiquid only to the extent the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional investors or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The Fund has a right to call each loan and obtain the securities,
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 of any important vote. The risk in
lending portfolio securities, as with other extensions of
<PAGE>
secured credit, consist of possible delay in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will only be made to
firms deemed by T. Rowe Price to be of good standing and will not be made
unless, in the judgment of T. Rowe Price, the consideration to be earned from
such loans would justify the risk.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors
Services, Inc., or the equivalent rating by T. Rowe Price. At that time, the
bank or securities dealer agrees to repurchase the underlying security at the
same price, plus specified interest. Repurchase agreements are generally for
a short period of time, often less than a week. Repurchase agreements which
do not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements where (i) the
underlying securities are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase directly, (ii)
the market value of the underlying security, including interest accrued, will
be at all times equal to or exceed the value of the repurchase agreement, and
(iii) payment for the underlying security is made only upon physical delivery
or evidence of book-entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of
a repurchase agreement, the Fund could experience both delays in liquidating
the underlying security and losses, including: (a) possible decline in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of enforcing its
rights.
Reverse Repurchase Agreements
Although the Fund has no current intention 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").
All Funds
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
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/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund. 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
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
50
<PAGE>
investment objective and program, provided that the combination of (i)
and (ii) shall not exceed 33/1//\\/3/\\% of the value of the Fund's total
assets (including the amount borrowed) less liabilities (other than
borrowings) or such other percentage permitted by law. Any borrowings
which come to exceed this amount will be reduced in accordance with
applicable law. The Fund may borrow from banks, other Price Funds, or
other persons to the extent permitted by applicable law;
(2) Commodities Purchase or sell physical commodities; except that the Fund
(other than the Money 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;
(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 (National and
California Funds Only) 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 (National and
California Funds Only) Purchase a security if, as a result, with respect
to 75% of the value of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities);
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the Fund from investing
in securities or other instruments backed by real estate or in securities
of companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
Investment Company Act of 1940;
(9) Taxable Securities (All Funds, except Tax-Efficient Balanced) During
periods of normal market conditions, purchase any security if, as a
result, less than 80% of the Fund's income would be exempt from federal,
and if applicable, any state, city, or local income tax. The income
included under the 80% test doesn't include income from securities
subject to the alternative minimum tax (AMT); or
(10) Underwriting Underwrite securities issued by other persons, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of its portfolio securities in the ordinary course of pursuing its
investment program.
NOTES
The following notes should be read in connection with the above-described
fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Fund will not
borrow from or lend to any other Price Fund (defined as any other mutual
fund managed by or for which T. Rowe Price or Price-Fleming acts as
adviser) unless each Fund applies for and receives an exemptive order
from the SEC or the SEC issues rules permitting such transactions. The
Fund has no current intention of engaging in any such activity and there
is no assurance the SEC would grant any order requested by the Fund or
promulgate any rules allowing the transactions.
<PAGE>
With respect to investment restriction (1), the Money 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.
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) Equity Securities (All Funds, except Tax-Efficient Balanced) Purchase any
equity security or security convertible into an equity security provided
that the Fund (other than the Money Funds) may invest up to 10% of its
total assets in equity securities which pay tax-exempt dividends and
which are otherwise consistent with the Fund's investment objective and,
further provided, that the Money Funds may invest up to 10% of its total
assets in equity securities of other tax-free open-end money market
funds;
(4) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the Fund's net asset value;
(5) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% (10% for Money Funds) of its net assets would be invested in
such securities;
(6) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the Investment Company
Act of 1940; (ii) in the case of the Tax-Free Funds, only securities o
other tax-free money market funds; or (iii) in the case of Tax-Efficient
Balanced Fund, securities of the Reserve Investment or Government Reserve
Investment Funds;
(7) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(8) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging or hypothecating may not exceed
33/1//\\/3/\\% of the Fund's total assets at the time of borrowing or
investment;
(9) Oil and Gas Programs Purchase participations 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;
(10) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(11) Short Sales Effect short sales of securities; or
(12) Warrants Invest in warrants if, as a result thereof, more than 2% of the
value of the net assets of the Fund would be invested in warrants.
With respect to investment restriction (6), the Funds have no current
intention of purchasing the securities of other investment companies.
Duplicate fees could result from any such purchases.
50
<PAGE>
MANAGEMENT OF FUNDS
-------------------------------------------------------------------------------
The officers and directors/trustees 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/trustees who are considered "interested persons" of T. Rowe Price
as defined under Section 2(a)(19) of the Investment Company Act of 1940 are
noted with an asterisk (*). These directors/trustees are referred to as
inside directors by virtue of their officership, directorship, and/or
employment with T. Rowe Price.
Independent Directors/Trustees
All Funds except Tax-Efficient Balanced Fund
CALVIN W. BURNETT, PH.D., Director-President, Coppin State College; Director,
Maryland Chamber of Commerce and Provident Bank of Maryland; Former
President, Baltimore Area Council Boy Scouts of America; Vice President,
Board of Directors, The Walters Art Gallery; Address: 2500 West North Avenue,
Baltimore, Maryland 21216
ANTHONY W. DEERING, Director-Director, Chairman of the Board, President and
Chief Operating Officer, The Rouse Company, real estate developers, Columbia,
Maryland; Advisory Director, Kleinwort, Benson (North America) Corporation, a
registered broker-dealer; Address: 10275 Little Patuxent Parkway, Columbia,
Maryland 21044
F. PIERCE LINAWEAVER, Director-President, F. Pierce Linaweaver & Associates,
Inc.; Consulting Environmental & Civil Engineer(s); formerly 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, Director-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: 1115 East
Illinois Road, Lake Forest, Illinois 60045
Tax-Efficient Balanced Fund
DONALD W. DICK, JR., Principal, EuroCapital Advisors, LLC, an acquisition and
management advisory firm; formerly (5/89-6/95) Principal, Overseas Partners,
Inc., a financial investment firm; (6/65-3/89) Director and Vice President;
Consumer Products Division, McCormick & Company, Inc., international food
processors; Director, Waverly, Inc., Baltimore, Maryland; Address: P.O. Box
491, Chilmark, MA 02535-0491
DAVID K. FAGIN, Chairman and Chief Executive Officer, Western Exploration and
Development, Ltd.; Director Golden Star Resources Ltd. and Miranda Mining
Development Corporation; formerly (1986-7/91) President, Chief Operating
Officer and Director, Homestake Mining Company; Address: 1660 Lincoln Street,
Suite 3000, Denver, Colorado 80264-3001
HANNE M. MERRIMAN, Retail business consultant; formerly President and Chief
Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty store,
Director (1984-90) and Chairman (1989-90) Federal Reserve Bank of Richmond,
and President and Chief Executive Officer (1988-89), Honeybee, Inc., a
division of Spiegel, Inc.; Director, Central Illinois Public Service Company,
CIPSCO Incorporated, Finlay Enterprises, Inc., The Rouse Company, State Farm
Mutual Automobile Insurance Company and USAir Group, Inc.; Address: 3201 New
Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016
HUBERT D. VOS, President, Stonington Capital Corporation, a private
investment company; Address: 1231 State Street, Suite 247, Santa Barbara,
California 93190-0409
PAUL M. WYTHES, Founding General Partner, Sutter Hill Ventures, a venture
capital limited partnership, providing equity capital to young high
technology companies throughout the United States; Director, Teltone
<PAGE>
Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005
Officers
HENRY H. HOPKINS, Vice President-Vice President, Price-Fleming and T. Rowe
Price Retirement Plan Services, Inc.; Director and Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment Services, Inc.,
T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
PATRICIA S. BUTCHER, Secretary-Assistant Vice President, T. Rowe Price and T.
Rowe Price Investment Services, Inc.
CARMEN F. DEYESU, Treasurer-Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller-Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
INGRID I. VORDEMBERGE, Assistant Vice President-Employee, T. Rowe Price
California and State Tax-Free Trusts
* WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Trustee and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Trustee -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
MARY J. MILLER, President -Managing Director, T. Rowe Price
JANET G. ALBRIGHT, Vice President -Vice President, T. Rowe Price
JEREMY N. BAKER, Vice President -Employee, T. Rowe Price
PATRICE BERCHTENBREITER ELY, Vice President -Vice President, T. Rowe Price
A. GENE CAPONI, Vice President -Vice President and Analyst, T. Rowe Price
PATRICIA S. DEFORD, Vice President -Vice President, T. Rowe Price
CHARLES B. HILL, Vice President -Vice President, T. Rowe Price
JOSEPH K. LYNAGH, Vice President -Assistant Vice President, T. Rowe Price
KONSTANTINE B. MALLAS, Vice President -Assistant Vice President, T. Rowe
Price
EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
WILLIAM F. SNIDER, Vice President -Vice President, T. Rowe Price
C. STEPHEN WOLFE II, Vice President -Vice President, T. Rowe Price
State Tax-Free Trust Only
MARCY M. LASH, Vice President -Assistant Vice President and Municipal Credit
Analyst, T. Rowe Price; (1998) formerly Assistant Vice President,
underwriting, at Connie Lee Insurance Company
HUGH D. MCGUIRK, Vice President -Assistant Vice President, T. Rowe Price
50
<PAGE>
GWENDOLYN G. WAGNER, Vice President -Vice President and Economist, T. Rowe
Price; Chartered Financial Analyst
ROBERT A. DONAHUE, Assistant Vice President -Municipal Credit Analyst, T.
Rowe Price; (1998) formerly Director of Policy Evaluation, District of
Columbia Public Schools
JULIE A. SALSBERY, Assistant Vice President -Fixed Income Trader, T. Rowe
Price; (1997) formerly assistant portfolio manager/trader at Wainwright Asset
Management
Tax-Efficient Balanced Fund
* JAMES A.C. KENNEDY III, Director and Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
MARY J. MILLER, Executive Vice President -Managing Director, T. Rowe Price
DONALD J. PETERS, Executive Vice President -Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company
STEPHEN W. BOESEL, Vice President -Managing Director, T. Rowe Price
HUGH D. MCGUIRK, Vice President -Assistant Vice President, T. Rowe Price
WILLIAM T. REYNOLDS, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
WILLIAM F. SNIDER, Vice President -Vice President, T. Rowe Price
WILLIAM J. STROMBERG, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
ARTHUR S. VARNADO, Vice President -Vice President, T. Rowe Price
J. JEFFREY LANG, Assistant Vice President-Assistant Vice President, T. Rowe
Price
Tax-Exempt Money Fund
* WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
PATRICE BERCHTENBREITER ELY, President -Vice President, T. Rowe Price
JANET G. ALBRIGHT, Vice President -Vice President, T. Rowe Price
JEREMY N. BAKER, Vice President -Employee, T. Rowe Price
PATRICIA S. DEFORD, Vice President -Vice President, T. Rowe Price
JOSEPH K. LYNAGH, Vice President -Assistant Vice President, T. Rowe Price
<PAGE>
MARY J. MILLER, Vice President -Managing Director, T. Rowe Price
EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
C. STEPHEN WOLFE II, Vice President -Vice President, T. Rowe Price
Tax-Free High Yield Fund
* WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
C. STEPHEN WOLFE II, Vice President -Vice President, T. Rowe Price
JANET G. ALBRIGHT, Vice President -Vice President, T. Rowe Price
A. GENE CAPONI, Vice President -Vice President and Analyst, T. Rowe Price
PATRICIA S. DEFORD, Vice President -Vice President, T. Rowe Price
CHARLES B. HILL, Vice President -Vice President, T. Rowe Price
KONSTANTINE B. MALLAS, Vice President -Assistant Vice President, T. Rowe
Price
HUGH D. MCGUIRK, Vice President -Assistant Vice President, T. Rowe Price
MARY J. MILLER, Vice President -Managing Director, T. Rowe Price
EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
WILLIAM F. SNIDER, Vice President -Vice President, T. Rowe Price
Tax-Free Income Fund
* WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
MARY J. MILLER, President -Managing Director, T. Rowe Price
JANET G. ALBRIGHT, Vice President -Vice President, T. Rowe Price
PATRICE BERCHTENBREITER ELY, Executive Vice President -Vice President, T.
Rowe Price
A. GENE CAPONI, Vice President -Vice President and Analyst, T. Rowe Price
PATRICIA S. DEFORD, Vice President -Vice President, T. Rowe Price
CHARLES B. HILL, Vice President -Vice President, T. Rowe Price
50
<PAGE>
MARCY M. LASH, Vice President -Assistant Vice President and Municipal Credit
Analyst, T. Rowe Price; (1998) formerly Assistant Vice President,
underwriting, at Connie Lee Insurance Company
KONSTANTINE B. MALLAS, Vice President -Assistant Vice President, T. Rowe
Price
HUGH D. MCGUIRK, Vice President -Assistant Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
WILLIAM F. SNIDER, Vice President -Vice President, T. Rowe Price
C. STEPHEN WOLFE II, Vice President -Vice President, T. Rowe Price
Tax-Free Insured Intermediate Bond Fund
* WILLIAM T. REYNOLDS, Director -Managing Director, T. Rowe Price; Chartered
Financial Analyst
* JAMES S. RIEPE, Director -Vice Chairman of the Board and Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Investment Services,
Inc., T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Trust Company; Director, Price-Fleming and General Re
Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES B. HILL, President -Vice President, T. Rowe Price
MARY J. MILLER, Executive Vice President -Managing Director, T. Rowe Price
JANET G. ALBRIGHT, Vice President -Vice President, T. Rowe Price
PATRICIA S. DEFORD, Vice President -Vice President, T. Rowe Price
KONSTANTINE B. MALLAS, Vice President -Assistant Vice President, T. Rowe
Price
HUGH D. MCGUIRK, Vice President -Assistant Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
WILLIAM F. SNIDER, Vice President -Vice President, T. Rowe Price
ROBERT A. DONAHUE, Assistant Vice President -Municipal Credit Analyst, T.
Rowe Price; (1998) formerly Director of Policy Evaluation, District of
Columbia Public Schools
JULIE A. SALSBERY, Assistant Vice President -Fixed Income Trader, T. Rowe
Price; (1997) formerly assistant portfolio manager/trader at Wainwright Asset
Management
Tax-Free Short-Intermediate Fund
* WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
MARY J. MILLER, President -Managing Director, T. Rowe Price
CHARLES B. HILL, Executive Vice President -Vice President, T. Rowe Price
JANET G. ALBRIGHT, Vice President -Vice President, T. Rowe Price
<PAGE>
PATRICE BERCHTENBREITER ELY, Vice President -Vice President, T. Rowe Price
PATRICIA S. DEFORD, Vice President -Vice President, T. Rowe Price
KONSTANTINE B. MALLAS, Vice President -Assistant Vice President, T. Rowe
Price
HUGH D. MCGUIRK, Vice President -Assistant Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
C. STEPHEN WOLFE II, Vice President -Vice President, T. Rowe Price
JULIE A. SALSBERY, Assistant Vice President -Fixed Income Trader, T. Rowe
Price; (1997) formerly assistant portfolio manager/trader at Wainwright Asset
Management
COMPENSATION TABLE
-------------------------------------------------------------------------------
The Funds do not pay pension or retirement benefits to their officers or
directors/trustees. Also, any director/ trustee of a Fund who is an officer
or employee of T. Rowe Price or Price-Fleming does not receive any
remuneration from the Fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and Fund Complex
Position ------- Paid to Directors/ Trustees(b)
- --------------------------- -----------
- ------------------------------------------------------------------
--------------------------------------------------------------------------
----------------------------------------------
<S> <S> <S>
California Tax-Free Bond Fund
Robert P. Black, Trustee(c) $1,303 $65,000
Calvin W. Burnett, Trustee 1,303 65,000
Anthony W. Deering, Trustee 1,115 81,000
F. Pierce Linaweaver, Trustee 1,303 66,000
John G. Schriber, Trustee 1,303 65,500
- --------------------------------------------------------------------------------------------------------------------------
California Tax-Free Money Fund
Robert P. Black, Trustee(c) $1,145 $65,000
Calvin W. Burnett, Trustee 1,145 65,000
Anthony W. Deering, Trustee 1,051 81,000
F. Pierce Linaweaver, Trustee 1,145 66,000
John G. Schriber, Trustee 1,145 65,500
- --------------------------------------------------------------------------------------------------------------------------
Florida Insured Intermediate Tax-Free Fund
Robert P. Black, Trustee(c) $1,139 $65,000
Calvin W. Burnett, Trustee 1,139 65,000
Anthony W. Deering, Trustee 1,048 81,000
F. Pierce Linaweaver, Trustee 1,139 66,000
John G. Schriber, Trustee 1,139 65,500
- --------------------------------------------------------------------------------------------------------------------------
Georgia Tax-Free Bond Fund
Robert P. Black, Trustee(c) $1,070 $65,000
Calvin W. Burnett, Trustee 1,070 65,000
Anthony W. Deering, Trustee 1,024 81,000
F. Pierce Linaweaver, Trustee 1,070 66,000
John G. Schriber, Trustee 1,070 65,500
- --------------------------------------------------------------------------------------------------------------------------
Maryland Short-Term Tax-Free Bond Fund
Robert P. Black, Trustee(c) $1,182 $65,000
Calvin W. Burnett, Trustee 1,182 65,000
Anthony W. Deering, Trustee 1,068 81,000
F. Pierce Linaweaver, Trustee 1,182 66,000
John G. Schriber, Trustee 1,182 65,500
- --------------------------------------------------------------------------------------------------------------------------
Maryland Tax-Free Bond Fund
Robert P. Black, Trustee(c) $2,508 $65,000
Calvin W. Burnett, Trustee 2,508 65,000
Anthony W. Deering, Trustee 1,579 81,000
F. Pierce Linaweaver, Trustee 2,508 66,000
John G. Schriber, Trustee 2,508 65,500
- --------------------------------------------------------------------------------------------------------------------------
New Jersey Tax-Free Bond Fund
Robert P. Black, Trustee(c) $1,141 $65,000
Calvin W. Burnett, Trustee 1,141 65,000
Anthony W. Deering, Trustee 1,056 81,000
F. Pierce Linaweaver, Trustee 1,141 66,000
John G. Schriber, Trustee 1,141 65,500
- --------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Bond Fund
Robert P. Black, Trustee(c) $1,270 $65,000
Calvin W. Burnett, Trustee 1,270 65,000
Anthony W. Deering, Trustee 1,093 81,000
F. Pierce Linaweaver, Trustee 1,270 66,000
John G. Schriber, Trustee 1,270 65,500
- --------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Money Fund
Robert P. Black, Trustee(c) $1,151 $65,000
Calvin W. Burnett, Trustee 1,151 65,000
Anthony W. Deering, Trustee 1,051 81,000
F. Pierce Linaweaver, Trustee 1,151 66,000
John G. Schriber, Trustee 1,151 65,500
- --------------------------------------------------------------------------------------------------------------------------
Virginia Short-Term Tax-Free Bond Fund
Robert P. Black, Trustee(c) $1,560 $65,000
Calvin W. Burnett, Trustee 1,560 65,000
Anthony W. Deering, Trustee 1,219 81,000
F. Pierce Linaweaver, Trustee 1,560 66,000
John G. Schriber, Trustee 1,560 65,500
- --------------------------------------------------------------------------------------------------------------------------
Virginia Tax-Free Bond Fund
Robert P. Black, Trustee(c) $1,665 $65,000
Calvin W. Burnett, Trustee 1,665 65,000
Anthony W. Deering, Trustee 1,271 81,000
F. Pierce Linaweaver, Trustee 1,665 66,000
John G. Schriber, Trustee 1,665 65,500
- --------------------------------------------------------------------------------------------------------------------------
Tax-Efficient Balanced Fund(d)
Donald W. Dick, Jr., Director(c) $549 $81,000
David K. Fagin, Director 741 65,000
Hanne M. Merriman, Director 741 65,000
Hubert D. Vos, Director 741 66,000
Paul M. Wythes, Director 549 80,000
- --------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Money Fund
Robert P. Black, Director(c) $2,973 $65,000
Calvin W. Burnett, Director 2,973 65,000
Anthony W. Deering, Director 1,763 81,000
F. Pierce Linaweaver, Director 2,973 66,000
John G. Schriber, Director 2,973 65,500
- --------------------------------------------------------------------------------------------------------------------------
Tax-Free High Yield Fund
Robert P. Black, Director(c) $3,390 $65,000
Calvin W. Burnett, Director 3,390 65,000
Anthony W. Deering, Director 1,920 81,000
F. Pierce Linaweaver, Director 3,390 66,000
John G. Schriber, Director 3,390 65,500
- --------------------------------------------------------------------------------------------------------------------------
Tax-Free Income Fund
Robert P. Black, Director(c) $1,770 $65,000
Calvin W. Burnett, Director 1,770 65,000
Anthony W. Deering, Director 1,295 81,000
F. Pierce Linaweaver, Director 1,770 66,000
John G. Schriber, Director 1,770 65,500
- --------------------------------------------------------------------------------------------------------------------------
Tax-Free Insured Intermediate Bond Fund
Robert P. Black, Director(c) $1,166 $65,000
Calvin W. Burnett, Director 1,166 65,000
Anthony W. Deering, Director 1,057 81,000
F. Pierce Linaweaver, Director 1,166 66,000
John G. Schriber, Director 1,166 65,500
- --------------------------------------------------------------------------------------------------------------------------
Tax-Free Short-Intermediate Fund
Robert P. Black, Director(c) $1,179 $65,000
Calvin W. Burnett, Director 1,179 65,000
Anthony W. Deering, Director 1,068 81,000
F. Pierce Linaweaver, Director 1,179 66,000
John G. Schriber, Director 1,179 65,500
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<PAGE>
(a) Amounts in this column are based on accrued compensation from March 1,
1997 to February 28, 1998.
(b) Amounts in this column are based on compensation received from January 1,
1997, to December 31, 1997. The T. Rowe Price complex included 84 funds as of
December 31, 1997.
(c) Mr. Black retired from his position with the Funds in April 1998.
(d) Expenses accrued from June 30, 1997 to February 28, 1998.
50
<PAGE>
The Fund's Executive Committee, consisting of the Fund's interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the Funds in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors/trustees of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
As of June 1, 1998, the following shareholders beneficially owned more than
5% of the outstanding shares of:
California Tax-Free Money Fund: Boone & Associates, Purity Adr Settlement
Escrow, 901 Corporate Center Drive, Suite 204, Monterey Park, California
91754-7630.
New York Tax-Free Money Fund: Coleman M. Brandt and Grace L. Brandt JT TEN,
330 West 72nd Street, Apt. 10A, New York, New York 10023-2649.
Tax-Efficient Balanced Fund: Agnes T. Corigliano and Cosmo Corigliano JT TEN,
243 Stamford Avenue, Stamford, Connecticut 06902-8202.
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 provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the Fund; maintaining
liaison with the agents employed by the Fund such as the Fund's custodian and
transfer agent; assisting the Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors/trustees, and committee members of the Fund without cost to the
Fund.
The Management Agreement also provides that T. Rowe Price, its
directors/trustees, 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
The Fund pays T. Rowe Price a fee ("Fee") which consists of two components: a
Group Management Fee ("Group Fee") and an Individual Fund Fee ("Fund Fee").
The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group Fee
accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee
Accrual for any particular day is computed by multiplying the Price Funds'
group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Price Fund's net assets for that day to the sum
of the aggregate net assets of the Price Funds for that day. The Daily Price
Funds' Group Fee Accrual for any particular day is calculated by
<PAGE>
multiplying the fraction of one (1) over the number of calendar days in the
year by the annualized Daily Price Funds' Group Fee Accrual for that day as
determined in accordance with the following schedule:
<TABLE>
Price Funds' Annual Group Base Fee Rate for Each Level of
Assets
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16
billion
---------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30
billion
---------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
---------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
---------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
For the purpose of calculating the Group Fee, the Price Funds include all the
mutual funds distributed by T. Rowe Price Investment Services, Inc.,
(excluding the T. Rowe Price Spectrum Funds, and any institutional, index, or
private label mutual funds). For the purpose of calculating the Daily Price
Funds' Group Fee Accrual for any particular day, the net assets of each Price
Fund are determined in accordance with the Funds' prospectus as of the close
of business on the previous business day on which the Fund was open for
business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee
accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate and multiplying this product by the net assets of the Fund for that day,
as determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for
business. The individual fund fees are listed in the chart below:
<TABLE>
<CAPTION>
<S> <C>
California Tax-Free Bond Fund 0.10%
California Tax-Free Money Fund 0.10%
Florida Insured Intermediate Tax-Free Fund 0.05%
Georgia Tax-Free Bond Fund 0.10%
Maryland Tax-Free Bond Fund 0.10%
Maryland Short-Term Tax-Free Bond Fund 0.10%
New Jersey Tax-Free Bond Fund 0.10%
New York Tax-Free Bond Fund 0.10%
New York Tax-Free Money Fund 0.10%
Virginia Tax-Free Bond Fund 0.10%
Virginia Short-Term Tax-Free Bond Fund 0.10%
Tax-Efficient Balanced Fund 0.20%
Tax-Exempt Money Fund 0.10%
Tax-Free High Yield Fund 0.30%
Tax-Free Income Fund 0.15%
Tax-Free Insured Intermediate Bond Fund 0.05%
Tax-Free Short-Intermediate Fund 0.10%
</TABLE>
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 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
California Tax-Free Bond $ 744,000 $ 644,000 $ 609,000
California Tax-Free Money 263,000 195,000 175,000
Florida Insured Intermediate Tax-Free 302,000 211,000 153,000
Georgia Tax-Free Bond 108,000 41,000 13,000
Maryland Tax-Free Bond 3,659,000 3,398,000 3,352,000
Maryland Short-Term Tax-Free Bond 488,000 378,000 326,000
---------------------------------------------
New Jersey Tax-Free Bond 352,000 244,000 206,000
New York Tax-Free Bond 670,000 582,000 550,000
New York Tax-Free Money 281,000 205,000 172,000
Virginia Tax-Free Bond 895,000 829,000 770,000
Virginia Short-Term Tax-Free Bond 0(a) 0(a) 0(a)
Tax-Efficient Balanced 0(a) -- --
Tax-Exempt Money 2,989,000 2,880,000 2,993,000
Tax-Free High Yield 7,051,000 6,309,000 5,968,000
Tax-Free Income 6,428,000 6,426,000 6,613,000
Tax-Free Insured Intermediate Bond 391,000 315,000 274,000
Tax-Free Short-Intermediate 1,856,000 1,884,000 1,975,000
- --------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
(a) Due to effect of expense limitations discussed below, the Fund did
not pay T. Rowe Price an investment management fee.
(b) Prior to commencement of operations.
Limitation on Fund Expenses
The Management Agreement between the Fund and T. Rowe Price provides that the
Fund will bear all expenses of its operations not specifically assumed by T.
Rowe Price.
For the purpose of determining whether a Fund is entitled to reimbursement,
the expenses of a Fund are calculated on a monthly basis. If a Fund is
entitled to reimbursement, that month's advisory fee will be reduced or
postponed, with any adjustment made after the end of the year.
California Tax-Free Money Fund and New York Tax-Free Funds
Pursuant to the California Money Fund's present expense limitation, $99,000,
of management fees were not accrued for the year ended February 28, 1998.
Additionally, $271,000 of unaccrued management fees related to a previous
expense limitation were not accrued. Pursuant to the New York Money Fund's
present expense limitations, $94,000 of management fees were not accrued for
the year ended February 28, 1998 and $258,000 and remain unaccrued from prior
periods. Subject to shareholder approval, the expenses of both funds may be
reimbursed to T. Rowe Price, provided that the recapture of fees would not
cause the ratio of expenses to average net assets to exceed the
above-mentioned ratios.
Florida Insured Intermediate Fund
Pursuant to the present expense limitation, $6,000 of management fees for the
Florida Insured Fund were not accrued for the year ended February 28, 1998,
and $123,000 remains unaccrued from the prior period.
Georgia Fund
Pursuant to the present expense limitation, $78,000 of management fees were
not accrued by the Georgia Bond Fund for the year ended February 28, 1998,
and $216,000 remains unaccrued from the prior period.
Maryland Short-Term Tax-Free Bond Fund
Pursuant to a previous expense limitation, $13,000 of management fees remain
unaccrued by the Maryland Short-Term Fund for the year ended February 28,
1998.
New Jersey Fund
Pursuant to the present expense limitation, $21,000 of management fees were
not accrued by the New Jersey Fund for the year ended February 28, 1998, and
$151,000 remains unaccrued from the prior period.
<PAGE>
Virginia Short-Term Bond Fund
Pursuant to the present expense limitation, $78,000 of management fees for
the Virginia Short-Term Bond Fund were not accrued for the year ended
February 28, 1998, and $4,000 of other expenses were borne by T. Rowe Price
and are subject to future reimbursement. Additionally, $102,000 of unaccrued
fees and expenses remain unaccrued from the prior period and are subject to
future reimbursement.
Tax-Efficient Balanced Fund
Pursuant to the present expense limitation, $35,000 of management fees were
not accrued by the Fund for the year ended February 28, 1998. Additionally,
$46,000 of other expenses were borne by the manager.
Tax-Free Insured Intermediate Bond Fund
Management fees were not accrued by the Fund for the year ended February 28,
1998. However, $36,000 of unaccrued fees and expenses from the prior period
are subject to reimbursement pursuant to a previous expense limitation.
DISTRIBUTOR FOR FUND
-------------------------------------------------------------------------------
T. Rowe Price Investment Services, Inc. ("Investment Services"), a Maryland
corporation formed in 1980 as a wholly owned subsidiary of T. Rowe Price,
serves as 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 shares, except for those fees and expenses specifically
assumed by the Fund. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with the sale
of shares in the various states in which Investment Services is qualified as
a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for 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 U.S.
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
Tax-Efficient Balanced Fund
The Fund has 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
50
<PAGE>
various foreign branches of The Chase Manhattan Bank and such other
custodians, including foreign banks and foreign securities depositories as
are approved in accordance with regulations under the Investment Company Act
of 1940. The address for The Chase Manhattan Bank, N.A., London is Woolgate
House, Coleman Street, London, EC2P 2HD, England.
All Funds
SHAREHOLDER SERVICES
-------------------------------------------------------------------------------
The Fund from time to time may enter into agreements with outside parties
through which shareholders hold Fund shares. The shares would be held by such
parties in omnibus accounts. The agreements would provide for payments by the
Fund to the outside party for shareholder services provided to shareholders
in the omnibus accounts.
CODE OF ETHICS
-------------------------------------------------------------------------------
The Fund's investment adviser (T. Rowe Price) has a written Code of Ethics
which requires all employees to obtain prior clearance before engaging in
personal securities transactions. In addition, all employees must report
their personal securities transactions within 10 days of their execution.
Employees will not be permitted to effect transactions in a security: if
there are pending client orders in the security; the security has been
purchased or sold by a client within seven calendar days; the security is
being considered for purchase for a client; the security is subject to
internal trading restrictions. In addition, employees are prohibited from
profiting from short-term trading (e.g., purchases and sales involving the
same security within 60 days). Any material violation of the Code of Ethics
is reported to the Board of the Fund. The Board also reviews the
administration of the Code of Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business
(including the equity portion of the Tax-Efficient Balanced Fund).
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 a fixed price offerings.
<PAGE>
How Evaluations Are Made of the Overall Reasonableness of Brokerage Commissions
Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
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.
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
50
<PAGE>
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 execution
which generally results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of transactions at
various prices on a given day, each participating client's proportionate
share of such order reflects the average price paid or received with respect
to the total order. T. Rowe Price has established a general investment policy
that it will ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if, as a result
of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation fees
paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
<PAGE>
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 February 28, 1998, 1997, and
February 29, 1996:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
California Tax-Free Bond $ 289,794,000 $ 286,416,000 $ 321,786,000
California Tax-Free Money 506,606,000 474,186,000 451,803,000
Florida Insured Intermediate
Tax-Free 142,932,000 244,915,000 244,903,000
Georgia Tax-Free Bond 97,029,000 104,491,000 101,969,000
Maryland Tax-Free Bond 918,045,000 775,356,000 608,562,000
Maryland Short-Term Tax-Free
Bond 221,540,000 112,384,000 181,246,000
New Jersey Tax-Free Bond 161,209,000 238,572,000 244,765,000
New York Tax-Free Bond 354,373,000 432,992,000 479,720,000
New York Tax-Free Money 444,785,000 451,170,000 323,642,000
Virginia Tax-Free Bond 563,466,000 508,640,000 586,982,000
Virginia Short-Term Tax-Free
Bond 56,461,000 35,817,000 33,183,000
Tax-Efficient Balanced 39,110,000 (a) (a)
Tax-Exempt Money 3,600,294,000 3,675,043,000 3,101,344,000
Tax-Free High Yield 1,755,491,000 1,801,447,000 1,643,296,000
Tax-Free Income 2,257,818,000 2,284,715,000 2,558,129,000
Tax-Free Insured Intermediate
Bond 272,682,000 320,231,000 249,376,000
Tax-Free Short-Intermediate 1,149,079,000 1,478,084,000 1,184,341,000
- -------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
The following amounts consisted of principal transactions as to which the
Funds have no knowledge of the profits or losses realized by the respective
broker-dealers for the fiscal years ended February 28, 1998, 1997, and
February 29, 1996:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
California Tax-Free Bond $ 253,929,000 $ 260,704,000 $ 298,191,000
California Tax-Free Money 503,591,000 472,277,000 449,790,000
Florida Insured Intermediate
Tax-Free 128,653,000 229,787,000 234,913,000
Georgia Tax-Free Bond 85,009,000 98,598,000 95,309,000
Maryland Tax-Free Bond 793,036,000 680,479,000 530,615,000
Maryland Short-Term Tax-Free
Bond 193,471,000 108,581,000 178,280,000
New Jersey Tax-Free Bond 136,223,000 225,435,000 232,059,000
New York Tax-Free Bond 299,419,000 394,711,000 465,446,000
New York Tax-Free Money 441,384,000 451,170,000 323,642,000
Virginia Tax-Free Bond 518,159,000 483,074,000 550,422,000
Virginia Short-Term Tax-Free
Bond 55,291,000 34,013,000 32,888,000
Tax-Efficient Balanced 27,555,000 (a) (a)
Tax-Exempt Money 3,586,230,000 3,662,460,000 3,084,964,000
Tax-Free High Yield 1,527,098,000 1,621,470,000 1,501,879,000
Tax-Free Income 1,959,351,000 2,034,461,000 2,318,802,000
Tax-Free Insured Intermediate
Bond 249,144,000 302,633,000 233,485,000
Tax-Free Short-Intermediate 1,083,550,000 1,384,758,000 1,113,118,000
- -------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
(a) Prior to commencement of operations.
The following amounts involved trades with brokers acting as agents or
underwriters for the fiscal years ended February 28, 1998, 1997, and February
29, 1996:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
California Tax-Free Bond $ 35,865,000 $ 25,712,000 $ 23,595,000
California Tax-Free Money 3,016,000 1,909,000 2,013,000
Florida Insured Intermediate
Tax-Free 14,279,000 15,128,000 9,990,000
Georgia Tax-Free Bond 12,020,000 5,893,000 6,660,000
Maryland Tax-Free Bond 125,009,000 94,877,000 77,947,000
Maryland Short-Term Tax-Free Bond 28,069,000 3,803,000 2,966,000
New Jersey Tax-Free Bond 24,987,000 13,137,000 12,706,000
New York Tax-Free Bond 54,954,000 38,281,000 14,274,000
New York Tax-Free Money 3,401,000 0 0
Virginia Tax-Free Bond 45,307,000 25,566,000 36,560,000
Virginia Short-Term Tax-Free Bond 1,170,000 1,804,000 295,000
Tax-Efficient Balanced 11,555,000 (a) (a)
Tax-Exempt Money 14,064,000 12,583,000 16,380,000
Tax-Free High Yield 228,393,000 179,977,000 141,417,000
Tax-Free Income 298,468,000 250,254,000 239,327,000
Tax-Free Insured Intermediate Bond 23,538,000 17,598,000 15,891,000
Tax-Free Short-Intermediate 65,529,000 93,326,000 71,223,000
- -------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
The following amounts involved trades with brokers acting as agents or
underwriters, in which such brokers received total commissions, including
discounts received in connection with underwritings for the fiscal years
ended February 28, 1998, 1997, and February 29, 1996:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
California Tax-Free Bond $ 206,000 $ 111,000 $ 152,000
California Tax-Free Money 2,000 1,000 6,000
Florida Insured Intermediate Tax-Free 59,000 85,000 42,000
Georgia Tax-Free Bond 74,000 30,000 30,000
Maryland Tax-Free Bond 680,000 371,000 243,000
Maryland Short-Term Tax-Free Bond 106,000 12,000 10,000
New Jersey Tax-Free Bond 176,000 75,000 62,000
New York Tax-Free Bond 362,000 251,000 92,000
New York Tax-Free Money 24,000 0 0
Virginia Tax-Free Bond 271,000 121,000 188,000
Virginia Short-Term Tax-Free Bond 6,000 4,000 1,000
Tax-Efficient Balanced 33,000 (a) (a)
Tax-Exempt Money 32,000 13,000 70,000
Tax-Free High Yield 1,655,000 1,139,000 970,000
Tax-Free Income 1,747,000 1,493,000 1,608,000
Tax-Free Insured Intermediate Bond 112,000 108,000 61,000
Tax-Free Short-Intermediate 289,000 370,000 281,000
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Prior to commencement of operations.
Of all such portfolio transactions, none were placed with firms which
provided research, statistical, or other services to T. Rowe Price in
connection with the management of the Funds, or in some cases, to the Funds.
The portfolio turnover rate for each Fund for the fiscal years ended February
28, 1998, 1997, and February 29, 1996, was as follows:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
California Tax-Free Bond 35.0% 47.3% 61.9%
California Tax-Free Money N/A N/A N/A
Florida Insured Intermediate Tax-Free 25.0 75.8 98.7
Georgia Tax-Free Bond 49.0 71.1 71.5
Maryland Tax-Free Bond 19.2 26.2 23.9
Maryland Short-Term Tax-Free Bond 60.4 21.4 39.3
New Jersey Tax-Free Bond 34.3 78.9 98.4
New York Tax-Free Bond 55.0 96.9 116.0
New York Tax-Free Money N/A N/A N/A
Virginia Tax-Free Bond 64.3 66.2 93.7
Virginia Short-Term Tax-Free Bond 75.0 32.5 36.4
Tax-Efficient Balanced 12.5 (a) (a)
Tax-Exempt Money N/A N/A N/A
Tax-Free High Yield 24.4 37.0 39.3
Tax-Free Income 36.3 40.7 48.7
Tax-Free Insured Intermediate Bond 56.1 76.8 63.8
Tax-Free Short-Intermediate 76.8 84.3 69.9
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
PRICING OF SECURITIES
-------------------------------------------------------------------------------
Fixed income securities are generally traded in the over-the-counter market.
With the exception of the Money Funds, investments in securities 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. Securities held by the Money Funds are valued at amortized cost.
There are a number of pricing services available, and the Board of
Directors/Trustees, 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.
50
<PAGE>
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/Trustees.
Tax-Efficient Balanced Fund
The Fund's municipal securities will be priced as described above. Equity
securities listed or regularly traded on a securities exchange are valued at
the last quoted sales price at the time the valuations are made. A security
that is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security. Listed
securities not traded on a particular day and securities regularly traded in
the over-the-counter market are valued at the mean of the latest bid and
asked prices. Other equity securities are valued at a price within the limits
of the latest bid and asked prices deemed by the Board of Directors/Trustees,
or by persons delegated by the Board, best to reflect fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation. In the absence of a last
sale price, purchased and written options are valued at the mean of the
latest bid and asked prices, respectively.
For the purposes of determining the Fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the officers
of the Fund, as authorized by the Board of Directors/Trustees.
Maintenance of Money Fund's Net Asset Value Per Share at $1.00
It is the policy of the Fund to attempt to maintain a net asset value of
$1.00 per share by using the amortized cost method of valuation permitted by
Rule 2a-7 under the Investment Company Act of 1940. Under this method,
securities are valued by reference to the Fund's acquisition cost as adjusted
for amortization of premium or accumulation of discount rather than by
reference to their market value. Under Rule 2a-7:
(a) The Board of Directors/Trustees 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/Trustees determines present minimal credit
risks, and which are eligible securities as defined by Rule 2a-7; and
(d) The Board of Directors/Trustees 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/ Trustees 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/Trustees 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
<PAGE>
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/Trustees 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 Securities and Exchange Commission
(or any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c), or (d) exist.
DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, the Fund's annual capital gain distribution and,
for the Tax-Efficient Balanced Fund, the annual dividend, if any, will be
reinvested on the reinvestment date using the NAV per share of that date. The
reinvestment date may precede the payment date by as much as 10 days although
the exact timing is subject to change.
TAX STATUS
-------------------------------------------------------------------------------
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
Dividends and distributions paid by any of the Funds are not eligible for the
dividends-received deduction for corporate shareholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. Each Fund must declare dividends
equal to at least 90% of net tax-exempt income (as of its year-end) to permit
pass-through of tax-exempt income to shareholders, and 98% of capital gains
(as of October 31) in order to avoid a federal excise tax and 100% of taxable
income, if any, and capital gains (as of its tax year-end) to avoid federal
income tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held
by the Fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable. For federal
income tax purposes, the
50
<PAGE>
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).
The Funds anticipate acquiring bonds after initial issuance at a price less
than the principal amount of such bonds ("market discount bonds"). Gain on
the disposition of such bonds is treated as taxable ordinary income to the
extent of accrued market discount. Such gains cannot be offset by losses on
the sale of other securities but must be distributed to shareholders annually
and taxed as ordinary income.
Each year, the Funds will mail you information on the tax status of dividends
and distributions. The Funds anticipate that substantially all of the
dividends to be paid by each Fund will be exempt from federal income taxes.
If any portion of a Fund's dividends is not exempt from federal income taxes,
you will receive a Form 1099 stating the taxable portion. The Funds will also
advise you of the percentage of your dividends, if any, which should be
included in the computation of alternative minimum tax. Social security
recipients who receive interest from tax-exempt securities may have to pay
taxes on a portion of their social security benefit.
Because the interest on municipal securities is tax exempt, any interest on
money you borrow that is directly or indirectly used to purchase Fund shares
is not deductible. (See Section 265(2) of the Internal Revenue Code.)
Further, entities or persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by industrial development
bonds should consult their tax advisers before purchasing shares of a Fund.
The income from such bonds may not be tax exempt for such substantial users.
Florida Insured Intermediate Tax-Free Fund
Although Florida does not have a state income tax, it does impose an
intangible personal property tax (intangibles tax) on assets, including
shares of mutual funds. This tax is based on the net asset value of shares
owned on January 1.
Under Florida law, shares of the Fund will be exempt from the intangibles tax
to the extent that, on January 1, the Fund's assets are solely invested in
certain exempt Florida securities, U.S. government securities, certain
short-term cash investments, or other exempt securities. If, on January 1,
the Fund's assets are invested in these tax-exempt securities and other
non-tax-exempt securities, only that portion of a share's net asset value
represented by U.S. government securities will be exempt from the intangibles
tax. Because the Fund will make every effort to have its portfolio invested
exclusively in exempt Florida municipal obligations (and other qualifying
investments) on January 1, shares of the Fund should be exempt from the
intangibles tax. However, under certain circumstances, the Fund may invest in
securities other than Florida municipal obligations and there can be no
guarantee that such non-exempt investments would not be in the Fund's
portfolio on January 1. In such cases, all or a portion of the value of the
Fund's shares may be subject to the intangibles tax, and a portion of the
Fund's income may be subject to federal income taxes.
YIELD INFORMATION
-------------------------------------------------------------------------------
Money 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 than 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.
<PAGE>
The Money Funds' current and compound yields for the seven days ended
February 28, 1998 were:
<TABLE>
<CAPTION>
Fund Current Yield Compound Yield
---- ------------- --------------
<S> <C> <C>
California Tax-Free Money 2.71% 2.75%
New York Tax-Free Money 2.90 2.94
Tax-Exempt Money 2.99 3.03
</TABLE>
Bond 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 Securities and Exchange
Commission. 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.
The yield of each Fund calculated under the above-described method for the
month ended February 28, 1998, was:
<TABLE>
<CAPTION>
<S> <C>
California Tax-Free Bond Fund 4.12%
Florida Insured Intermediate Tax-Free Fund 3.63
Georgia Tax-Free Bond Fund 4.04
Maryland Tax-Free Bond Fund 4.20
Maryland Short-Term Tax-Free Bond Fund 3.28
New Jersey Tax-Free Bond Fund 4.26
New York Tax-Free Bond Fund 4.24
Virginia Tax-Free Bond Fund 4.29
Virginia Short-Term Tax-Free Bond Fund 3.30
Tax-Efficient Balanced Fund N/A
Tax-Free High Yield Fund 4.54
Tax-Free Income Fund 4.28
Tax-Free Insured Intermediate Bond Fund 3.69
Tax-Free Short-Intermediate Fund 3.54
</TABLE>
The tax equivalent yields (assuming a federal tax bracket of 31.0%) for each
Fund for the same period were as follows:
<TABLE>
<CAPTION>
<S> <C>
California Tax-Free Bond Fund(a) 6.58%
Florida Insured Intermediate Tax-Free Fund(b) 5.46
Georgia Tax-Free Bond Fund(c) 6.22
Maryland Tax-Free Bond Fund(d) 6.61
Maryland Short-Term Tax-Free Bond Fund(d) 5.17
New Jersey Tax-Free Bond Fund(e) 6.59
New York Tax-Free Bond Fund(f) 6.85
Virginia Tax-Free Bond Fund(g) 6.60
Virginia Short-Term Tax-Free Bond Fund(g) 5.08
Tax-Efficient Balanced Fund N/A
Tax-Free High Yield Fund 6.58
Tax-Free Income Fund 6.20
Tax-Free Insured Intermediate Bond Fund 5.35
Tax-Free Short-Intermediate Fund 5.13
- --------------------------------------------------------------------
</TABLE>
50
<PAGE>
(a) Assumes a state tax bracket of 9.3%.
(b) Assumes an intangible tax rate of 0.2%.
(c) Assumes a state tax bracket of 6.0%.
(d) Assumes a state tax bracket of 4.95% and a local tax bracket
of 2.97%.
(e) Assumes a state tax bracket of 6.37%.
(f) Assumes a state tax bracket of 6.85% and a local tax bracket
of 3.4%.
(g) Assumes a state tax bracket of 5.75%.
The tax equivalent yields (assuming a federal tax bracket of 28.0%) for each
Fund for the same period were as follows:
<TABLE>
<CAPTION>
<S> <C>
California Tax-Free Bond Fund(a) 6.31%
Florida Insured Intermediate Tax-Free Fund(b) 5.24
Georgia Tax-Free Bond Fund(c) 5.97
Maryland Tax-Free Bond Fund(d) 6.33
Maryland Short-Term Tax-Free Bond Fund(d) 4.95
New Jersey Tax-Free Bond Fund(e) 6.26
New York Tax-Free Bond Fund(f) 6.56
Virginia Tax-Free Bond Fund(g) 6.32
Virginia Short-Term Tax-Free Bond Fund(g) 4.86
Tax-Efficient Balanced Fund N/A
Tax-Free High Yield Fund 6.31
Tax-Free Income Fund 5.94
Tax-Free Insured Intermediate Bond Fund 5.13
Tax-Free Short-Intermediate Fund 4.92
- --------------------------------------------------------------------
</TABLE>
(a) Assumes a state tax bracket of 9.3%.
(b) Assumes an intangible tax rate of 0.2%.
(c) Assumes a state tax bracket of 6.0%.
(d) Assumes a state tax bracket of 4.95% and a local tax bracket
of 2.97%.
(e) Assumes a state tax bracket of 5.525%.
(f) Assumes a state tax bracket of 6.85% and a local tax bracket
of 3.4%.
(g) Assumes a state tax bracket of 5.75%.
<PAGE>
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(1998)(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>
$42,351-$102,300 $25,351-$61,400 28.0% 2.78 4.17 5.56 6.94 8.33
102,301-155,950 61,401-128,100 31.0 2.90 4.35 5.80 7.25 8.70
155,951-278,450 128,101-278,450 36.0 3.13 4.69 6.25 7.81 9.38
278,451 and above 278,451 and above 39.6 3.31 4.97 6.62 8.28 9.93
- -----------------------------------------------------------------------------------------------
Your Taxable Income(1998)(a) A Tax-Exempt Yield Of:(c)
7% 8% 9% 10%
Joint Return Single Return Federal Tax Is Equivalent to a
Rates(b) Taxable Yield of:
- -----------------------------------------------------------------------------------------------
$42,351-$102,300 $25,351-$61,400 28.0% 9.72 11.11 12.50 13.89
102,301-155,950 61,401-128,100 31.0 10.14 11.59 13.04 14.49
155,951-278,450 128,101-278,450 36.0 10.94 12.50 14.06 15.63
278,451 and above 278,451 and above 39.6 11.59 13.25 14.90 16.56
- -----------------------------------------------------------------------------------------------
</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.
(c) Combined marginal rate assumes the deduction of state income taxes on the
federal return.
California Funds
<TABLE>
<CAPTION>
Your Taxable Income(1998)(a) Marginal Tax Rates
Joint Return Single Return Federal(b) State Combined Marginal(c)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$37,522-$42,350 $18,761-$25,350 15.0 6.0 20.1
42,351-52,090 25,351-26,045 28.0 6.0 32.3
52,091-65,832 26,046-32,916 28.0 8.0 33.8
65,833-102,300 32,917-61,400 28.0 9.3 34.7
102,301-155,950 61,401-128,100 31.0 9.3 37.4
155,951-278,450 128,101-278,450 36.0 9.3 42.0
278,451 and above 278,451 and above 39.6 9.3 45.2
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3.75 5.01 6.26 7.51 8.76 10.01 '11.26 12.52
4.43 5.91 7.39 8.86 10.34 11.82 13.29 14.77
4.53 6.04 7.55 9.06 10.57 12.08 13.60 15.11
4.59 6.13 7.66 9.19 10.72 12.25 13.78 15.31
4.79 6.39 7.99 9.58 11.18 12.78 14.38 15.97
5.17 6.90 8.62 10.34 12.07 13.79 15.52 17.24
5.47 7.30 9.12 10.95 12.77 14.60 16.42 18.25
- -------------------------------------------------------
</TABLE>
50
<PAGE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size, nature and amount
of itemized deductions.
(c) Combined marginal rate assumes the deduction of state income taxes on
the federal return.
Georgia Tax-Free Bond Fund
<TABLE>
<CAPTION>
Your Taxable Income(1998)(a) Marginal Tax Rates
Joint Return Single Return Federal(b) State Combined Marginal(c)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$42,351-$102,300 $25,351-$61,400 28.0 6.00 32.3
102,301-155,950 61,401-128,100 31.0 6.00 35.1
155,951-278,450 128,101-278,450 36.0 6.00 39.8
278,451 and above 278,451 and above 39.6 6.00 43.2
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
4.43 5.91 7.39 8.86 10.34 11.82 13.29 14.77
4.62 6.16 7.70 9.24 10.79 12.33 13.87 15.41
4.98 6.64 8.31 9.97 11.63 13.29 14.95 16.61
5.28 7.04 8.80 10.56 12.32 14.08 15.85 17.61
- ------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size, nature and amount
of itemized deductions.
(c) Combined marginal rate assumes the deduction of state income taxes on
the federal return.
Maryland Funds
<TABLE>
<CAPTION>
Your Taxable Income(1998)(a) Marginal Tax Rates
Joint Return Single Return Federal(b) State Local(c) Combined Marginal(d)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$42,351-$102,300 $25,351-$61,400 28.0 4.95 2.97 33.7
102,301-155,950 61,401-128,100 31.0 4.95 2.97 36.5
155,951-278,450 128,101-278,450 36.0 4.95 2.97 41.1
278,451 and above 278,451 and above 39.6 4.95 2.97 44.4
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
4.52 6.03 7.54 9.05 10.56 12.07 13.57 15.08
4.72 6.30 7.87 9.45 11.02 12.60 14.17 15.75
5.09 6.79 8.49 10.19 11.88 13.58 15.28 16.98
5.40 7.19 8.99 10.79 12.59 14.39 16.19 17.99
- ------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size, nature and amount
of itemized deductions.
(c) Assumes a local tax rate equal to 60% of the state rate for residents
in the 5% state bracket.
(d) Combined marginal rate assumes the deduction of state income taxes on
the federal return.
New Jersey Tax-Free Bond Fund
<TABLE>
<CAPTION>
Your Taxable Income(1998)(a) Marginal Tax Rates
Joint Return Single Return Federal(b) State Combined Marginal(c)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$0-$20,000 $0-$20,000 15.0 1.400 16.2
20,001-42,350 20,001-25,350 15.0 1.750 16.5
42,351-50,000 25,351-35,000 28.0 1.750 29.3
50,001-70,000 -- 28.0 2.450 29.8
70,001-80,000 35,001-40,000 28.0 3.500 30.5
80,001-102,300 40,001-61,400 28.0 5.525 32.0
102,301-150,000 61,401-75,000 31.0 5.525 34.8
150,001-155,950 75,001-128,100 31.0 6.370 35.4
155,951-278,450 128,101-278,450 36.0 6.370 40.1
278,451 and above 278,451 and above 39.6 6.370 43.4
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3.58 4.77 5.97 7.16 8.35 9.55 10.74 11.93
3.59 4.79 5.99 7.19 8.38 9.58 10.78 11.98
4.24 5.66 7.07 8.49 9.90 11.32 12.73 14.14
4.27 5.70 7.12 8.55 9.97 11.40 12.82 14.25
4.32 5.76 7.19 8.63 10.07 11.51 12.95 14.39
4.41 5.88 7.35 8.82 10.29 11.76 13.24 14.71
4.60 6.13 7.67 9.20 10.74 12.27 13.80 15.34
4.64 6.19 7.74 9.29 10.84 12.38 13.93 15.48
5.01 6.68 8.35 10.02 11.69 13.36 15.03 16.69
5.30 7.07 8.83 10.60 12.37 14.13 15.90 17.67
- ------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size, nature and amount
of itemized deductions.
(c) Combined marginal rate assumes the deduction of state income taxes on
the federal return.
50
<PAGE>
New York Funds
<TABLE>
<CAPTION>
Your Taxable Income(1998)(a) Marginal Tax Rates
Joint Return Single Return Federal(b) State Local(c) Combined Marginal(d)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$26,000-$40,000 $13,000-$20,000 15.0 5.90 3.30 22.8
40,001-42,350 20,001-25,000 15.0 6.85 3.30 23.6
-- 25,001-25,350 15.0 6.85 3.35 23.7
42,351-45,000 -- 28.0 6.85 3.30 35.3
45,001-90,000 25,351-50,000 28.0 6.85 3.35 35.3
90,001-102,300 50,001-61,400 28.0 6.85 3.40 35.4
102,301-155,950 61,401-128,100 31.0 6.85 3.40 38.1
155,951-278,450 128,101-278,450 36 6.85 3.40 42.6
278,451 and above 278,451 and above 39.6 6.85 3.40 45.8
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3.89 5.18 6.48 7.77 9.07 10.36 11.66 12.95
3.93 5.24 6.54 7.85 9.16 10.47 11.78 13.09
3.93 5.24 6.55 7.86 9.17 10.48 11.80 13.11
4.64 6.18 7.73 9.27 10.82 12.36 13.91 15.46
4.64 6.18 7.73 9.27 10.82 12.36 13.91 15.46
4.64 6.19 7.74 9.29 10.84 12.38 13.93 15.48
4.85 6.46 8.08 9.69 11.31 12.92 14.54 16.16
5.23 6.97 8.71 10.45 12.20 13.94 15.68 17.42
5.54 7.38 9.23 11.07 12.92 14.76 16.61 18.45
- ------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size, nature and amount
of itemized deductions.
(c) Tax rates are for New York City residents.
(d) Combined marginal rate assumes the deduction of state income taxes on
the federal return.
Virginia Funds
<TABLE>
<CAPTION>
Your Taxable Income(1998)(a) Marginal Tax Rates
Joint Return Single Return Federal(b) State Combined Marginal(c)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$42,351-$102,300 $25,351-$61,400 28.0 5.75 32.1
102,301-155,950 61,401-128,100 31.0 5.75 35.0
155,951-278,450 128,101-278,450 36.0 5.75 39.7
278,451 and above 278,451 and above 39.6 5.75 43.1
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
4.42 5.89 7.36 8.84 10.31 11.78 13.25 14.73
4.62 6.15 7.69 9.23 10.77 12.31 13.85 15.38
4.98 6.63 8.29 9.95 11.61 13.27 14.93 16.58
5.27 7.03 8.79 10.54 12.30 14.06 15.82 17.57
- ------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size, nature and amount
of itemized deductions.
(c) Combined marginal rate assumes the deduction of state income taxes on
the federal return.
Florida Insured Intermediate Tax-Free Fund
EFFECTIVE YIELD FACTORING IN INTANGIBLES TAX
<TABLE>
<CAPTION>
Your Taxable Income(1998)(a)
Federal Tax Intangible Tax
Joint Return Single Return Rates(b) Rate
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
$
$42,351-$102,300 25,350-$61,400
And Your Intangible Assets on 1/1/97 Total:
40,000 or less 20,000 or less$ 28 N/A
40,001-200,000 20,001-100,000 28 0.1
200,001 and above 100,001 and above 28 0.2
- -----------------------------------------------------------------------------
$102,301-$155,950 $61,401-$128,100
And Your Intangible Assets on 1/1/97 Total:
40,000 or less 20,000 or less$ 31 N/A
40,001-200,000 20,001-100,000 31 0.1
200,001 and above 100,001 and above 31 0.2
- -----------------------------------------------------------------------------
$12
8
,
101
-$27
8
,
4
$155,951-$278,450 50
And Your Intangible Assets on 1/1/97 Total:
40,000 or less 20,000 or less$ 36 N/A
40,001-200,000 20,001-100,000 36 0.1
200,001 and above 100,001 and above 36 0.2
- -----------------------------------------------------------------------------
$
278,451
$278,451 and above+ and above+
- -----------------------------------------------------------------------------
And Your Intangible Assets on 1/1/97 Total:
40,000 or less 20,000 or less$ 39.6 N/A
40,001-200,000 20,001-100,000 39.6 0.1
200,001 and above 100,001 and above 39.6 0.2
- -----------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
A Tax-Exempt Yield of(c):
3% 4% 5% 6% 7% 8% 9% 10% 11%
Is Equivalent to a Taxable Yield of:
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4.17 5.56 6.94 8.33 9.72 11.11 12.50 13.89 15.28
4.27 5.66 7.04 8.43 9.82 11.21 12.60 13.99 15.38
4.37 5.76 7.14 8.53 9.92 11.31 12.70 14.09 15.48
- -------------------------------------------------------------
4.35 5.80 7.25 8.70 10.14 11.59 13.04 14.49 15.94
4.45 5.90 7.35 8.80 10.24 11.69 13.14 14.59 16.04
4.55 6.00 7.45 8.90 10.34 11.79 13.24 14.69 16.14
- -------------------------------------------------------------
4.69 6.25 7.81 9.38 10.94 12.50 14.06 15.63 17.19
4.79 6.35 7.91 9.48 11.04 12.60 14.16 15.73 17.29
4.89 6.45 8.01 9.58 11.14 12.70 14.26 15.83 17.39
- -------------------------------------------------------------
4.97 6.62 8.28 9.93 11.59 13.25 14.90 16.56 18.21
5.07 6.72 8.38 10.03 11.69 13.35 15.00 16.66 18.31
5.17 6.82 8.48 10.13 11.79 13.45 15.10 16.76 18.41
- -------------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Federal rates may vary depending on family size, nature and amount of
itemized deductions.
(c) Assumes 100% exemption from federal income and Florida intangible
property taxes.
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
Fund 1 Yr. Ended 5 Yrs. Ended 10 Yrs. Ended % Since Incep- Inception
---- ----------- ------------ ------------- -------------- ---------
- ------------------------ 2/28/98 2/28/98 2/28/98 tion 2/28/98 Date
------- ------- ------- ------------ ----
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California Tax-Free
Bond 9.31% 36.32% 108.49% 115.36% 09/15/86
Florida Insured
Intermediate Tax-Free 6.71 -- -- 33.38 03/31/93
Georgia Tax-Free Bond 9.70 -- -- 40.34 03/31/93
Maryland Short-Term
Tax-Free Bond 4.56 22.12 -- 24.16 01/29/93
Maryland Tax-Free Bond 8.68 35.04 107.48 106.24 03/31/87
New Jersey Tax-Free
Bond 9.24 34.45 -- 69.16 04/30/91
New York Tax-Free Bond 9.75 36.33 113.15 126.95 08/28/86
Virginia Short-Term
Tax-Free Bond 4.48 -- -- 17.52 11/30/94
Virginia Tax-Free Bond 9.03 36.33 -- 68.20 04/30/91
Tax-Efficient Balanced
Tax-Free High Yield 10.42 41.23 127.76 228.24 03/01/85
Tax-Free Income 9.37 35.94 109.98 350.74 10/26/76
Tax-Free Insured
Intermediate Bond 7.31 32.65 -- 41.68 11/30/92
Tax-Free 5.28 24.64 69.87 125.08 12/23/83
Short-Intermediate
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
Fund 1 Yr. Ended 5 Yrs. Ended 10 Yrs. Ended % Since Incep- Inception
---- ----------- ------------ ------------- -------------- ---------
- ------------------------ 2/28/98 2/28/98 2/28/98 tion 2/28/98 Date
------- ------- ------- ------------ ----
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California Tax-Free
Bond 9.31% 6.39% 7.62% 6.93% 09/15/86
Florida Insured
Intermediate Tax-Free 6.71 -- -- 6.04 03/31/93
Georgia Tax-Free Bond 9.70 -- -- 7.14 03/31/93
Maryland Short-Term
Tax-Free Bond 4.56 4.08 -- 4.35 01/29/93
Maryland Tax-Free Bond 8.68 6.19 7.57 6.86 03/31/87
New Jersey Tax-Free
Bond 9.24 6.10 -- 8.00 04/30/91
New York Tax-Free Bond 9.75 6.39 7.86 7.38 08/28/86
Virginia Short-Term
Tax-Free Bond 4.48 -- -- 5.10 11/30/94
Virginia Tax-Free Bond 9.03 6.39 -- 7.91 04/30/91
Tax-Efficient Balanced
Tax-Free High Yield 10.42 7.15 8.58 9.58 03/01/85
Tax-Free Income 9.37 6.33 7.70 7.31 10/26/76
Tax-Free Insured
Intermediate Bond 7.31 5.81 -- 6.87 11/30/92
Tax-Free 5.28 4.50 5.44 5.89 12/23/83
Short-Intermediate
- ---------------------------------------------------------------------------------------------
</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: (i) a
broadbased index; (ii) other groups of mutual funds, including T. Rowe Price
Funds, tracked by independent research firms ranking entities, or financial
publications; (iii) indices of 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
50
<PAGE>
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 T. Rowe
Price Investment Services, Inc., T. Rowe Price mutual fund portfolio managers
may discuss economic, financial and political developments in the U.S. and
abroad and how these conditions have affected or may affect securities prices
or the Fund; individual securities within the Fund's portfolio; and their
philosophy regarding the selection of individual stocks, including why
specific stocks have been added, removed or excluded from the Fund's
portfolio.
Other Features and Benefits
The Fund is a member of the T. Rowe Price family of Funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the Fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price Associates, Inc. and/or T. Rowe Price Investment Services, Inc. may be
made available.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
investors or use fund assets to finance distribution activities. These fees
are in addition to the normal advisory fees and expenses charged by all
mutual funds. There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or "load") can be
charged at the time the fund is purchased (front-end load) or at the time of
redemption (back-end load). Front-end loads are charged on the total amount
invested. Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1 plans allow for
the payment of marketing and sales expenses from fund assets. These expenses
are usually computed daily as a fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges or 12b-1 fees.
No-load funds are generally sold directly to the public without the use of
commissioned sales representatives. This means that 100% of your purchase is
invested for you.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the Fund, brokerage fees could be incurred by the
shareholder in a subsequent sale of such securities.
CAPITAL STOCK
-------------------------------------------------------------------------------
Tax-Efficient Balanced, Tax-Free High Yield, Income, Insured Intermediate
Bond, and Short-Intermediate Funds
The Fund's Charter authorizes the Board of Directors/Trustees to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications
<PAGE>
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/Trustees 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/Trustees might
provide by resolution that holders of shares of a particular class are
entitled to vote as a class on specified matters presented for a vote of the
holders of all shares entitled to vote on such matters, there would be no
right of class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no provision
entitling the holders of the present class of capital stock to a vote as a
class on any matter. Accordingly, the preferences, rights, and other
characteristics attaching to any class of shares, including the present class
of capital stock, might be altered or eliminated, or the class might be
combined with another class or classes, by action approved by the vote of the
holders of a majority of all the shares of all classes entitled to be voted
on the proposal, without any additional right to vote as a class by the
holders of the capital stock or of another affected class or classes.
Tax-Efficient Balanced, Tax-Exempt Money, Tax-Free High Yield, Income,
Insured Intermediate Bond, and Short-Intermediate Funds
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/trustees (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/trustees
unless and until such time as less than a majority of the directors/ trustees
holding office have been elected by shareholders, at which time the
directors/trustees then in office will call a shareholders' meeting for the
election of directors/trustees. Except as set forth above, the directors/
trustees shall continue to hold office and may appoint successor
directors/trustees. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors/trustees can,
if they choose to do so, elect all the directors/trustees of the Fund, in
which event the holders of the remaining shares will be unable to elect any
person as a director/trustee. As set forth in the By-Laws of the Fund, a
special meeting of shareholders of the Fund shall be called by the Secretary
of the Fund on the written request of shareholders entitled to cast at least
10% of all the votes of the Fund entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Fund the reasonably
estimated costs of preparing and mailing the notice of the meeting. The Fund,
however, will otherwise assist the shareholders seeking to hold the special
meeting in communicating to the other shareholders of the Fund to the extent
required by Section 16(c) of the Investment Company Act of 1940.
California and State Tax-Free Trusts
ORGANIZATION OF THE FUNDS
-------------------------------------------------------------------------------
Currently, the T. Rowe Price California Tax-Free Income Trust consists of two
series, California Tax-Free Bond Fund and California Tax-Free Money Fund, and
the T. Rowe Price State Tax-Free Income Trust consists of nine series,
Florida Insured Intermediate Tax-Free Fund, Georgia Tax-Free Bond Fund,
Maryland Short-Term Tax-Free Bond Fund, Maryland Tax-Free Bond Fund, New
Jersey Tax-Free Bond Fund, New York Tax-Free Bond Fund, New York Tax-Free
Money Fund, Virginia Short-Term Tax-Free Bond Fund, and Virginia Tax-Free
Bond Fund each of which represents a separate class of each Trust's shares
and has different objectives and investment policies.
For tax and business reasons, the Funds were organized as Massachusetts
Business Trusts, and are registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 as diversified, open-end
investment companies, commonly known as "mutual funds."
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of a single class. The Declaration of
Trust also provides that the Board of Trustees may issue additional
50
<PAGE>
series or classes of shares. Each share represents an equal proportionate
beneficial interest in the Fund. In the event of the liquidation of the Fund,
each share is entitled to a pro-rata share of the net assets of the Fund.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of trustees (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing trustees unless and
until such time as less than a majority of the trustees holding office have
been elected by shareholders, at which time the trustees then in office will
call a shareholders' meeting for the election of trustees. Pursuant to
Section 16(c) of the Investment Company Act of 1940, holders of record of not
less than two-thirds of the outstanding shares of the Fund may remove a
trustee by a vote cast in person or by proxy at a meeting called for that
purpose. Except as set forth above, the trustees shall continue to hold
office and may appoint successor trustees. Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in the election of
trustees can, if they choose to do so, elect all the trustees of the Trust,
in which event the holders of the remaining shares will be unable to elect
any person as a trustee. No amendments may be made to the Declaration of
Trust without the affirmative vote of a majority of the outstanding shares of
the Trust.
Shares have no preemptive or conversion rights; the right of redemption and
the privilege of exchange are described in the prospectus. Shares are fully
paid and nonassesable, except as set forth below. The Trust may be terminated
(i) upon the sale of its assets to another diversified, open-end management
investment company, if approved by the vote of the holders of two-thirds of
the outstanding shares of the Trust, or (ii) upon liquidation and
distribution of the assets of the Trust, if approved by the vote of the
holders of a majority of the outstanding shares of the Trust. If not so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Fund or a
Trustee. The Declaration of Trust provides for indemnification from Fund
property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its
obligations, a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the Fund, the shareholders of the Fund
paying such liability will be entitled to reimbursement from the general
assets of the Fund. The Trustees intend to conduct the operations of the Fund
is such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The Fund's shares are registered for sale under the Securities Act of 1933.
Registration of the Fund's shares is not required under any state law, but
the Fund is required to make certain filings with and pay fees to the states
in order to sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Shereff, Friedman, Hoffman, & Goodman LLP, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Fund.
<PAGE>
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
Coopers & Lybrand L.L.P., 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are independent accountants to the Fund.
The financial statements of the Funds for the year ended February 28, 1998,
and the report of independent accountants are included in each Fund's Annual
Report for the year ended February 28, 1998. 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 February 28, 1998, are incorporated into this
Statement of Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CALIFORNIA FLORIDA INSURED GEORGIA
TAX-FREE FUNDS INTERMEDIATE TAX-FREE
-------------- TAX-FREE FUND BOND FUND
- ---------------------------------------------------------------- ---------
----------------------------
<S> <C> <C> <C>
Report of Independent Accountants 27 18 17
Statement of Net Assets, February
28, 1998 11-21 9-12 8-11
Statement of Operations, year
ended
February 28, 1998 22 13 12
Statement of Changes in Net
Assets, years ended
February 28, 1998 and February
28, 1997 23- 14 13
Notes to Financial Statements,
February 28, 1998 24-26 15-17 14-16
Financial Highlights 9-10 8 7
</TABLE>
<TABLE>
<CAPTION>
MARYLAND NEW JERSEY NEW YORK
TAX-FREE FUNDS TAX-FREE TAX-FREE FUNDS
-------------- BOND FUND --------------
---------
<S> <C> <C> <C>
Report of Independent Accountants 33 18 26
Statement of Net Assets, February
28, 1998 11-27 7-12 11-20
Statement of Operations, year
ended
February 28, 1998 28 13 21
Statement of Changes in Net
Assets, years ended
February 28, 1998 and February
28, 1997 29 14 22
Notes to Financial Statements,
February 28, 1998 30-32 15-17 23-25
Financial Highlights 9-10 6 9-10
</TABLE>
<TABLE>
<CAPTION>
VIRGINIA TAX-EXEMPT TAX-FREE HIGH
TAX-FREE MONEY FUND YIELD FUND
FUNDS ---------- ----------
-----
<S> <C> <C> <C>
Report of Independent Accountants 26 20 31
Statement of Net Assets, February 28,
1998 11-20 3-15 3-25
Statement of Operations, year ended
February 28, 1998 21 16 26
Statement of Changes in Net Assets,
years ended
February 28, 1998 and February 28, 1997 22 17 27
Notes to Financial Statements, February
28, 1998 23-25 18-19 28-30
Financial Highlights 9-10 2 2
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE TAX-FREE
TAX-FREE INSURED SHORT-
INCOME FUND INTERMEDIATE INTERMEDIATE
----------- BOND FUND FUND
--------- ----
<S> <C> <C> <C>
Report of Independent Accountants 27 14 15
Statement of Net Assets, February
28, 1998 3-21 3-8 3-10
Statement of Operations, year ended
February 28, 1998 22 9 11
Statement of Changes in Net Assets,
years ended
February 28, 1998 and February 28,
1997 23 10 12
Notes to Financial Statements,
February 28, 1998 24-26 11-13 13-14
Financial Highlights 2 2 2
</TABLE>
<TABLE>
<CAPTION>
TAX-EFFICIENT
BALANCED FUND
-------------
<S> <C>
Report of Independent Accountants 28
Portfolio of Investments, February 28, 1998 9-20
Statement of Assets and Liabilities, February 28,
1998 21
Statement of Operations, period from June 30, 1997
(commencement of operations) to February 28, 1998 22
Statement of Changes in Net Assets, period from
June 30, 1997 (commencement of operations) to
February 28, 1998 23
Notes to Financial Statements, February 28, 1998 24-27
Financial Highlights 8
</TABLE>
RATINGS OF MUNICIPAL DEBT SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Services, Inc. (Moody's)
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally 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
<PAGE>
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 (S&P)
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, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other
than through changes in the money rate. The prime feature of a "AAA" bond is
the showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the 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
50
<PAGE>
conditions ad 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 Investors Service, Inc. F-1+ exceptionally strong credit quality,
strongest degree of assurance for timely payment. F-1 very strong credit
quality. F-2 good credit quality, having a satisfactory degree of assurance
for timely payment. F-3 fair credit quality, assurance for timely payment is
adequate but adverse changes could cause the securities to be rated below
investment grade. F-5 weak credit quality, having characteristics suggesting
a minimal degree of assurance for timely payment.
RATINGS OF COMMERCIAL PAPER
-------------------------------------------------------------------------------
Moody's Investors Services, Inc. P-1 superior capacity for repayment. P-2
strong capacity for repayment. P-3 acceptable capacity for repayment of
short-term promissory obligations.
Standard & Poor's Corporation A-1 highest category, degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation. A-2 satisfactory capacity to pay principal and interest. A-3
adequate capacity for timely payment, but are vulnerable to adverse effects
of changes in circumstances than higher-rated issues. B and C speculative
capacity to pay principal and interest.
Fitch Investors Service, Inc. F-1+ exceptionally strong credit quality,
strongest degree of assurance for timely payment. F-1 very strong credit
quality. F-2 good credit quality, having a satisfactory degree of assurance
for timely payment. F-3 fair credit quality, assurance for timely payment is
adequate but adverse changes could cause the securities to be rated below
investment grade. F-5 weak credit quality, having characteristics suggesting
a minimal degree of assurance for timely payment.
<PAGE>
PAGE 6
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. Condensed financial information (Financial Highlights
table) is included in Part A of the Registration Statement.
Financial Highlights, Statement of Net Assets, Statement of Operations, and
Statement of Changes in Net Assets are included in the Annual Report to
Shareholders, the pertinent portions of which are incorporated by reference in
Part B of the Registration Statement.
(b) Exhibits.
TAX-EXEMPT MONEY FUND
(1)
Articles of Incorporation of Registrant, dated March 25, 1980
(electronically filed with Amendment No. 18 dated April 22, 1994)
(1)(a)
Articles of Amendment dated January 1, 1981 (electronically filed
with Amendment No. 18 dated April 22, 1994)
(2)
By-Laws of Registrant, as amended June 29, 1981, January 21, 1988,
April 20, 1990, July 1, 1991, and July 20, 1993 (electronically
filed with Amendment No. 18 dated April 22, 1994)
(3) Inapplicable
(4) Specimen Stock Certificate (filed with Amendment No. 1)
(5)
Investment Management Agreement between Registrant and T. Rowe
Price Associates, Inc. (electronically filed with Amendment No. 18
dated April 22, 1994)
(6)Underwriting Agreement between Registrant and T. Rowe Price
Investment Services, Inc. (electronically filed with Amendment No.
18 dated April 22, 1994)
TAX-FREE SHORT-INTERMEDIATE FUND
(1)
Articles of Incorporation of Registrant, dated October 7, 1983
(electronically filed with Amendment No. 17 dated April 22, 1994)
(2)
By-Laws of Registrant, as amended January 28, 1988, April 20, 1990,
July 1, 1991, and July 20, 1993 (electronically filed with
Amendment No. 17 dated
<PAGE>
PAGE 7
April 22, 1994)
(3) Inapplicable
(4) Specimen Stock Certificate (filed with Amendment No. 1)
(5)
Investment Management Agreement between Registrant and T. Rowe
Price Associates, Inc. (electronically filed with Amendment No. 17
dated June 9, 1995)
(6)Underwriting Agreement between Registrant and T. Rowe Price
Investment Services, Inc. (electronically filed with Amendment No.
17 dated April 22, 1994)
TAX-FREE INSURED INTERMEDIATE BOND FUND
(1)
Articles of Incorporation of Registrant, dated October 14, 1992
(electronically filed with initial Registration Statement on
October 15, 1992)
(2)By-Laws of Registrant (electronically filed with initial
Registration Statement on October 15, 1992)
(3) Inapplicable
(4)
See Article SIXTH, Capital Stock, Paragraph (b)(1)-(10) of the
Articles of Incorporation, Article II, Shareholders, Sections
2.01-2.11 and Article VIII, Capital Stock, Sections 8.01-8.05 of
the By-laws filed as exhibits to this Registration Statement.
(5)
Investment Management Agreement between Registrant and T. Rowe
Price Associates, Inc., dated November 3, 1992 (electronically
filed with Amendment No. 1 on November 25, 1992)
(6)Underwriting Agreement between Registrant and T. Rowe Price
Investment Services, Inc., dated November 3, 1992 (electronically
filed with Amendment No. 1 on November 25, 1992)
TAX-FREE INCOME FUND
(1)
Articles of Incorporation of Registrant, dated September 24, 1976
(electronically filed with Amendment No. 20 dated April 22, 1994)
(1)(a)
Articles of Amendment, dated November 4, 1976 (electronically filed
with Amendment No. 20 dated April 22, 1994)
(1)(b)
Article of Amendment dated May 1, 1981 (electronically filed with
Amendment No. 20 dated
<PAGE>
PAGE 8
April 22, 1994)
(1)(c)
Articles of Amendment dated July 1, 1983 (electronically filed with
Amendment No. 20 dated April 22, 1994)
(2)
By-Laws of Registrant, as amended May 1, 1981, January 21, 1982,
October 27, 1982, January 1, 1983, February 23, 1983, January 21,
1988, April 20, 1990, July 1, 1991, and July 20, 1993
(electronically filed with Amendment No. 20 dated April 22, 1994)
(3) Inapplicable
(4) Specimen Stock Certificate (filed with Amendment No. 2)
(5)
Investment Management Agreement between Registrant and T. Rowe
Price Associates, Inc. (electronically filed with Amendment No. 20
dated April 22, 1994)
(6)Underwriting Agreement between Registrant and T. Rowe Price
Investment Services, Inc. (electronically filed with Amendment No.
20 dated April 22, 1994)
TAX-FREE HIGH YIELD FUND
(1)
Articles of Incorporation of Registrant, dated November 30, 1984
(electronically filed with Amendment No. 14 dated April 22, 1994)
(2)
By-Laws of Registrant, as amended January 21, 1988, April 20, 1990,
July 1, 1991, and July 20, 1993 (electronically filed with
Amendment No. 14 dated April 22, 1994)
(3) Inapplicable
(4) Specimen Stock Certificate (filed with Amendment No. 1)
(5)
Investment Management Agreement between Registrant and T. Rowe
Price Associates, Inc. (electronically filed with Amendment No. 14
dated April 22, 1994)
(6)Underwriting Agreement between Registrant and T. Rowe Price
Investment Services, Inc. (electronically filed with Amendment No.
14 dated April 22, 1994)
ALL FUNDS
(7) Inapplicable
(8) Custody Agreements
<PAGE>
PAGE 9
(8)(a)
Custodian Agreement between T. Rowe Price Funds and State Street
Bank and Trust Company, dated January 28, 1998
(8)(b)
Subcustodian Agreements between T. Rowe Price Tax-Free Funds and
Irving Trust Company and Morgan Guaranty Trust Company (filed with
Amendment No. 8)
(8)(c)
Subcustodian Agreement between Irving Trust Company and State
Street Bank and Trust Company (filed with Amendment No. 12)
(9) Other Agreements
(9)(a)
Transfer Agency and Service Agreement between T. Rowe Price
Services, Inc. and T. Rowe Price Funds, dated January 1, 1998, as
amended January 21, 1998
(9)(b)
Agreement between T. Rowe Price Associates, Inc. and T. Rowe Price
Funds for Fund Accounting Services, dated January 1, 1998, as
amended January 21, 1998
(10) Opinion of Counsel
(11) Consent of Independent Accountants
(12) Inapplicable
(13) Inapplicable
(14) Inapplicable
(15) Inapplicable
(16)
The Coregistrants hereby incorporate by reference the methodology
used in calculating the performance information included in
Post-Effective Amendment No. 36 and Amendment No. 20 of the T. Rowe
Price Tax-Free Income Fund, Inc. (SEC File Nos. 2-57265/811-2684,
CIK No. 202927) dated April 22, 1994
(17) Financial Data Schedule
(18) Inapplicable
(19) Other Exhibits
(a)Power of Attorney
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
<PAGE>
PAGE 10
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of May 31, 1998, there were 15,399 shareholders in the T. Rowe Price
Tax-Exempt Money Fund, Inc., 8,835 shareholders in the T. Rowe Price Tax-Free
Short-Intermediate Fund, Inc., 3,955 shareholders in the T. Rowe Price Tax-Free
Insured Intermediate Bond Fund, Inc., 25,352 shareholders in the T. Rowe Price
Tax-Free Income Fund, Inc., and 26,121 shareholders in the T. Rowe Price
Tax-Free High Yield Fund. Inc.
ITEM 27. INDEMNIFICATION
The Coegistrants maintain comprehensive Errors and Omissions and Officers
and Directors insurance policies written by the Evanston Insurance Company, The
Chubb Group and ICI Mutual. These policies provide coverage for the named
insureds, which include T. Rowe Price Associates, Inc. ("Manager"), Rowe
Price-Fleming International, Inc. ("Price-Fleming"), T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price Trust Company, T.
Rowe Price Stable Asset Management, Inc., RPF International Bond Fund and fifty
other investment companies, including, 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 Insured
Intermediate Bond Fund, Inc., T. Rowe Price Dividend Growth Fund, Inc., T. Rowe
Price Blue Chip Growth Fund, Inc., T. Rowe Price Summit Funds, Inc., T. Rowe
Price Summit Municipal Funds, Inc., T. Rowe Price Equity Series, Inc., T. Rowe
Price International Series, Inc., T. Rowe Price Fixed Income Series, Inc., T.
Rowe Price Personal Strategy Funds, Inc., T. Rowe Price Value Fund, Inc., T.
Rowe Price Capital Opportunity Fund, Inc., T. Rowe Price Corporate Income Fund,
Inc., T. Rowe Price Health Sciences Fund, Inc., T. Rowe Price Mid-Cap Value
Fund, Inc., Institutional Equity Funds, Inc., T. Rowe Price Financial Services
Fund, Inc., T. Rowe Price Diversified Small-Cap Growth Fund, Inc., T. Rowe Price
Tax-Efficient Balanced Fund, Inc., Reserve Investment Funds,
<PAGE>
PAGE 11
Inc., T. Rowe Price Media & Telecommunications Fund, Inc., and T. Rowe Price
Real Estate Fund, Inc. The Coegistrants and the fifty investment companies
listed above, with the exception of Institutional International Funds, Inc., and
Institutional Equity Funds, Inc., will be collectively referred to as the Price
Funds. The investment manager for Institutional Equity Funds, Inc., and the
Price Funds, excluding T. Rowe Price International Funds, Inc. and T. Rowe Price
International Series, Inc., is the Manager. Price-Fleming is the manager to T.
Rowe Price International Funds, Inc., T. Rowe Price International Series, Inc.
and Institutional International Funds, Inc. and is 50% owned by TRP Finance,
Inc., a subsidiary of the Manager, 25% owned by Copthall Overseas Limited, a
subsidiary of Robert Fleming Holdings Limited, and 25% owned by Jardine Fleming
International Holdings Limited. In addition to the corporate insureds, the
policies also cover the officers, directors, and employees of each of the named
insureds. The premium is allocated among the named corporate insureds in
accordance with the provisions of Rule 17d-1(d)(7) under the Investment Company
Act of 1940.
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 herein 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
<PAGE>
PAGE 12
applicable Maryland Law, as from time to time amended. Subject to any applicable
limitations and requirements set forth in the Corporation's Articles of
Incorporation and in these By-Laws, any payment of indemnification or advance of
expenses shall be made in accordance with the procedures set forth in applicable
Maryland law, as from time to time amended.
Notwithstanding the foregoing, nothing herein shall protect or purport to
protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office
("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a)
there is a final decision on the merits by a court or other body
before whom the Proceeding was brought that the Indemnitee was not
liable by reason of Disabling Conduct; or
(b)in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the
Indemnitee was not liable by reason of Disabling Conduct, which
determination shall be made by:
(i)
the vote of a majority of a quorum of directors who are neither
"interested persons" of the Corporation, as defined in Section
2(a)(19) of the Investment Company Act of 1940, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance of
expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking; or
(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
<PAGE>
PAGE 13
entitled to indemnification, which determination shall be made by:
(i)
a majority of a quorum of directors who are neither "interested
persons" of the Corporation as defined in Section 2(a)(19) of the
Investment Company Act of 1940, nor parties to the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02 of each 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 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER.
Rowe Price-Fleming International, Inc. ("Price-Fleming"), a Maryland
corporation, is a corporate joint venture 50% owned by TRP Finance, Inc., a
wholly owned subsidiary of the Manager. Price-Fleming was incorporated in
Maryland in 1979 to provide investment counsel service with respect to foreign
securities for
<PAGE>
PAGE 14
institutional investors in the United States. In addition to managing private
counsel client accounts, Price-Fleming also sponsors registered investment
companies which invest in foreign securities, serves as general partner of RPFI
International Partners, Limited Partnership, and provides investment advice to
the T. Rowe Price Trust Company, trustee of the International Common Trust Fund.
T. Rowe Price Investment Services, Inc. ("Investment Services"), a wholly
owned subsidiary of the Manager, was incorporated in Maryland in 1980 for the
purpose of acting as the principal underwriter and distributor for the Price
Funds. Investment Services is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is a member of the National Association of Securities
Dealers, Inc. In 1984, Investment Services expanded its activities to include a
discount brokerage service.
TRP Distribution, Inc., a wholly owned subsidiary of Investment Services,
was incorporated in Maryland in 1991. It was organized for, and engages in, the
sale of certain investment related products prepared by Investment Services 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 the Manager). The Foundation's
overall objective emphasizes various community needs by giving to a broad range
of educational, civic, cultural, and health-related institutions. The Foundation
has a very generous matching gift program whereby employee gifts designated to
qualifying institutions are matched according to established guidelines.
T. Rowe Price Services, Inc. ("Price Services"), a wholly owned subsidiary
of the Manager, was incorporated in Maryland in 1982 and is registered as a
transfer agent under the Securities Exchange Act of 1934. Price Services
provides transfer agent, dividend disbursing, and certain other services,
including shareholder services, to the Price Funds.
T. Rowe Price Retirement Plan Services, Inc. ("RPS"), a wholly owned
subsidiary of the Manager, was incorporated in Maryland in 1991 and is
registered as a transfer agent under the Securities Exchange Act of 1934. RPS
provides administrative, recordkeeping, and subaccounting services to
administrators of employee benefit plans.
T. Rowe Price Trust Company ("Trust Company"), a wholly owned subsidiary of
the Manager, is a Maryland-chartered limited-purpose trust company, organized in
1983 for the purpose of providing fiduciary services. The Trust Company serves
as trustee/custodian for employee benefit plans, individual retirement accounts,
and common trust funds and as trustee/ investment agent for one trust.
<PAGE>
PAGE 15
T. Rowe Price Investment Technologies, Inc. was incorporated in Maryland in
1996. A wholly owned subsidiary of the Manager, it owns the technology rights,
hardware, and software of the Manager and affiliated companies and provides
technology services to them.
TRPH Corporation, a wholly owned subsidiary of the Manager, 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
the Manager, was incorporated in Maryland in 1994 and serves as the general
partner of T. Rowe Price Threshold Fund III, L.P., a Delaware limited
partnership established in 1994.
T. Rowe Price Threshold Fund II, L.P., a Delaware limited partnership, was
organized in 1986 by the Manager and invests in private financings of small
companies with high growth potential; the Manager is the General Partner of the
partnership.
T. Rowe Price Threshold Fund III, L.P., a Delaware limited partnership, was
organized in 1994 by the Manager and invests in private financings of small
companies with high growth potential; T. Rowe Price Threshold Fund Associates,
Inc., is the General Partner of this partnership.
RPFI International Partners, L.P., is a Delaware limited partnership
organized in 1985 for the purpose of investing in a diversified group of small
and medium-sized non-U.S. companies. Price-Fleming is the general partner of
this partnership, and certain institutional investors, including advisory
clients of Price-Fleming, are its limited partners.
T. Rowe Price Stable Asset Management, Inc. ("Stable Asset Management"),
was incorporated in Maryland in 1988 as a wholly owned subsidiary of the
Manager. Stable Asset Management, is registered as an investment adviser under
the Investment Advisers Act of 1940, and specializes in the management of
investment portfolios which seek stable and consistent investment returns
through the use of guaranteed investment contracts, bank investment contracts,
structured investment contracts, and short-term fixed income securities.
T. Rowe Price Recovery Fund Associates, Inc., a Maryland corporation, is a
wholly owned subsidiary of the Manager organized in 1988 for the purpose of
serving as 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 organized in 1996. Wholly owned by the Manager and the Trust
Company, it serves as General Partner of T. Rowe Price Recovery Fund II, L.P., a
Delaware limited partnership which also invests in financially distressed
<PAGE>
PAGE 16
companies.
T. Rowe Price (Canada), Inc. ("TRP Canada") is a Maryland corporation
organized in 1988 as a wholly owned subsidiary of the Manager. This entity is
registered as an investment adviser under the Investment Advisers Act of 1940
and as a non-Canadian Adviser under the Securities Act (Ontario).
T. Rowe Price Insurance Agency, Inc., is a wholly owned subsidiary of T.
Rowe Price Associates, Inc. organized in Maryland in 1994 and licensed to do
business in several states to act primarily as an insurance agency in connection
with the sale of the Price Funds' variable annuity products.
Since 1983, the Manager has organized several distinct Maryland limited
partnerships, which are informally called the Pratt Street Ventures
partnerships, for the purpose of acquiring interests in growth-oriented
businesses.
TRP Suburban, Inc., is a Maryland corporation organized in 1990 as a wholly
owned subsidiary of the Manager. It entered into agreements with McDonogh School
and CMANE-McDonogh-Rowe Limited Partnership to construct an office building in
Owings Mills, Maryland, which currently houses the Manager's transfer agent,
plan administrative services, retirement plan services, and operations support
functions.
TRP Suburban Second, Inc., a wholly owned Maryland subsidiary of T. Rowe
Price Associates, Inc., was incorporated in 1995 to primarily engage in the
development and ownership of real property located in Owings Mills, Maryland.
TRP Finance, Inc., a wholly owned subsidiary of the Manager, is a Delaware
corporation organized in 1990 to manage certain passive corporate investments
and other intangible assets.
T. Rowe Price Strategic Partners Fund L.P. and T. Rowe Price Strategic
Partners Fund II, L.P. ("Strategic Partners Funds") are Delaware limited
partnerships organized in 1990 and 1992, respectively, 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, L.P. is T. Rowe Price Strategic Partners, L.P., a
Delaware limited partnership whose general partner is T. Rowe Price Strategic
Partners Associates, Inc., a Maryland corporation which is a wholly owned
subsidiary of the Manager. 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 also T. Rowe Price Strategic
Partners Associates, Inc.
Listed below are the directors and executive officers of the Manager who
have other substantial businesses, professions, vocations, or employment aside
from that of Director of the
<PAGE>
PAGE 17
Manager:
JAMES E. HALBKAT, JR., Director of the Manager. Mr. Halbkat is President of U.S.
Monitor Corporation, a provider of public response systems. Mr. Halbkat's
address is: P.O. Box 23109, Hilton Head Island, South Carolina 29925.
RICHARD L. MENSCHEL, Director of the Manager. Mr. Menschel is a limited partner
of The Goldman Sachs Group, L.P. Mr. Menschel's address is 85 Broad Street, 2nd
Floor, New York, New York 10004.
JOHN W. ROSENBLUM, Director of the Manager. Mr. Rosenblum is the Dean of the
Jepson School of Leadership Studies at the University of Richmond and a director
of: Comdial Corporation, a manufacturer of telephone systems for businesses;
Cone Mills Corporation, a textiles producer; and Providence Journal Company, a
publisher of newspapers and owner of broadcast television stations. Mr.
Rosenblum's address is: University of Richmond, Richmond, Virginia 23173.
ROBERT L. STRICKLAND, Director of the Manager. Mr. Strickland retired as
Chairman of Lowe's Companies, Inc., as of January 31, 1998. He is a Director of
Hannaford Bros., Co., a food retailer. Mr. Strickland's address is 604 Two
Piedmont Plaza Building, Winston-Salem, North Carolina 27104.
PHILIP C. WALSH, Director of the Manager. Mr. Walsh is a Consultant to Cyprus
Amax Minerals Company, Englewood, Colorado and Director of Piedmont Mining
Company, Inc., in Charlotte, North Carolina. Mr. Walsh's address is: Pleasant
Valley, Peapack, New Jersey 07977.
ANNE MARIE WHITTEMORE, Director of the Manager. Mrs. Whittemore is a partner of
the law firm of McGuire, Woods, Battle & Boothe and is a director of Owens &
Minor, Inc.; USF&G Corporation; the James River Corporation of Virginia; and
Albemarle Corporation. Mrs. Whittemore's address is One James Center, Richmond,
Virginia 23219.
With the exception of Messrs. Halbkat, Menschel, Rosenblum, Strickland, and
Walsh, and Mrs. Whittemore, all of the following directors of the Manager are
employees of the Manager.
JAMES S. RIEPE, who is a Vice-Chairman of the Board, Director, and Managing
Director of the Manager is also Chairman of the Board of T. Rowe Price (Canada),
Inc., T. Rowe Price Investment Services, T. Rowe Price Investment Technologies,
Inc., T. Rowe Price Retirement Plan Services, Inc., T. Rowe Price Services,
Inc., and T. Rowe Price Trust Company; a Director of Price-Fleming, General Re
Corporation, T. Rowe Price Insurance Agency, Inc.; a Director and Vice President
of T. Rowe Price Stable Asset Management, Inc.; a Director and President of TRP
Distribution, Inc. and TRP Suburban Second, Inc.
<PAGE>
PAGE 18
GEORGE A. ROCHE, who is Chairman of the Board, President, and Managing Director
of the Manager is also Chairman of the Board of TRP Finance, Inc.; a Director of
T. Rowe Price Retirement Plan Services, Inc., T. Rowe Price Strategic Partners,
Inc., and TRP Suburban, Inc.; and a Director and Vice President of
Price-Fleming, T. Rowe Price Threshold Fund, Inc., and TRP Suburban Second, Inc.
M. DAVID TESTA, who is a Vice-Chairman of the Board, Chief Investment Officer,
and Managing Director of the Manager is also Chairman of the Board of
Price-Fleming; President and Director of T. Rowe Price (Canada), Inc.; a
Director and Vice President of T. Rowe Price Trust Company; and a Director of
TRPH Corporation.
HENRY H. HOPKINS, who is a Director and Managing Director of the Manager is also
a Director of T. Rowe Price Insurance Agency, Inc.; a Vice President and
Director of T. Rowe Price Investment Services, Inc., T. Rowe Price Services,
Inc., T. Rowe Price Threshold Fund Associates, Inc., TRP Distribution, Inc., and
TRPH Corporation; and a Vice President of Price-Fleming.
JAMES A. C. KENNEDY III, JOHN H. LAPORTE, JR., WILLIAM T. REYNOLDS, AND BRIAN C.
ROGERS are Directors and Managing Directors of the Manager. In addition, Mr.
Kennedy is also President and Director of T. Rowe Price Strategic Partners
Associates, Inc., and a Director and Vice President of T. Rowe Price Threshold
Fund Associates, Inc.; Mr. Reynolds is Chairman of the Board of T. Rowe Price
Stable Asset Management and a Director of TRP Finance, Inc.; and Mr. Rogers is a
Vice President of T. Rowe Price Trust Company.
CHARLES P. SMITH AND PETER VAN DYKE are Managing Directors of the Manager and
Vice Presidents of Price-Fleming. In addition, Mr. Van Dyke is also a Vice
President of T. Rowe Price (Canada), Inc., T. Rowe Price Stable Asset
Management, and T. Rowe Price Trust Company.
EDWARD C. BERNARD is a Managing Director of the Manager and a Director and
President of T. Rowe Price Insurance Agency and T. Rowe Price Investment
Services, Inc.; a Director of T. Rowe Price Services, Inc., and a Vice President
of TRP Distribution, Inc.
STEPHEN W. BOESEL, EDMUND M. NOTZON, and RICHARD T. WHITNEY are Managing
Directors of the Manager and Vice Presidents of T. Rowe Price Trust Company.
THOMAS H. BROADUS, JR. is a Managing Director of the Manager and a Vice
President of T. Rowe Price (Canada), Inc.
MICHAEL A. GOFF is a Managing Director of the Manager and a Director and the
President of T. Rowe Price Investment Technologies, Inc.
ANDREW C. GORESH is a Managing Director of the Manager and a Director and Vice
President of TRP Suburban, Inc., and TRP
<PAGE>
PAGE 19
Suburban Second, Inc.
GEORGE A. MURNAGHAN is a Managing Director of the Manager; an Executive Vice
President of Price-Fleming; and a Vice President of T. Rowe Price Trust Company.
R. TODD RUPPERT is a Managing Director of the Manager; a Director and the
President of TRPH Corporation; and a Vice President of T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Trust Company.
CHARLES E. VIETH is a Managing Director of the Manager and a Director and
President of T. Rowe Price Retirement Plan Services, Inc.; Director and Vice
President of T. Rowe Price Services, Inc. and T. Rowe Price Investment Services,
Inc.; and Vice President of TRP Distribution, Inc. and T. Rowe Price (Canada),
Inc.
ALVIN M. YOUNGER, JR., who is Chief Financial Officer, Managing Director,
Secretary, and Treasurer of the Manager is also Secretary and Treasurer for
Price-Fleming, T. Rowe Price (Canada), Inc., T. Rowe Price Insurance Agency,
Inc., T. Rowe Price Investment Services, Inc., T. Rowe Price Investment
Technologies, Inc., T. Rowe Price Recovery Fund Associates, Inc., T. Rowe Price
Retirement Plan Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Stable Asset Management, Inc., T. Rowe Price Strategic Partners Associates,
Inc., T. Rowe Price Trust Company, TRP Distribution, Inc., and TRPH Corporation;
and Treasurer and Clerk of T. Rowe Price Insurance Agency of Massachusetts,
Inc.; and Director, Vice President, Treasurer, and Secretary of TRP Suburban,
Inc., and TRP Suburban Second, Inc.; and Director of TRP Finance, Inc.
PRESTON G. ATHEY, BRIAN W.H. BERGHUIS, MARY J. MILLER, AND CHARLES A. MORRIS are
Managing Directors of the Manager.
Certain directors and officers of the Manager are also officers and/or
directors of one or more of the Price Funds and/or one or more of the affiliated
entities listed herein.
See also "Management of Fund," in Coregistrants' Statement of Additional
Information.
ITEM 29. PRINCIPAL UNDERWRITERS
(a)
The principal underwriter for the Coregistrants is Investment
Services. Investment Services acts as the principal underwriter for
eighty-six mutual funds. Investment Services is a wholly owned
subsidiary of the Manager, is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Investment Services has
been formed for the limited purpose of distributing the shares of
the Price Funds and will not engage in the general
<PAGE>
PAGE 20
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>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
<S> <C> <C>
James S. Riepe Chairman of the Board
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
Joseph C. Bonasorte Vice President None
Darrell N. Braman Vice President None
Ronae M. Brock Vice President None
Meredith C. Callanan Vice President None
Ann R. Campbell Vice President None
Christine M. Carolan Vice President None
Joseph A. Carrier Vice President None
Sarah H. Carroll Vice President None
Laura H. Chasney Vice President None
Renee M. Christoff Vice President None
Victoria C. Collins 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
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
Jeanette M. LeBlanc Vice President None
Keith W. Lewis Vice President None
Sarah McCafferty Vice President None
Maurice A. Minerbi 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
David Oestricher Vice President None
Pamela D. Preston Vice President None
George D. Riedel Vice President None
Lucy B. Robins Vice President None
John R. Rockwell Vice President None
Kenneth J. Rutherford Vice President None
Kristin E. Seeberger Vice President None
Donna B. Singer Vice President None
Charles E. Vieth Vice President None
William F. Wendler II Vice President None
Jane F. White Vice President None
Thomas R. Woolley Vice President None
Alvin M. Younger, Jr. Secretary and Treasurer None
Barbara A. O'Connor Controller None
Richard J. Barna Assistant Vice President None
Catherine L.Berkenkemper Assistant Vice President None
Sanjay Bhandari Assistant Vice President None
Edwin J. Brooks III Assistant Vice President None
Patricia S. Butcher Assistant Vice President Secretary
Charles R. Dicken Assistant Vice President None
Cheryl L. Emory Assistant Vice President None
John A. Galateria Assistant Vice President None
Susanne L. Gigliotti Assistant Vice President None
Edward F. Giltenan Assistant Vice President None
Janelyn A. Healey Assistant Vice President None
Sandra J. Kiefler Assistant Vice President None
Steven A. Larson Assistant Vice President None
C. Lillian Matthews Assistant Vice President None
Janice D. McCrory Assistant Vice President None
Marta Mills Assistant Vice President None
Danielle N. Nicholson Assistant Vice President None
JeanneMarie B. Patella Assistant Vice President None
Carin C. Quinn Assistant Vice President None
David A. Roscum Assistant Vice President None
Arthur J. Silber Assistant Vice President None
Jerome Tuccille Assistant Vice President None
Nolan L. North Assistant Treasurer None
Barbara A. Van Horn Assistant Secretary None
</TABLE>
PAGE 22
(c)Not applicable. Investment Services will not receive any
compensation with respect to its activities as underwriter for the
Price Funds since the Price Funds are sold on a no-load basis.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and other documents required to be maintained by the
Coregistrants under Section 31(a) of the Investment Company Act of 1940 and the
rules thereunder will be maintained by T. Rowe Price at its offices at 100 East
Pratt Street, Baltimore, Maryland 21202. Transfer, dividend disbursing, and
shareholder service activities are performed by T. Rowe Price Services, Inc., at
100 East Pratt Street, Baltimore, Maryland 21202. Custodian activities for are
performed at State Street Bank and Trust Company's Service Center (State Street
South), 1776 Heritage Drive, Quincy, Massachusetts 02171.
ITEM 31. MANAGEMENT SERVICES
Coegistrants are not party to any management-related service contract,
other than as set forth in the Prospectus.
ITEM 32. UNDERTAKINGS
(a)
The Coregistrants agrees to furnish, upon request and without
charge, a copy of their latest Annual Report to each person to whom
a prospectus is delivered.
<PAGE>
PAGE 23
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on their behalf by the undersigned,
thereunto duly authorized, in the City of Baltimore, State of Maryland, this
June 23, 1998.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
/s/Patrice L. Berchtenbreiter Ely
By: Patrice L. Berchtenbreiter Ely,
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Patrice L. Berchtenbreiter Ely President June 23, 1998
Patrice L. Berchtenbreiter Ely
/s/William T. Reynolds Chairman of the Board June 23, 1998
William T. Reynolds (Chief Executive Officer)
/s/Carmen F. Deyesu Treasurer June 23, 1998
Carmen F. Deyesu (Chief Financial Officer)
* Director June 23, 1998
Calvin W. Burnett
* Director June 23, 1998
Anthony W. Deering
* Director June 23, 1998
F. Pierce Linaweaver
/s/James S. Riepe Director June 23, 1998
James S. Riepe and Vice President
* Director June 23, 1998
John G. Schreiber
/s/M. David Testa Director June 23, 1998
M. David Testa
*/s/Henry H. Hopkins, Attorney-In-Fact June 23, 1998
Henry H. Hopkins
<PAGE>
PAGE 24
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Baltimore, State of Maryland, this
June 23, 1998.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
/s/Mary J. Miller
By: Mary J. Miller, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Mary J. Miller President June 23, 1998
Mary J. Miller
/s/William T. Reynolds Chairman of the Board June 23, 1998
William T. Reynolds (Chief Executive Officer)
/s/Carmen F. Deyesu Treasurer June 23, 1998
Carmen F. Deyesu (Chief Financial Officer)
* Director June 23, 1998
Calvin W. Burnett
* Director June 23, 1998
Anthony W. Deering
* Director June 23, 1998
F. Pierce Linaweaver
/s/James S. Riepe Director June 23, 1998
James S. Riepe and Vice President
* Director June 23, 1998
John G. Schreiber
/s/M. David Testa Director June 23, 1998
M. David Testa
*/s/Henry H. Hopkins, Attorney-In-Fact June 23, 1998
Henry H. Hopkins
<PAGE>
PAGE 25
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Baltimore, State of Maryland, this
June 23, 1998.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
/s/Charles B. Hill
By: Charles B. Hill, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Charles B. Hill President June 23, 1998
Charles B. Hill (Chief Executive Officer)
/s/Carmen F. Deyesu Treasurer June 23, 1998
Carmen F. Deyesu (Chief Financial Officer)
* Director June 23, 1998
Calvin W. Burnett
* Director June 23, 1998
Anthony W. Deering
* Director June 23, 1998
F. Pierce Linaweaver
/s/William T. Reynolds Director June 23, 1998
William T. Reynolds
/s/James S. Riepe Director June 23, 1998
James S. Riepe
* Director June 23, 1998
John G. Schreiber
/s/M. David Testa Director June 23, 1998
M. David Testa
*/s/Henry H. Hopkins Attorney-In-Fact June 23, 1998
Henry H. Hopkins
<PAGE>
PAGE 26
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Baltimore, State of Maryland, this
June 23, 1998.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
/s/Mary J. Miller
By: Mary J. Miller, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Mary J. Miller President June 23, 1998
Mary J. Miller
/s/William T. Reynolds Chairman of the Board June 23, 1998
William T. Reynolds (Chief Executive Officer)
/s/Carmen F. Deyesu Treasurer June 23, 1998
Carmen F. Deyesu (Chief Financial Officer)
* Director June 23, 1998
Calvin W. Burnett
* Director June 23, 1998
Anthony W. Deering
* Director June 23, 1998
F. Pierce Linaweaver
/s/James S. Riepe Director June 23, 1998
James S. Riepe
* Director June 23, 1998
John G. Schreiber
/s/M. David Testa Director June 23, 1998
M. David Testa
*/s/Henry H. Hopkins, Attorney-In-Fact June 23, 1998
Henry H. Hopkins
<PAGE>
PAGE 27
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Baltimore, State of Maryland, this
June 23, 1998.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
/s/C. Stephen Wolfe II
By: C. Stephen Wolfe II, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/C. Stephen Wolfe II President June 23, 1998
C. Stephen Wolfe II
/s/William T. Reynolds Chairman of the Board June 23, 1998
William T. Reynolds (Chief Executive Officer)
/s/Carmen F. Deyesu Treasurer June 23, 1998
Carmen F. Deyesu (Chief Financial Officer)
* Director June 23, 1998
Calvin W. Burnett
* Director June 23, 1998
Anthony W. Deering
* Director June 23, 1998
F. Pierce Linaweaver
/s/James S. Riepe Director June 23, 1998
James S. Riepe and Vice President
* Director June 23, 1998
John G. Schreiber
/s/M. David Testa Director June 23, 1998
M. David Testa
*/s/Henry H. Hopkins, Attorney-In-Fact June 23, 1998
Henry H. Hopkins
<PAGE>
PAGE 28
The Custodian Agreement dated January 28, 1998, between State Street Bank
and Trust Company and T. Rowe Price Funds.
Custodian Agreement
This Agreement is made as of January 28, 1998 by and between
each entity set forth on Appendix A hereto (as such Appendix A
may be amended from time to time) which executes a copy of this
Agreement (each referred to herein as the "Fund"), and State
Street Bank and Trust Company, a Massachusetts trust company with
its principal place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Custodian").
Witnesseth:
Whereas, each Fund desires to retain the Custodian to act as
custodian of certain of the assets of the Fund, and the Custodian
is willing to provide such services to each Fund, upon the terms
and conditions hereinafter set forth; and
Whereas, except as otherwise set forth herein, this Agreement
is intended to supersede that certain custodian contract among
the parties hereto dated September 28, 1987, as amended; and
Whereas, the Funds have retained Chase Manhattan Bank, N.A. to
act as the Funds' custodian with respect to the assets of each
such Fund to be held outside of the United States of America
(except as otherwise set forth in this Agreement) pursuant to a
written custodian agreement (the "Foreign Custodian Agreement"),
Now, Therefore, in consideration of the mutual covenants and
agreements hereinafter contained, each of the parties hereto
agrees as follows:
Section 1. Employment of Custodian and Property to be Held by It.
Each Fund hereby employs the Custodian as the custodian of
certain of its assets, including those securities it desires to
be held within the United States of America ("domestic
securities") and those securities it desires to be held outside
the United States of America (the "United States") which are (i)
not held on the Funds' behalf by Chase Manhattan Bank, N.A. pursuant
to the Foreign Custodian Agreement and (ii) described with
greater particularity in Section 3 hereof (such securities shall
be referred to herein as "foreign securities"). Each Fund agrees
to deliver to the Custodian all domestic securities, foreign
securities and cash owned by it from time to time, and all
payments of income, payments of principal or capital
distributions received by it with respect to securities held by
it hereunder, and the cash consideration received by it for such
new or treasury shares of capital stock of each Fund as may be
issued or sold from time to time ("Shares"). The Custodian shall
not be responsible for any property of any Fund held or received
by such Fund (i) not delivered to the Custodian, or (ii) held in
the custody of Chase Manhattan Bank N.A.
The Custodian is authorized to employ one or more
sub-custodians located within the United States, provided that
the Custodian shall have obtained the written acknowledgment of
the Fund with respect to such employment. The Custodian is
authorized to employ sub-custodians located outside the United
States as noted on Schedule A attached hereto (as such Schedule A
may be amended from time to time). The Custodian shall have no
more or less responsibility or liability to any Fund on account
of any actions or omissions of any sub-custodian so employed than
any such sub-custodian has to the Custodian and shall not release
any sub-custodian from any responsibility or liability unless so
agreed in writing by the Custodian and the applicable Fund. With
the exception of State Street Bank and Trust Company (London
branch), the Custodian shall not be liable for losses arising
from the bankruptcy, insolvency or receivership of any
sub-custodian located outside the United States.
Section 2. Duties of the Custodian with Respect to Property of the Funds
Held By the Custodian in the United States.
Section 2.1 Holding Securities. The Custodian shall hold and
physically segregate for the account of each Fund all non-cash
property to be held by it in the United States, including all
domestic securities owned by the Fund other than (a) securities
which are maintained pursuant to Section 2.9 in a clearing agency
which acts as a securities depository or in a book-entry system
authorized by the United States Department of the Treasury and
certain federal agencies (each, a "U.S. Securities System") and
(b) commercial paper of an issuer for which the Custodian acts as
issuing and paying agent ("Direct Paper") which is deposited
and/or maintained in the Direct Paper system of the Custodian
(the "Direct Paper System") pursuant to Section 2.10.
Section 2.2 Delivery of Investments. The Custodian shall
release and deliver domestic investments owned by a Fund held by
the Custodian or in a U.S. Securities System account of the
Custodian or in the Custodian's Direct Paper System account
("Direct Paper System Account") only upon receipt of Proper
Instructions, which may be continuing instructions when agreed to
by the parties, and only in the following cases:
1) Upon sale of such investments for the account of the
Fund and receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such investments
entered into by the Fund;
3) In the case of a sale effected through a U.S.
Securities System, in accordance with the provisions
of Section 2.9 hereof;
4) To the depository agent in connection with tender or
other similar offers for portfolio investments of
the Fund;
5) To the issuer thereof or its agent when such
investments are called, redeemed, retired or
otherwise become payable; provided that, in any such
case, the cash or other consideration is to be
delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer
into the name of the Fund or into the name of any
nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed pursuant
to Section 2.8 or into the name or nominee name of
any sub-custodian appointed pursuant to Section 1;
or for exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units; provided
that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such investments for the account of
the Fund, to the broker or its clearing agent,
against a receipt, for examination in accordance
with usual "street delivery" custom; provided that
in any such case the Custodian shall have no
responsibility or liability for any loss arising
from the delivery of such investments prior to
receiving payment for such investments except as may
arise from the Custodian's own negligence or willful
misconduct;
8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the investments of
the issuer of such investments, or pursuant to
provisions for conversion contained in such
investments, or pursuant to any deposit agreement;
provided that, in any such case, the new investments
and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar
investments, the surrender thereof in the exercise
of such warrants, rights or similar investments or
the surrender of interim receipts or temporary
investments for definitive investments; provided
that, in any such case, the new investments and
cash, if any, are to be delivered to the Custodian
or against a receipt;
10) For delivery in connection with any loans of
investments made on behalf of the Fund, but only
against receipt of adequate collateral as agreed
upon from time to time by the Fund or its duly-
appointed agent (which may be in the form of cash or
obligations issued by the United States government,
its agencies or instrumentalities, or such other
property as the Fund may agree), except that in
connection with any loans for which collateral is to
be credited to the Custodian's account in the
book-entry system authorized by the U.S. Department
of the Treasury, the Custodian will not be held
liable or responsible for the delivery of
investments owned by the Fund prior to the receipt
of such collateral in the absence of the Custodian's
negligence or willful misconduct;
11) For delivery as security in connection with any
borrowing by the Fund requiring a pledge of assets
by the Fund, but only against receipt of amounts
borrowed, except where additional collateral is
required to secure a borrowing already made, subject
to Proper Instructions, further securities may be
released and delivered for that purpose;
12) For delivery in accordance with the provisions of
any agreement among the Fund, the Custodian and a
broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation, the
rules of any registered national securities exchange
or of any similar organization or organizations, or
under the Investment Company Act of 1940, as amended
from time to time (the "1940 Act"), regarding escrow
or other arrangements in connection with
transactions by the Fund;
13) For delivery in accordance with the provisions of
any agreement among the Fund, the Custodian, and a
Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with
the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any
similar organization or organizations, or under the
1940 Act, regarding account deposits in connection
with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent
for the Fund (the "Transfer Agent"), for delivery to
such Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the Fund's currently
effective prospectus, statement of additional
information or other offering documents (all, as
amended, supplemented or revised from time to time,
the "Prospectus"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
15) For any other purpose, but only upon receipt of
Proper Instructions specifying (a) the investments
to be delivered, (b) setting forth the purpose for
which such delivery is to be made, and (c) naming
the person or persons to whom delivery of such
investments shall be made.
Section 2.3 Registration of Investments. Domestic investments
held by the Custodian (other than bearer securities) shall be
registered in the name of the Fund or in the name of any nominee
of the Fund or of any nominee of the Custodian which nominee
shall be assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be used in
common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of
any agent appointed pursuant to Section 2.8 or in the name or
nominee name of any sub-custodian appointed pursuant to Section
1. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Agreement shall be in good
deliverable form. If, however, the Fund directs the Custodian to
maintain securities in "street name", the Custodian shall utilize
its best efforts only to timely collect income due the Fund on
such securities and to notify the Fund of relevant corporate
actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
Section 2.4 Bank Accounts. The Custodian shall open and
maintain a separate bank account or accounts in the United States
in the name of the Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and
shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account
established and used in accordance with Rule 17f-3 under the 1940
Act. Monies held by the Custodian for the Fund may be deposited
by the Custodian to its credit as custodian in the banking
department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable
in the performance of its duties hereunder; provided, however,
that every such bank or trust company shall be qualified to act
as a custodian under the 1940 Act, and that each such bank or
trust company and the funds to be deposited with each such bank
or trust company shall be approved by vote of a majority of the
board of directors or the board of trustees of the applicable
Fund (as appropriate and in each case, the "Board"). Such funds
shall be deposited by the Custodian in its capacity as custodian
and shall be withdrawable by the Custodian only in that capacity.
Section 2.5 Collection of Income. Subject to the provisions
of Section 2.3, the Custodian shall collect on a timely basis all
income and other payments with respect to United States
registered investments held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the investments
business, and shall collect on a timely basis all income and
other payments with respect to United States bearer investments
if, on the date of payment by the issuer, such investments are
held by the Custodian or its agent thereof and shall credit such
income, as collected, to the Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items
requiring presentation as and when they become due, collect
interest when due on investments held hereunder, and receive and
collect all stock dividends, rights and other items of like
nature as and when they become due and payable. With respect to
income due the Fund on United States investments of the Fund
loaned (pursuant to the provisions of Section 2.2 (10)) in
accordance with a separate agreement between the Fund and the
Custodian in its capacity as lending agent, collection thereof
shall be in accordance with the terms of such agreement. Except
as otherwise set forth in the immediately preceding sentence,
income due the Fund on United States investments of the Fund
loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund; the Custodian will have no duty
or responsibility in connection therewith other than to provide
the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Fund is properly entitled.
Section 2.6 Payment of Fund Monies. Upon receipt of Proper
Instructions, which may be continuing instructions when agreed to
by the parties, the Custodian shall, from monies of the Fund held
by the Custodian, pay out such monies in the following cases
only:
1) Upon the purchase of domestic investments, options,
futures contracts or options on futures contracts
for the account of the Fund but only (a) against the
delivery of such investments, or evidence of title
to such options, futures contracts or options on
futures contracts, to the Custodian (or any bank,
banking firm or trust company doing business in the
United States or abroad which is qualified under the
1940 Act to act as a custodian and has been
designated by the Custodian as its agent for this
purpose in accordance with Section 2.8) registered
in the name of the Fund or in the name of a nominee
of the Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the case of a
purchase effected through a U.S. Securities System,
in accordance with the conditions set forth in
Section 2.9 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.10
hereof; or (d) for transfer to a time deposit
account of the Fund in any bank, whether domestic or
foreign, such transfer may be effected prior to
receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions;
2) In connection with conversion, exchange or surrender
of investments owned by the Fund as set forth in
Section 2.2 hereof;
3) For the redemption or repurchase of Shares as set
forth in Section 4 hereof;
4) For the payment of any expense or liability incurred
by the Fund, including but not limited to the
following payments for the account of the Fund:
interest, taxes, management fees, accounting fees,
transfer agent fees, legal fees, and operating
expenses of the Fund (whether or not such expenses
are to be in whole or part capitalized or treated as
deferred expenses);
5) For the payment of any dividends declared by the
Board;
6) For payment of the amount of dividends received in
respect of investments sold short;
7) For repayment of a loan upon redelivery of pledged
securities and upon surrender of the note(s), if
any, evidencing the loan; or
8) In connection with any repurchase agreement entered
into by the Fund with respect to which the
collateral is held by the Custodian, the Custodian
shall act as the Fund s "securities intermediary"(
as that term is defined in Part 5 of Article 8 of
the Massachusetts Uniform Commercial Code, as
amended), and, as securities intermediary, the
Custodian shall take the following steps on behalf
of the Fund: (a) provide the Fund with notification
of the receipt of the purchased securities, and (b),
by book-entry identify on the books of the Custodian
as belonging to the Fund uncertificated securities
registered in the name of the Fund and held in the
Custodian s account at the Federal Reserve Bank. In
connection with any repurchase agreement entered
into by the Fund with respect to which the
collateral is not held by the Custodian, the
Custodian shall (a) provide the Fund with such
notification as it may receive with respect to such
collateral, and (b), by book-entry or otherwise,
identify as belonging to the Fund securities as
shown in the Custodian s account on the books of the
entity appointed by the Fund to hold such
collateral.
9) For any other purpose, but only upon receipt of
Proper Instructions specifying (a) the amount of
such payment, (b) setting forth the purpose for
which such payment is to be made, and (c) naming the
person or persons to whom such payment is to be
made.
Section 2.7 Liability for Payment in Advance of Receipt of
Securities Purchased. In any and every case where payment for
purchase of domestic securities for the account of the Fund is
made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from
the Fund to so pay in advance, the Custodian shall be absolutely
liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
Section 2.8 Appointment of Agents. The Custodian may at any
time or times in its discretion appoint (and may at any time
remove) any other bank or trust company, which is itself
qualified under the 1940 Act to act as a custodian, as its agent
to carry out such of the provisions of this Section 2 as the
Custodian may from time to time direct; provided, however, that
the appointment of any such agent shall not relieve the Custodian
of its responsibilities or liabilities hereunder.
Section 2.9 Deposit of Investments in U.S. Securities Systems.
The Custodian may deposit and/or maintain domestic investments
owned by the Fund in a U.S. Securities System in accordance with
applicable Federal Reserve Board and United States Securities and
Exchange Commission ("SEC") rules and regulations, if any,
subject to the following provisions:
1) The Custodian may keep domestic investments of the
Fund in a U.S. Securities System provided that such
investments are represented in an account of the
Custodian in the U.S. Securities System ("Account")
which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to
domestic investments of the Fund which are
maintained in a U.S. Securities System shall
identify by book-entry those investments belonging
to the Fund;
3) The Custodian shall pay for domestic investments
purchased for the account of the Fund upon (i)
receipt of advice from the U.S. Securities System
that such investments have been transferred to the
Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian
shall transfer domestic investments sold for the
account of the Fund upon (i) receipt of advice from
the U.S. Securities System that payment for such
investments has been transferred to the Account, and
(ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from
the U.S. Securities System of transfers of domestic
investments for the account of the Fund shall
identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish
the Fund confirmation of each transfer to or from
the account of the Fund in the form of a written
advice or notice and shall furnish to the Fund
copies of daily transaction sheets reflecting each
day's transactions in the U.S. Securities System for
the account of the Fund;
4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the U.S. Securities
System's accounting system, internal accounting
control and procedures for safeguarding domestic
investments deposited in the U.S. Securities System;
5) The Custodian shall have received from the Fund the
initial or annual certificate, as the case may be,
described in Section 10 hereof; and
6) Anything to the contrary in this Agreement
notwithstanding, the Custodian shall be liable to
the Fund for any loss or damage to the Fund
resulting from use of the U.S. Securities System by
reason of any negligence, misfeasance or misconduct
of the Custodian or any of its agents or of any of
its or their employees, or from failure of the
Custodian or any such agent to enforce effectively
such rights as it may have against the U.S.
Securities System. At the election of the Fund, the
Fund shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim
against the U.S. Securities System or any other
person which the Custodian may have as a consequence
of any such loss, expense or damage if and to the
extent that the Fund has not been made whole for any
such loss, expense or damage.
Section 2.10 Fund Assets Held in the Direct Paper System. The
Custodian may deposit and/or maintain investments owned by the
Fund in the Direct Paper System subject to the following
provisions:
1) No transaction relating to investments in the Direct
Paper System will be effected in the absence of
Proper Instructions;
2) The Custodian may keep investments of the Fund in
the Direct Paper System only if such investments are
represented in the Direct Paper System Account,
which account shall not include any assets of the
Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
3) The records of the Custodian with respect to
investments of the Fund which are maintained in the
Direct Paper System shall identify by book-entry
those investments belonging to the Fund;
4) The Custodian shall pay for investments purchased
for the account of the Fund upon the making of an
entry on the records of the Custodian to reflect
such payment and transfer of investments to the
account of the Fund. The Custodian shall transfer
investments sold for the account of the Fund upon
the making of an entry on the records of the
Custodian to reflect such transfer and receipt of
payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund, in
the form of a written advice or notice, of Direct
Paper on the next business day following such
transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the
account of the Fund; and
6) The Custodian shall provide the Fund with any report
on its system of internal accounting control as the
Fund may reasonably request from time to time.
Section 2.11 Segregated Account. The Custodian shall, upon
receipt of Proper Instructions, establish and maintain a
segregated account or accounts for and on behalf of the Fund,
into which account or accounts may be transferred cash and/or
investments, including investments maintained in an account by
the Custodian pursuant to Section 2.10 hereof, (i) in accordance
with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act
and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or
of any similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the Fund,
(ii) for purposes of segregating cash or government investments
in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or
sold by the Fund, (iii) for the purposes of compliance by the
Fund with the procedures required by 1940 Act Release No. 10666,
or any other procedures subsequently required under the 1940 Act
relating to the maintenance of segregated accounts by registered
investment companies, and (iv) for other purposes, but only, in
the case of clause (iv) upon receipt of Proper Instructions
specifying (a) the investments to be delivered, (b) setting forth
the purpose for which such delivery is to be made, and (c) naming
the person or persons to whom delivery of such investments shall
be made.
Section 2.12 Ownership Certificates for Tax Purposes. The
Custodian shall execute ownership and other certificates and
affidavits for all United States federal and state tax purposes
in connection with receipt of income or other payments with
respect to domestic investments of the Fund held by it hereunder
and in connection with transfers of such investments.
Section 2.13 Proxies. The Custodian shall, with respect to
the domestic investments held hereunder, cause to be promptly
executed by the registered holder of such investments, if the
investments are registered otherwise than in the name of the Fund
or a nominee of the Fund, all proxies without indication of the
manner in which such proxies are to be voted, and shall promptly
deliver to the Fund such proxies, all proxy soliciting materials
received by the Custodian and all notices received relating to
such investments.
Section 2.14 Communications Relating to Fund Investments. Subject
to the provisions of Section 2.3, the Custodian shall transmit
promptly to the Fund all written information (including, without
limitation, pendency of calls and maturities of domestic
investments and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund
and the maturity of futures contracts purchased or sold by the
Fund) received by the Custodian in connection with the domestic
investments being held for the Fund pursuant to this Agreement.
With respect to tender or exchange offers, the Custodian shall
transmit to the Fund all written information received by the
Custodian, any agent appointed pursuant to Section 2.8 hereof, or
any sub-custodian appointed pursuant to Section 1 hereof, from
issuers of the domestic investments whose tender or exchange is
sought and from the party (or his agents) making the tender or
exchange offer. If the Fund desires to take action with respect
to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least two (2)
New York Stock Exchange business days prior to the time such
action must be taken under the terms of the tender, exchange
offer or other similar transaction, and it will be the
responsibility of the Custodian to timely transmit to the
appropriate person(s) such notice. Where the Fund provides the
Custodian with less than two (2) New York Stock Exchange business
days notice of its desired action, the Custodian shall use its
best efforts to timely transmit the Fund's notice to the
appropriate person. It is expressly noted that the parties may
agree to alternative procedures with respect to such two (2) New
York Stock Exchange business days notice period on a selective
and individual basis.
Section 2.15 Reports to Fund by Independent Public Accountants. The
Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public
accountants on the accounting system, internal accounting control
and procedures for safeguarding investments, futures contracts
and options on futures contracts, including domestic investments
deposited and/or maintained in a U.S. Securities System, relating
to the services provided by the Custodian under this Agreement.
Such reports shall be of sufficient scope and detail, as may
reasonably be required by the Fund, to provide reasonable
assurance that any material inadequacies would be disclosed by
such examination, and if there are no such inadequacies the
reports shall so state.
Section 3. Duties of the Custodian with Respect to Certain Property of
the Funds Held Outside of the United States
Section 3.1 Definitions. The following capitalized terms
shall have the respective following meanings:
"Foreign Securities System" means a clearing agency or a
securities depository listed on Schedule A hereto.
"Foreign Sub-Custodian" means a foreign banking institution set
forth on Schedule A hereto.
Section 3.2 Holding Securities. The Custodian shall identify
on its books as belonging to the Funds the foreign securities
held by each Foreign Sub-Custodian or Foreign Securities System.
The Custodian may hold foreign securities for all of its
customers, including the Funds, with any Foreign Sub-Custodian in
an account that is identified as belonging to the Custodian for
the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to foreign securities of
the Funds which are maintained in such account shall identify
those securities as belonging to the Funds and (ii) the Custodian
shall require that securities so held by the Foreign Sub-
Custodian be held separately from any assets of such Foreign Sub-
Custodian or of other customers of such Foreign Sub-Custodian.
Section 3.3 Foreign Securities Systems. Foreign securities
shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the
Foreign Sub-Custodian in such country pursuant to the terms of
this Agreement.
Section 3.4 Transactions in Foreign Custody Account.
3.4.1. Delivery of Foreign Securities. The Custodian or a
Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in
a Foreign Securities System account, only upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the
Funds in accordance with reasonable market practice
in the country where such foreign securities are
held or traded, including, without limitation: (A)
delivery against expectation of receiving later
payment; or (B) in the case of a sale effected
through a Foreign Securities System in accordance
with the rules governing the operation of the
Foreign Securities System;
(ii) in connection with any repurchase agreement related
to foreign securities;
(iii) to the depository agent in connection with tender or
other similar offers for foreign securities of the
Funds;
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or
otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer
into the name of the Custodian (or the name of the
respective Foreign Sub-Custodian or of any nominee
of the Custodian or such Foreign Sub-Custodian) or
for exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents
for examination or trade execution in accordance
with market custom; provided that in any such case
the Foreign Sub-Custodian shall have no
responsibility or liability for any loss arising
from the delivery of such securities prior to
receiving payment for such securities except as may
arise from the Foreign Sub-Custodian's own
negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization,
reorganization or readjustment of the securities of
the issuer of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign
securities, the surrender thereof in the exercise of
such warrants, rights or similar securities or the
surrender of interim receipts or temporary
securities for definitive securities;
(ix) or delivery as security in connection with any
borrowing by the Funds requiring a pledge of assets
by the Funds;
(x) in connection with trading in options and futures
contracts, including delivery as original margin and
variation margin;
(xi) in connection with the lending of foreign
securities; and
(xii) for any other proper purpose, but only upon receipt
of Proper Instructions specifying the foreign
securities to be delivered, setting forth the
purpose for which such delivery is to be made,
declaring such purpose to be a proper Fund purpose,
and naming the person or persons to whom delivery of
such securities shall be made.
3.4.2. Payment of Fund Monies. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, the Custodian shall pay out, or
direct the respective Foreign Sub-Custodian or the respective
Foreign Securities System to pay out, monies of a Fund in the
following cases only:
(i) upon the purchase of foreign securities for the
Fund, unless otherwise directed by Proper
Instructions, by (A) delivering money to the seller
thereof or to a dealer therefor (or an agent for
such seller or dealer) against expectation of
receiving later delivery of such foreign securities;
or (B) in the case of a purchase effected through a
Foreign Securities System, in accordance with the
rules governing the operation of such Foreign
Securities System;
(ii) in connection with the conversion, exchange or
surrender of foreign securities of the Fund;
(iii) for the payment of any expense or liability of the
Fund, including but not limited to the following
payments: interest, taxes, investment advisory
fees, transfer agency fees, fees under this
Agreement, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or
foreign exchange contracts for the Fund, including
transactions executed with or through the Custodian
or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures
contracts, including delivery as original margin and
variation margin;
(vii) in connection with the borrowing or lending of
foreign securities; and
(viii) for any other proper Fund purpose, but only upon
receipt of Proper Instructions specifying the amount
of such payment, setting forth the purpose for which
such payment is to be made, declaring such purpose
to be a proper Fund purpose, and naming the person
or persons to whom such payment is to be made.
3.4.3. Market Conditions. Notwithstanding any provision of
this Agreement to the contrary, settlement and payment for
foreign securities received for the account of the Funds and
delivery of foreign securities maintained for the account of the
Funds may be effected in accordance with the customary
established securities trading or processing practices and
procedures in the country or market in which the transaction
occurs, including, without limitation, delivering foreign
securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) with the expectation of
receiving later payment for such foreign securities from such
purchaser or dealer.
Section 3.5 Registration of Foreign Securities. The foreign
securities maintained in the custody of a Foreign Custodian
(other than bearer securities) shall be registered in the name of
the applicable Fund or in the name of the Custodian or in the
name of any Foreign Sub-Custodian or in the name of any nominee
of the foregoing, and the Fund agrees to hold any such nominee
harmless from any liability as a holder of record of such foreign
securities. The Custodian or a Foreign Sub-Custodian shall not
be obligated to accept securities on behalf of a Fund under the
terms of this Agreement unless the form of such securities and
the manner in which they are delivered are in accordance with
reasonable market practice.
Section 3.6 Bank Accounts. A bank account or bank accounts
opened and maintained outside the United States on behalf of a
Fund with a Foreign Sub-Custodian shall be subject only to draft
or order by the Custodian or such Foreign Sub-Custodian, acting
pursuant to the terms of this Agreement to hold cash received by
or from or for the account of the Fund.
Section 3.7 Collection of Income. The Custodian shall use
reasonable commercial efforts to collect all income and other
payments with respect to the foreign securities held hereunder to
which the Funds shall be entitled and shall credit such income,
as collected, to the applicable Fund. In the event that
extraordinary measures are required to collect such income, the
Fund and the Custodian shall consult as to such measures and as
to the compensation and expenses of the Custodian relating to
such measures.
Section 3.8 Proxies. With respect to the foreign
securities held under this Section 3, the Custodian will use
reasonable commercial efforts to facilitate the exercise of
voting and other shareholder proxy rights, subject always to the
laws, regulations and practical constraints that may exist in the
country where such securities are issued. The Fund acknowledges
that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have
the effect of severely limiting the ability of the Fund to
exercise shareholder rights.
Section 3.9 Communications Relating to Foreign Securities. The
Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities
of foreign securities and expirations of rights in connection
therewith) received by the Custodian in connection with the
foreign securities being held for the account of the Fund. With
respect to tender or exchange offers, the Custodian shall
transmit promptly to the Fund written information so received by
the Custodian in connection with the foreign securities whose
tender or exchange is sought or from the party (or its agents)
making the tender or exchange offer.
Section 3.10 Liability of Foreign Sub-Custodians and Foreign
Securities Systems. Each agreement pursuant to which the Custodian
employs as a Foreign Sub-Custodian shall, to the extent possible,
require the Foreign Sub-Custodian to exercise reasonable care in
the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or
in connection with the Foreign Sub-Custodian's performance of
such obligations. At the Fund's election, the Funds shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or
claim if and to the extent that the Funds have not been made
whole for any such loss, damage, cost, expense, liability or
claim.
Section 3.11 Tax Law. The Custodian shall have no
responsibility or liability for any obligations now or hereafter
imposed on the Fund or the Custodian as custodian of the Funds by
the tax law of the United States or of any state or political
subdivision thereof. It shall be the responsibility of the Fund
to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Funds by the tax law of
countries set forth on Schedule A hereto, including
responsibility for withholding and other taxes, assessments or
other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard
to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the
tax law of countries for which the Fund has provided such
information.
Section 4. Payments for Repurchases or Redemptions and Sales of Shares.
From such funds as may be available for the purpose, the
Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares
which have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the
redemption or repurchase of Shares, the Custodian is authorized
upon receipt of, and in accordance with, instructions from the
Transfer Agent to wire funds to or through a commercial bank
designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares, the Custodian shall honor
checks drawn on the Custodian by a holder of Shares, which checks
have been furnished by the Fund to the holder of Shares, when
presented to the Custodian in accordance with such written
procedures and controls as may be mutually agreed upon from time
to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the
Shares or from the Transfer Agent and deposit to the account of
the Fund such payments as are received by the distributor or the
Transfer Agent, as the case may be, for Shares issued or sold
from time to time. The Custodian will notify the Fund and the
Transfer Agent of any payments for Shares received by it from
time to time.
Section 5. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Board to
keep the books of account of the Fund and/or compute the net
asset value per Share of the outstanding Shares or, if directed
in writing to do so by the Fund, shall itself keep such books of
account and/or compute such net asset value per Share. If so
directed, the Custodian shall also (i) calculate daily the net
income of the Fund as described in the Prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts
of such net income, and/or (ii) advise the Transfer Agent
periodically of the division of such net income among its various
components. The calculations of the net asset value per share
and the daily income of the Fund shall be made at the time or
times described from time to time in the Prospectus.
Section 6. Proper Instructions.
"Proper Instructions," as such term is used throughout this
Agreement, means either (i) a writing, including a facsimile
transmission, signed by one or more persons as set forth on, and
in accordance with, an "Authorized Persons List," as such term is
defined herein (each such instruction a "Written Proper
Instruction"), (ii) a "Client Originated Electronic Financial
Instruction," as such term is defined in the Data Access Services
Addendum hereto, given in accordance with the terms of such
Addendum, or (iii) instructions received by the Custodian from a
third party in accordance with any three-party agreement which
requires a segregated asset account in accordance with Section
2.11.
Each Written Proper Instruction shall set forth a brief
description of the type of transaction involved (choosing from
among the types of transactions set forth on the Authorized
Persons List), including a specific statement of the purpose for
which such action is requested, and any modification to a Written
Proper Instruction must itself be a Written Proper Instruction
and subject to all the provisions herein relating to Written
Proper Instructions. The Fund will provide the Custodian with an
"Authorized Persons List," which list shall set forth (a) the
names of the individuals (each an "Authorized Person") who are
authorized by the Board to give Written Proper Instructions with
respect to the transactions described therein, and (b) the number
of Authorized Persons whose signature or approval, as the case
may be, is necessary for the Custodian to be able to act in
accordance with such Written Proper Instructions with respect to
a particular type of transaction. The Custodian may accept oral
instructions or instructions delivered via electronic mail as
Proper Instructions if the Custodian reasonably believes such
instructions to have been given by an Authorized Person or
Persons (as appropriate to the type of transaction); provided,
however, that in no event will instructions delivered orally or
via electronic mail be considered Proper Instructions with
respect to transactions involving the movement of cash,
securities or other assets of a Fund. The Custodian shall be
entitled to rely upon instructions given in accordance with an
Authorized Persons List until it actually receives written notice
from the Board of the applicable Fund to the contrary.
Section 7. Evidence of Authority.
Subject to Section 9 hereof, the Custodian shall be
protected in acting upon any instructions, notice, request,
consent, certificate or other instrument or paper reasonably and
in good faith believed by it to be genuine and to have been
properly executed by or on behalf of the Fund. The Custodian may
receive and accept a copy of a vote of the Board, certified by
the secretary or an assistant secretary of the applicable Fund,
as conclusive evidence (a) of the authority of any person to act
in accordance with such vote or (b) of any determination or of
any action by the Board described in such vote, and such vote may
be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
Section 8. Actions Permitted without Express Authority.
The Custodian may in its discretion and without express
authority from the Fund:
1) make payments to itself or others for minor expenses of
handling investments or other similar items relating to
its duties under this Agreement, provided that all such
payments shall be accounted for to the Fund;
2) surrender investments in temporary form for investments
in definitive form;
3) endorse for collection, in the name of the Fund,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the
investments and property of the Fund except as
otherwise directed by the Board.
Section 9. Responsibility of Custodian.
The Custodian shall not be responsible for the title,
validity or genuineness of any property or evidence of title
thereto received by it or delivered by it pursuant to this
Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party
or parties, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options
agreement. Notwithstanding anything to the contrary herein, the
Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Agreement, and it shall be
kept indemnified by and shall be without liability to the Fund
for any action taken or omitted by it in good faith without
negligence. In order for the indemnification provision contained
in this Section to apply, it is understood that if in any case
the Fund may be asked by the Custodian to indemnify or hold the
Custodian harmless, the Fund shall be fully and promptly advised
of all pertinent facts concerning the situation in question, and
it is further understood that the Custodian will use reasonable
care to identify, and notify the Fund promptly concerning, any
situation which presents or appears likely to present the
probability of such a claim for indemnification. The Fund shall
have the option to defend the Custodian against any claim which
may be the subject of a claim for indemnification hereunder, and
in the event that the Fund so elects, it will notify the
Custodian thereof and, thereupon, (i) the Fund shall take over
complete defense of the claim and (ii) the Custodian shall
initiate no further legal or other expenses with respect to such
claim. The Custodian shall in no case confess any claim or make
any compromise with respect to any claim for which it will seek
indemnity from the Fund except with the Fund's prior written
consent. Nothing herein shall be construed to limit any right or
cause of action on the part of the Custodian under this Agreement
which is independent of any right or cause of action on the part
of the Fund. The Custodian shall be entitled to rely on and may
act upon advice of counsel (who may be counsel for the Fund or
other such counsel as agreed to by the parties) on all matters,
and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. The Custodian shall be entitled
to rely upon, and shall have no duty of inquiry with respect to,
the accuracy of any representation or warranty given to it by the
Fund or any duly-authorized employee or agent thereof, and shall
be without liability for any action reasonably taken or omitted
by it in reliance thereon. Regardless of whether assets held
pursuant to this Agreement are maintained in the custody of a
foreign banking institution, a foreign securities depository, or
a branch or affiliate of a U.S. bank, the Custodian shall not be
liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization
by the Fund to maintain custody of any securities or cash or
other property of the Fund in a foreign country including, but
not limited to, losses resulting from the nationalization or
expropriation of assets, the imposition of currency controls or
restrictions, acts of war or terrorism or civil unrest, riots,
revolutions, work stoppages, natural disasters or other similar
events or acts.
Except as may arise from the Custodian's own negligence or
willful misconduct or the negligence or willful misconduct of a
sub-custodian or agent, the Custodian shall be without liability
to the Fund for any loss, liability, claim or expense resulting
from or caused by: (i) events or circumstances beyond the
reasonable control of the Custodian or any sub-custodian or
Securities System or any agent or nominee of any of the
foregoing, including, without limitation, the interruption,
suspension or restriction of trading on or the closure of any
securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications
disruptions; (ii) errors by the Fund or its duly-appointed
investment advisor in their instructions to the Custodian
provided such instructions have been given in accordance with
this Agreement; (iii) the insolvency of or acts or omissions by a
Securities System; (iv) any delay or failure of any broker, agent
or intermediary, central bank or other commercially prevalent
payment or clearing system to deliver to the Custodian's sub-
custodian or agent securities purchased or in the remittance or
payment made in connection with securities sold; (v) any delay or
failure of any company, corporation or other body in charge of
registering or transferring securities in the name of the
Custodian, the Fund, the Custodian's sub-custodians, nominees or
agents, or any consequential losses arising out of such delay or
failure to transfer such securities, including non-receipt of
bonus, dividends and rights and other accretions or benefits;
(vi) delays or inability to perform its duties due to any
disorder in market infrastructure with respect to any particular
security or Securities System; and (vii) changes to any provision
of any present or future law or regulation or order of the United
States, or any state thereof, or of any other country or
political subdivision thereof, or any order of any court of
competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a
foreign banking institution acting as a sub-custodian hereunder
to the same extent as set forth with respect to sub-custodians
generally in this Agreement.
If the Fund requires the Custodian to take any action with
respect to investments, which action involves the payment of
money or which action may, in the reasonable opinion of the
Custodian, result in the Custodian or its nominee assigned to the
Fund being liable for the payment of money or incurring liability
of some other form, the Fund, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the
Custodian in an amount and form satisfactory to it.
If the Custodian, or any of its affiliates, subsidiaries or
agents, advances cash or investments to the Fund for any purpose
(including but not limited to securities settlements, foreign
exchange contracts and assumed settlement), or in the event that
the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as
may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at
any time held for the account of the Fund shall be security
therefor, and should the Fund fail to repay the Custodian
promptly the Custodian shall be entitled to utilize available
cash and to dispose of the Fund assets to the extent necessary to
obtain reimbursement, provided that the Custodian gives the Fund
reasonable notice to repay such cash or securities advanced, and
provided further that such notice requirement shall not preclude
the Custodian's right to assert and execute on such lien.
Except as may arise from the Custodian's own negligence or
willful misconduct, or the negligence or willful misconduct of a
subcustodian or agent appointed by the Custodian, the Fund agrees
to indemnify and hold the Custodian harmless from and against any
and all costs, expenses, losses, damages, charges, reasonable
counsel fees, payments and liabilities which may be asserted
against the Custodian (i) acting in accordance with any Proper
Instruction, or (ii) for any acts or omissions of Chase Manhattan
Bank N.A.
Notwithstanding any provision herein to the contrary, to the
extent the Custodian is found to be liable hereunder for any
loss, liability, claim, expense or damage, the Custodian shall be
liable only for such loss, liability, claim, expense or damage
which was reasonably foreseeable.
Section 10. Effective Period, Termination and Amendment.
This Agreement shall become effective as of the date of its
execution, shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by
mutual agreement of the parties hereto, and may be terminated by
either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take
effect not sooner than thirty (30) days after the date of such
delivery or mailing in the case of a termination by the Fund, and
not sooner than one hundred eighty (180) days after the date of
such delivery or mailing in the case of termination by the
Custodian; provided, however that the Custodian shall not act
under Section 2.9 hereof in the absence of receipt of an initial
certificate of a Fund's secretary, or an assistant secretary
thereof, that the Board has approved the initial use of a
particular U.S. Securities System, as required by the 1940 Act or
any applicable Rule thereunder, and that the Custodian shall not
act under Section 2.10 hereof in the absence of receipt of an
initial certificate of a Fund's secretary, or an assistant
secretary thereof, that the Board has approved the initial use of
the Direct Paper System; provided further, however, that the Fund
shall not amend or terminate this Agreement in contravention of
any applicable federal or state regulations, or any provision of
the Fund's articles of incorporation, agreement of trust, by-laws
and/or registration statement (as applicable, the "Governing
Documents"); and further provided that the Fund may at any time
by action of its Board (i) substitute another bank or trust
company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Agreement in
the event of the appointment of a conservator or receiver for the
Custodian by the United States Comptroller of the Currency or
upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Agreement, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for its
reasonable costs, expenses and disbursements, provided that the
Custodian shall not incur any costs, expenses or disbursements
specifically in connection with such termination unless it has
received prior approval from the Fund, such approval not to be
unreasonably withheld.
Section 11. Successor Custodian.
If a successor custodian shall be appointed by the Board,
the Custodian shall, upon termination, deliver to such successor
custodian at the offices of the Custodian, duly endorsed and in
the form for transfer, all investments and other properties then
held by it hereunder, and shall transfer to an account of the
successor custodian all of the Fund's investments held in a
Securities System. If no such successor custodian shall be
appointed, the Custodian shall, in like manner, upon receipt of a
copy of a vote of the Board, certified by the secretary or an
assistant secretary of the applicable Fund, deliver at the
offices of the Custodian and transfer such investments, funds and
other properties in accordance with such vote. In the event that
no written order designating a successor custodian or certified
copy of a vote of the Board shall have been delivered to the
Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to
deliver to a bank or trust company, which is a "bank" as defined
in the 1940 Act, doing business in Boston, Massachusetts, or New
York, New York, of its own selection and having an aggregate
capital, surplus, and undivided profits, as shown by its last
published report, of not less than $100,000,000, all property
held by the Custodian under this Agreement and to transfer to an
account of such successor custodian all of the Fund's investments
held in any Securities System; thereafter, such bank or trust
company shall be the successor of the Custodian under this
Agreement.
In the event that any property held pursuant to this
Agreement remains in the possession of the Custodian after the
date of termination hereof owing to failure of the Fund to
procure the certified copy of the vote referred to or of the
Board to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period
as the Custodian retains possession of such property, and the
provisions of this Agreement relating to the duties and
obligations of the Custodian shall remain in full force and
effect.
Section 12. General.
Section 12.1 Compensation of Custodian. The Custodian shall
be entitled to compensation for its services and reimbursement of
its expenses as Custodian as agreed upon from time to time
between the Fund and the Custodian.
Section 12.2 Massachusetts Law to Apply. This Agreement shall
be construed and the provisions thereof interpreted under and in
accordance with laws of The Commonwealth of Massachusetts.
Section 12.3 Records. The Custodian shall create and
maintain all records relating to its activities and obligations
under this Agreement in such manner as will meet the obligations
of the Fund under the 1940 Act, with particular attention to
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All
such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open
for inspection by duly authorized officers, employees or agents
of the Fund and employees and agents of the SEC. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation
of investments owned by the Fund and held by the Custodian
hereunder, and shall, when requested to do so by an officer of
the Fund, and for such compensation as shall be agreed upon
between the Fund and the Custodian, include certificate numbers
in such tabulations.
Section 12.4 Opinion of Fund's Independent Accountant. The
Custodian shall take all reasonable action as the Fund may from
time to time request to obtain from year to year favorable
opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of
the Fund's Form N-1A, the preparation of the Fund's Form N-SAR,
the preparation of any other annual reports to the SEC with
respect to the Fund, and with respect to any other requirements
of the SEC.
Section 12.5 Interpretive and Additional Provisions. In
connection with the operation of this Agreement, the Custodian
and the Fund may from time to time agree on such provisions
interpretive of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the
general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both
parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any
applicable federal or state regulations or any provision of the
Governing Documents. No interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be
an amendment of this Agreement.
Section 12.6 Bond. The Custodian shall at all times
maintain a bond in such form and amount as is acceptable to the
Fund, which shall be issued by a reputable fidelity insurance
company authorized to do business in the place where such bond is
issued, against larceny and embezzlement, covering each officer
and employee of the Custodian who may, singly or jointly with
others, have access to securities or funds of the Fund, either
directly or through authority to receive and carry out any
certificate instruction, order request, note or other instrument
required or permitted by this Agreement. The Custodian agrees
that it shall not cancel, terminate or modify such bond insofar
as it adversely affects the Fund except after written notice
given to the Fund not less than 10 days prior to the effective
date of such cancellation, termination or modification. The
Custodian shall, upon request, furnish to the Fund a copy of each
such bond and each amendment thereto.
Section 12.7 Confidentiality. The Custodian agrees to treat
all records and other information relative to the Fund and its
prior, present or future shareholders as confidential, and the
Custodian, on behalf of itself and its employees, agrees to keep
confidential all such information except, after prior
notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be
withheld where the Custodian may be exposed to civil or criminal
contempt proceedings for failure to comply when requested to
divulge such information by duly constituted authorities, or when
so requested by the Fund.
Section 12.8 Exemption from Lien. Except as set forth in
Section 9 hereof, the securities and other assets held by the
Custodian hereunder shall not be subject to lien or charge of any
kind in favor of the Custodian or any person claiming through the
Custodian. Nothing herein shall be deemed to deprive the
Custodian of its right to invoke any and all remedies available
at law or equity to collect amounts due it under this Agreement.
Section 12.9 Assignment. This Agreement may not be
assigned by either party without the written consent of the
other, except that either party may assign its rights and
obligations hereunder to a party controlling, controlled by, or
under common control with such party.
Section 12.10 Prior Agreements. Without derogating the rights
established thereunder prior to the date of this Agreement, this
Agreement supersedes and terminates, as of the date hereof, all
prior agreements between the Fund and the Custodian relating to
the custody of Fund assets.
Section 12.11 Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an
original, and all such counterparts taken together shall
constitute but one and the same Agreement.
Section 12.12 Notices. Any notice, instruction or other
instrument required to be given hereunder may be delivered in
person to the offices of the parties as set forth herein during
normal business hours or delivered prepaid registered mail or by
telex, cable or telecopy to the parties at the following
addresses or such other addresses as may be notified by any party
from time to time.
To any Fund: c/o T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Carmen Deyesu
Telephone: 410-345-6658
Telecopy: 410-685-8827/8830
To the Custodian: State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171, U.S.A.
Attention: Carol C. Ayotte
Telephone: 617-985-6894
Telecopy: 617-537-6321
Such notice, instruction or other instrument shall be deemed
to have been served in the case of a registered letter at the
expiration of five business days after posting, in the case of
cable twenty-four hours after dispatch and, in the case of telex,
immediately on dispatch and if delivered outside normal business
hours it shall be deemed to have been received at the next time
after delivery when normal business hours commence and in the
case of cable, telex or telecopy on the business day after the
receipt thereof. Evidence that the notice was properly
addressed, stamped and put into the post shall be conclusive
evidence of posting.
Section 12.13 Entire Agreement. This Agreement (including all
schedules, appendices, exhibits and attachments hereto)
constitutes the entire Agreement between the parties with respect
to the subject matter hereof.
Section 12.14 Headings Not Controlling. Headings used in this
Agreement are for reference purposes only and shall not be deemed
a part of this Agreement.
Section 12.15 Survival. All provisions regarding
indemnification, confidentiality, warranty, liability and limits
thereon shall survive following the expiration or termination of
this Agreement.
Section 12.16 Severability. In the event any provision of this
Agreement is held illegal, void or unenforceable, the balance
shall remain in effect.
Section 12.17 The Parties. All references herein to the "Fund"
are to each of the funds listed on Appendix A hereto
individually, as if this Agreement were between such individual
Fund and the Custodian. In the case of a series fund or trust,
all references to the "Fund" are to the individual series or
portfolio of such fund or trust, or to such fund or trust on
behalf of the individual series or portfolio, as appropriate.
Any reference in this Agreement to "the parties" shall mean the
Custodian and such other individual Fund as to which the matter
pertains. Each Fund hereby represents and warranties that (i) it
has the requisite power and authority under applicable laws and
its Governing Documents to enter into and perform this Agreement,
(ii) all requisite proceedings have been taken to authorize it to
enter into and perform this Agreement, and (iii) its entrance
into this Agreement shall not cause a material breach or be in
material conflict with any other agreement or obligation of the
Fund or any law or regulation applicable to it.
Section 12.18 Directors and Trustees. It is understood and is
expressly stipulated that neither the holders of Shares nor any
member of the Board be personally liable hereunder. Whenever
reference is made herein to an action required to be taken by the
Board, such action may also be taken by the Board's executive
committee.
Section 12.19 Massachusetts Business Trust. With respect to any
Fund which is a party to this Agreement and which is organized as
a Massachusetts business trust, the term "Fund" means and refers
to the trustees from time to time serving under the applicable
trust agreement of such trust, as the same may be amended from
time to time (the "Declaration of Trust"). It is expressly
agreed that the obligations of any such Fund hereunder shall not
be binding upon any of the trustees, shareholders, nominees,
officers, agents or employees of the Fund personally, but bind
only the trust property of the Fund as set forth in the
applicable Declaration of Trust. In the case of each Fund which
is a Massachusetts business trust (in each case, a "Trust"), the
execution and delivery of this Agreement on behalf of the Trust
has been authorized by the trustees, and signed by an authorized
officer, of the Trust, in each case acting in such capacity and
not individually, and neither such authorization by the trustees
nor such execution and delivery by such officer shall be deemed
to have been made by any of them individually, but shall bind
only the trust property of the Trust as provided in its
Declaration of Trust.
Section 12.20 Reproduction of Documents. This Agreement and all
schedules, exhibits, attachments and amendments hereto may be
reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The
parties hereto all/each agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or
administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a
party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such
reproduction shall likewise be admissible in evidence.
Section 12.21 Shareholder Communications Election. SEC Rule 14b-2
requires banks which hold securities for the account of customers
to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that
issuer held by the bank unless the beneficial owner has expressly
objected to disclosure of this information. In order to comply
with the rule, the Custodian needs the Fund to indicate whether
it authorizes the Custodian to provide the Fund's name, address,
and share position to requesting companies whose securities the
Fund owns. If the Fund tells the Custodian "no", the Custodian
will not provide this information to requesting companies. If
the Fund tells the Custodian "yes" or does not check either "yes"
or "no" below, the Custodian is required by the rule to treat the
Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established
by the Fund. For the Fund's protection, the Rule prohibits the
requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate
below whether the Fund consents or objects by checking one of the
alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [X] The Custodian is not authorized to release the
Fund's name, address, and share positions.
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
Addendum to the Custodian Agreement (as defined below)
between each fund listed on Appendix A to the Custodian
Agreement, as such Appendix A is amended from time to time (each
such fund listed on Appendix A shall be individually referred to
herein as the "Fund"), and State Street Bank and Trust Company
("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of
certain assets of the Fund pursuant to a certain Custodian
Agreement (the "Custodian Agreement") dated as of January 28,
1998, and amended thereafter from time to time;
WHEREAS, State Street has developed and utilizes proprietary
accounting and other systems, including State Street's
proprietary Multicurrency HORIZON (registered trademark)
Accounting System, in its role as custodian of the Fund, and
maintains certain Fund-related data ("Fund Data") in databases
under the control and ownership of State Street (the "Data Access
Services"); and
WHEREAS, State Street makes available to the Fund (and
certain of the Fund' agents as set forth herein) certain Data
Access Services solely for the benefit of the Fund, and intends
to provide additional services, consistent with the terms and
conditions of this Addendum.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable
consideration, the parties agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
a. System. Subject to the terms and conditions of this
Addendum and solely for the purpose of providing access to Fund
Data as set forth herein, State Street hereby agrees to provide
the Fund, or certain third parties approved by State Street that
serve as the Fund's investment advisors, investment managers or
fund accountants (the "Fund Accountants") or as the Fund's
independent auditors (the "Auditor"), with access to State
Street's Multicurrency HORIZON (registered trademark) Accounting
System and the other information systems described in Attachment
A (collectively, the "System") on a remote basis solely on the
computer hardware, system software and telecommunication links
described in Attachment B (the "Designated Configuration") or on
any designated substitute or back-up equipment configuration
consented to in writing by State Street, such consent not to be
unreasonably withheld.
b. Data Access Services. State Street agrees to make
available to the Fund the Data Access Services subject to the
terms and conditions of this Addendum and such data access
operating standards and procedures as may be issued by State
Street from time to time. The Fund shall be able to access the
System to (i) originate electronic instructions to State Street
in order to (a) effect the transfer or movement of cash or
securities held under custody by State Street or (b) transmit
accounting or other information (the transactions described in
(i)(a) and (i)(b) above are referred to herein as "Client
Originated Electronic Financial Instructions"), and (ii) access
data for the purpose of reporting and analysis, which shall all
be deemed to be Data Access Services for purposes of this
Addendum.
c. Additional Services. State Street may from time to
time agree to make available to the Fund additional Systems that
are not described in the attachments to this Addendum. In the
absence of any other written agreement concerning such additional
systems, the term "System" shall include, and this Addendum shall
govern, the Fund's access to and use of any additional System
made available by State Street and/or accessed by the Fund.
2. NO USE OF THIRD PARTY SYSTEMS-LEVEL SOFTWARE
State Street and the Fund acknowledge that in connection
with the Data Access Services provided under this Addendum, the
Fund will have access, through the Data Access Services, to Fund
Data and to functions of State Street's proprietary systems;
provided, however that in no event will the Fund have direct
access to any third party systems-level software that retrieves
data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. Designated Equipment; Designated Locations. The System
and the Data Access Services shall be used and accessed solely on
and through the Designated Configuration at the offices of the
Fund or the Fund Accountants in Baltimore, Maryland or Owings
Mills, Maryland ("Designated Locations").
b. Designated Configuration; Trained Personnel. State
Street and the Fund shall be responsible for supplying,
installing and maintaining the Designated Configuration at the
Designated Locations. State Street and the Fund agree that each
will engage or retain the services of trained personnel to enable
both parties to perform their respective obligations under this
Addendum. State Street agrees to use commercially reasonable
efforts to maintain the System so that it remains serviceable,
provided, however, that State Street does not guarantee or assure
uninterrupted remote access use of the System.
c. Scope of Use. The Fund will use the System and the
Data Access Services only for the processing of securities
transactions, the keeping of books of account for the Fund and
accessing data for purposes of reporting and analysis. The Fund
shall not, and shall cause its employees and agents not to (i)
permit any unauthorized third party to use the System or the Data
Access Services, (ii) sell, rent, license or otherwise use the
System or the Data Access Services in the operation of a service
bureau or for any purpose other than as expressly authorized
under this Addendum, (iii) use the System or the Data Access
Services for any fund, trust or other investment vehicle), other
than as set forth herein, without the prior written consent of
State Street, (iv) allow access to the System or the Data Access
Services through terminals or any other computer or
telecommunications facilities located outside the Designated
Locations, (v) allow or cause any information (other than
portfolio holdings, valuations of portfolio holdings, and other
information reasonably necessary for the management or
distribution of the assets of the Fund) transmitted from State
Street's databases, including data from third party sources,
available through use of the System or the Data Access Services
to be redistributed or retransmitted to another computer,
terminal or other device for other than use for or on behalf of
the Fund or (vi) modify the System in any way, including without
limitation developing any software for or attaching any devices
or computer programs to any equipment, system, software or
database which forms a part of or is resident on the Designated
Configuration.
d. Other Locations. Except in the event of an emergency
or of a planned System shutdown, the Fund's access to services
performed by the System or to Data Access Services at the
Designated Locations may be transferred to a different location
only upon the prior written consent of State Street. In the
event of an emergency or System shutdown, the Fund may use any
back-up site included in the Designated Configuration or any
other back-up site agreed to by State Street, which agreement
will not be unreasonably withheld. The Fund may secure from
State Street the right to access the System or the Data Access
Services through computer and telecommunications facilities or
devices complying with the Designated Configuration at additional
locations only upon the prior written consent of State Street and
on terms to be mutually agreed upon by the parties.
e. Title. Title and all ownership and proprietary rights
to the System, including any enhancements or modifications
thereto, whether or not made by State Street, are and shall
remain with State Street.
f. No Modification. Without the prior written consent of
State Street, the Fund shall not modify, enhance or otherwise
create derivative works based upon the System, nor shall the Fund
reverse engineer, decompile or otherwise attempt to secure the
source code for all or any part of the System.
g. Security Procedures. The Fund shall comply with data
access operating standards and procedures and with user
identification or other password control requirements and other
security procedures as may be issued from time to time by State
Street for use of the System on a remote basis and to access the
Data Access Services. The Fund shall have access only to the
Fund Data and authorized transactions agreed upon from time to
time by State Street and, upon notice from State Street, the Fund
shall discontinue remote use of the System and access to Data
Access Services for any security reasons cited by State Street;
provided, that, in such event, State Street shall, for a period
not less than 180 days (or such other shorter period specified by
the Fund) after such discontinuance, assume responsibility to
provide accounting services under the terms of the Custodian
Agreement.
h. Inspections. State Street shall have the right to
inspect the use of the System and the Data Access Services by the
Fund, the Fund Accountants and the Auditor to ensure compliance
with this Addendum. The on-site inspections shall be upon prior
written notice to Fund, the Fund Accountants and the Auditor and
at reasonably convenient times and frequencies so as not to
result in an unreasonable disruption of the Fund's or the Fund
Accountants' or the Auditor respective businesses.
4. PROPRIETARY INFORMATION
a. Proprietary Information. The Fund acknowledges and
State Street represents that the System and the databases,
computer programs, screen formats, report formats, interactive
design techniques, documentation and other information made
available to the Fund by State Street as part of the Data Access
Services and through the use of the System constitute
copyrighted, trade secret, or other proprietary information of
substantial value to State Street. Any and all such information
provided by State Street to the Fund shall be deemed proprietary
and confidential information of State Street (hereinafter
"Proprietary Information"). The Fund agrees that it will hold
such Proprietary Information in the strictest confidence and
secure and protect it in a manner consistent with its own
procedures for the protection of its own confidential information
and to take appropriate action by instruction or agreement with
its employees or agents who are permitted access to the
Proprietary Information to satisfy its obligations hereunder.
The Fund further acknowledges that State Street shall not be
required to provide the Fund Accountants or the Auditor with
access to the System unless it has first received from the Fund
Accountants and the Auditor an undertaking with respect to State
Street's Proprietary Information in the form of Attachment C
and/or Attachment C-1 to this Addendum. The Fund shall use all
commercially reasonable efforts to assist State Street in
identifying and preventing any unauthorized use, copying or
disclosure of the Proprietary Information or any portions thereof
or any of the logic, formats or designs contained therein.
b. Cooperation. Without limitation of the foregoing, the
Fund shall advise State Street immediately in the event the Fund
learns or has reason to believe that any person to whom the Fund
has given access to the Proprietary Information, or any portion
thereof, has violated or intends to violate the terms of this
Addendum, and the Fund will, at its reasonable expense, cooperate
with State Street in seeking injunctive or other equitable relief
in the name of the Fund or State Street against any such person.
c. Injunctive Relief. The Fund acknowledges that the
disclosure of any Proprietary Information, or of any information
which at law or equity ought to remain confidential, will
immediately give rise to continuing irreparable injury to State
Street inadequately compensable in damages at law. In addition,
State Street shall be entitled to obtain immediate injunctive
relief against the breach or threatened breach of any of the
foregoing undertakings, in addition to any other legal remedies
which may be available.
d. Survival. The provisions of this Section 4 shall
survive the termination of this Addendum.
5. LIMITATION ON LIABILITY
a. Standard of Care and Limitation on Amount and Time for
Bringing Action. State Street shall be held to a standard of
reasonable care with respect to all of its duties and obligations
under this Addendum. The Fund agrees that any liability of State
Street to the Fund or any third party arising with respect to the
System or State Street's provision of Data Access Services under
this Data Access Services Addendum shall be limited to the amount
paid by the Fund for the preceding 24 months for such services.
The foregoing limitation shall relate solely to State Street's
provision of the Data Access Services pursuant to this Addendum
and is not intended to limit State Street's responsibility to
perform in accordance with the Custodian Agreement, including its
duty to act in accordance with Proper Instructions. In no event
shall State Street be liable to the Fund or any other party
pursuant to this Addendum for any special, indirect, punitive or
consequential damages even if advised of the possibility of such
damages. No action, regardless of form, arising out of the terms
of this Addendum may be brought by the Fund more than two years
after the Fund has knowledge that the cause of action has arisen.
b. Limited Warranties. NO OTHER WARRANTIES, WHETHER
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, ARE MADE BY STATE STREET.
c. Third-Party Data. Organizations from which State
Street may obtain certain data included in the System or the Data
Access Services are solely responsible for the contents of such
data, and State Street shall have no liability for claims arising
out of the contents of such third-party data, including, but not
limited to, the accuracy thereof.
d. Regulatory Requirements. As between State Street and
the Fund, the Fund shall be solely responsible for the accuracy
of any accounting statements or reports produced using the Data
Access Services and the System and the conformity thereof with
any requirements of law.
e. Force Majeure. Neither party shall be liable for any
costs or damages due to delay or nonperformance under this Data
Access Services Addendum arising out of any cause or event beyond
such party's control, including, without limitation, cessation of
services hereunder or any damages resulting therefrom to the
other party as a result of work stoppage, power or other
mechanical failure, computer virus, natural disaster,
governmental action, or communication disruption.
6. INDEMNIFICATION
The Fund agrees to indemnify and hold State Street harmless
from any loss, damage or expense including reasonable attorney's
fees, (a "loss") suffered by State Street arising from (i) the
negligence or willful misconduct in the use by the Fund of the
Data Access Services or the System, including any loss incurred
by State Street resulting from a security breach at the
Designated Locations or committed by the Fund's employees or
agents or the Fund Accountants or the and Auditor, and (ii) any
loss resulting from incorrect Client Originated Electronic
Financial Instructions. State Street shall be entitled to rely
on the validity and authenticity of Client Originated Electronic
Financial Instructions without undertaking any further inquiry as
long as such instruction is undertaken in conformity with
security procedures established by State Street from time to
time.
7. FEES
Fees and charges for the use of the System and the Data
Access Services and related payment terms shall be as set forth
in the custody fee schedule in effect from time to time between
the parties (the "Fee Schedule"). Any tariffs, duties or taxes
imposed or levied by any government or governmental agency by
reason of the transactions contemplated by this Addendum,
including, without limitation, federal, state and local taxes,
use, value added and personal property taxes (other than income,
franchise or similar taxes which may be imposed or assessed
against State Street) shall be borne by the Fund. Any claimed
exemption from such tariffs, duties or taxes shall be supported
by proper documentary evidence delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at
a designated State Street training facility or at the Designated
Locations, to the Fund's personnel in connection with the use of
the System on the Designated Configuration. The Fund agrees that
it will set aside, during regular business hours or at other
times agreed upon by both parties, sufficient time to enable all
operators of the System and the Data Access Services, designated
by the Fund, to receive the training offered by State Street
pursuant to this Addendum.
b. Installation and Conversion. State Street and the Fund
shall be responsible for the technical installation and
conversion ("Installation and Conversion") of the Designated
Configuration. The Fund shall have the following
responsibilities in connection with Installation and Conversion
of the System:
(i) The Fund shall be solely responsible for the timely
acquisition and maintenance of the hardware and
software that attach to the Designated Configuration
in order to use the Data Access Services at the
Designated Locations, and
(ii) State Street and the Fund each agree that they will
assign qualified personnel to actively participate
during the Installation and Conversion phase of the
System implementation to enable both parties to perform
their respective obligations under this Addendum.
9. SUPPORT
During the term of this Addendum, State Street agrees to
provide the support services set out in Attachment D to this
Addendum.
10. TERM
a. Term. This Addendum shall become effective on the date
of its execution by State Street and shall remain in full force
and effect until terminated as herein provided.
b. Termination. Either party may terminate this Addendum
(i) for any reason by giving the other party at least one-
hundred and eighty (180) days' prior written notice in the case
of notice of termination by State Street to the Fund or thirty
(30) days' notice in the case of notice from the Fund to State
Street of termination; or (ii) immediately for failure of the
other party to comply with any material term and condition of the
Addendum by giving the other party written notice of termination.
In the event the Fund shall cease doing business, shall become
subject to proceedings under the bankruptcy laws (other than a
petition for reorganization or similar proceeding) or shall be
adjudicated bankrupt, this Addendum and the rights granted
hereunder shall, at the option of State Street, immediately
terminate with notice to the Fund. This Addendum shall in any
event terminate as to any Fund within ninety (90) days after the
termination of the Custodian Agreement.
c. Termination of the Right to Use. Upon termination of
this Addendum for any reason, any right to use the System and
access to the Data Access Services shall terminate and the Fund
shall immediately cease use of the System and the Data Access
Services. Immediately upon termination of this Addendum for any
reason, the Fund shall return to State Street all copies of
documentation and other Proprietary Information in its
possession; provided, however, that in the event that either
party terminates this Addendum or the Custodian Agreement for any
reason other than the Fund's breach, State Street shall provide
the Data Access Services for a period of time and at a price to
be agreed upon in writing by the parties.
11. MISCELLANEOUS
a. Year 2000. State Street will take all steps necessary
to ensure that its products (and those of its third-party
suppliers) reflect the available state of the art technology to
offer products that are Year 2000 compliant, including, but not
limited to, century recognition of dates, calculations that
correctly compute same century and multi-century formulas and
date values, and interface values that reflect the date issues
arising between now and the next one-hundred years. If any
changes are required, State Street will make the changes to its
products at no cost to the Fund and in a commercially reasonable
time frame and will require third-party suppliers to do likewise.
b. Assignment; Successors. This Addendum and the rights
and obligations of the Fund and State Street hereunder shall not
be assigned by either party without the prior written consent of
the other party, except that State Street may assign this
Addendum to a successor of all or a substantial portion of its
business, or to a party controlling, controlled by, or under
common control with State Street.
c. Survival. All provisions regarding indemnification,
warranty, liability and limits thereon, and confidentiality
and/or protection of proprietary rights and trade secrets shall
survive the termination of this Addendum.
d. Entire Agreement. This Addendum and the attachments
hereto constitute the entire understanding of the parties hereto
with respect to the Data Access Services and the use of the
System and supersedes any and all prior or contemporaneous
representations or agreements, whether oral or written, between
the parties as such may relate to the Data Access Services or the
System, and cannot be modified or altered except in a writing
duly executed by the parties. This Addendum is not intended to
supersede or modify the duties and liabilities of the parties
hereto under the Custodian Agreement or any other agreement
between the parties hereto except to the extent that any such
agreement specifically refers to the Data Access Services or the
System. No single waiver or any right hereunder shall be deemed
to be a continuing waiver.
e. Severability. If any provision or provisions of this
Addendum shall be held to be invalid, unlawful, or unenforceable,
the validity, legality, and enforceability of the remaining
provisions shall not in any way be affected or impaired.
f. Governing Law. This Addendum shall be interpreted and
construed in accordance with the internal laws of The
Commonwealth of Massachusetts without regard to the conflict of
laws provisions thereof.
ATTACHMENT A
Multicurrency HORIZON (registered trademark) Accounting System
System Product Description
I. The Multicurrency HORIZON (registered trademark)
Accounting System is designed to provide lot level portfolio and
general ledger accounting for SEC and ERISA type requirements and
includes the following services: 1) recording of general ledger
entries; 2) calculation of daily income and expense; 3)
reconciliation of daily activity with the trial balance, and 4)
appropriate automated feeding mechanisms to (i) domestic and
international settlement systems, (ii) daily, weekly and monthly
evaluation services, (iii) portfolio performance and analytic
services, (iv) customer's internal computing systems and (v)
various State Street provided information services products.
II. GlobalQuest (registered trademark) GlobalQuest
(registered trademark) is designed to provide customer access to
the following information maintained on The Multicurrency
HORIZON (registered trademark) Accounting System: 1) cash
transactions and balances; 2) purchases and sales; 3) income
receivables; 4) tax refund; 5) daily priced positions; 6) open
trades; 7) settlement status; 8) foreign exchange transactions;
9) trade history; and 10) daily, weekly and monthly evaluation
services.
III. HORIZON (registered trademark) Gateway. HORIZON
(registered trademark) Gateway provides customers with the
ability to (i) generate reports using information maintained on
the Multicurrency HORIZON (registered trademark) Accounting
System which may be viewed or printed at the customer's location;
(ii) extract and download data from the Multicurrency HORIZON
(registered trademark) Accounting System; and (iii) access
previous day and historical data. The following information
which may be accessed for these purposes: 1) holdings; 2)
holdings pricing; 3) transactions, 4) open trades; 5) income;
6) general ledger and 7) cash.
IV. State Street Interchange. State Street Interchange is an
open information delivery architecture wherein proprietary
communication products, data formats and workstation tools are
replaced by industry standards and is designed to enable the
connection of State Street's network to customer networks,
thereby facilitating the sharing of information.
ATTACHMENT C
Undertaking
(Fund Accountants)
The undersigned understands that in the course of its
employment as Fund Accountant to each fund listed on Appendix A
(as amended from time to time) to that certain Custodian
Agreement dated as of January 28, 1998 (the "Fund"), it will have
access to State Street Bank and Trust Company's Multicurrency
HORIZON Accounting System and other information systems
(collectively, the "System").
The undersigned acknowledges that the System and the
databases, computer programs, screen formats, report formats,
interactive design techniques, documentation, and other
information made available to the Undersigned by State Street
Bank and Trust Company ("State Street") as part of the Data
Access Services provided to the Fund and through the use of the
System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all
such information provided by State Street to the Undersigned
shall be deemed proprietary and confidential information of State
Street (hereinafter "Proprietary Information"). The undersigned
agrees that it will hold such Proprietary Information in
confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential
information and to take appropriate action by instruction or
agreement with its employees who are permitted access to the
Proprietary Information to satisfy its obligations hereunder.
The undersigned will not attempt to intercept data, gain
access to data in transmission, or attempt entry into any system
or files for which it is not authorized. It will not
intentionally adversely affect the integrity of the System
through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use
the System and access to the Data Access Services shall terminate
and the Undersigned shall immediately cease use of the System and
the Data Access Services. Immediately upon notice by State
Street for any reason, the undersigned shall return to State
Street all copies of documentation and other Proprietary
Information in its possession.
[The Fund Accountants]
By: ______________________________
Title: ______________________________
Date: ______________________________
ATTACHMENT C-1
Undertaking
(Auditor)
The undersigned understands that in the course of its
employment as Auditor to each fund listed on Appendix A (as
amended from time to time) to that certain Custodian Agreement
dated as of January 28, 1998 (the "Fund") it will have access to
State Street Bank and Trust Company's Multicurrency HORIZON
Accounting System and other information systems (collectively,
the "System").
The undersigned acknowledges that the System and the
databases, computer programs, screen formats, report formats,
interactive design techniques, documentation, and other
information made available to the Undersigned by State Street
Bank and Trust Company ("State Street") as part of the Data
Access Services provided to the Fund and through the use of the
System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all
such information provided by State Street to the Undersigned
shall be deemed proprietary and confidential information of State
Street (hereinafter "Proprietary Information"). The undersigned
agrees that it will hold such Proprietary Information in
confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential
information and to take appropriate action by instruction or
agreement with its employees who are permitted access to the
Proprietary Information to satisfy its obligations hereunder.
The undersigned will not attempt to intercept data, gain
access to data in transmission, or attempt entry into any system
or files for which it is not authorized. It will not
intentionally adversely affect the integrity of the System
through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use
the System and access to the Data Access Services shall terminate
and the Undersigned shall immediately cease use of the System and
the Data Access Services. Immediately upon notice by State
Street for any reason, the undersigned shall return to State
Street all copies of documentation and other Proprietary
Information in its possession.
[The Auditor]
By: ______________________________
Title: ______________________________
Date: ______________________________
ATTACHMENT D
Support
During the term of this Addendum, State Street agrees to
provide the following on-going support services:
a. Telephone Support. The Fund Designated Persons may
contact State Street's HORIZON (registered trademark) Help Desk
and Fund Assistance Center between the hours of 8 a.m. and 6 p.m.
(Eastern time) on all business days for the purpose of obtaining
answers to questions about the use of the System, or to report
apparent problems with the System. From time to time, the Fund
shall provide to State Street a list of persons who shall be
permitted to contact State Street for assistance (such persons
being referred to as the "Fund Designated Persons").
b. Technical Support. State Street will provide technical
support to assist the Fund in using the System and the Data
Access Services. The total amount of technical support provided
by State Street shall not exceed 10 resource days per year.
State Street shall provide such additional technical support as
is expressly set forth in the fee schedule in effect from time to
time between the parties (the "Fee Schedule"). Technical
support, including during installation and testing, is subject to
the fees and other terms set forth in the Fee Schedule.
c. Maintenance Support. State Street shall use
commercially reasonable efforts to correct system functions that
do not work according to the System Product Description as set
forth on Attachment A in priority order in the next scheduled
delivery release or otherwise as soon as is practicable.
d. System Enhancements. State Street will provide to the
Fund any enhancements to the System developed by State Street and
made a part of the System; provided that State Street offer the
Fund reasonable training on the enhancement. Charges for system
enhancements shall be as provided in the Fee Schedule. State
Street retains the right to charge for related systems or
products that may be developed and separately made available for
use other than through the System.
e. Custom Modifications. In the event the Fund desires
custom modifications in connection with its use of the System,
the Fund shall make a written request to State Street providing
specifications for the desired modification. Any custom
modifications may be undertaken by State Street in its sole
discretion in accordance with the Fee Schedule.
f. Limitation on Support. State Street shall have no
obligation to support the Fund's use of the System: (1) for use
on any computer equipment or telecommunication facilities which
does not conform to the Designated Configuration or (ii) in the
event the Fund has modified the System in breach of this
Addendum.
In Witness Whereof, each of the parties has caused this
instrument to be executed in its name and on its behalf by its
duly authorized representative as of the date and year first
written above.
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 International Funds, Inc.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Bond Fund
T. Rowe Price Emerging Markets Stock Fund
T. Rowe Price Global Stock Fund
T. Rowe Price Growth & Income Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Tax-Free Income Fund, Inc.
T. Rowe Price Tax-Exempt Money Fund, Inc.
T. Rowe Price Tax-Free Short-Intermediate Fund, Inc.
T. Rowe Price High Yield Fund, Inc.
T. Rowe Price Tax-Free High Yield Fund, Inc.
T. Rowe Price New America Growth Fund
T. Rowe Price Equity Income Fund
T. Rowe Price GNMA Fund
T. Rowe Price Capital Appreciation Fund
T. Rowe Price State Tax-Free Income Trust
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. Rowe Price California Tax-Free Income Trust
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. Rowe Price Science & Technology Fund, Inc.
T. Rowe Price Small-Cap Value Fund, Inc.
Institutional International Funds, Inc.
Foreign Equity Fund
T. Rowe Price U.S. Treasury Funds, Inc.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. Rowe Price Index Trust, Inc.
T. Rowe Price Equity Index 500 Fund
T. Rowe Price Extended Equity Market Index Fund
T. Rowe Price Total Equity Market Index Fund
T. Rowe Price Spectrum Fund, Inc.
Spectrum Growth Fund
Spectrum Income Fund
Spectrum International Fund
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 Tax-Free Insured Intermediate Bond Fund, Inc.
T. Rowe Price Dividend Growth Fund, Inc.
T. Rowe Price Blue Chip Growth Fund, Inc.
T. Rowe Price Summit Funds, Inc.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond 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 Fund
T. Rowe Price Summit Municipal Income Fund
T. Rowe Price Equity Series, Inc.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. Rowe Price International Series, Inc.
T. Rowe Price International Stock Portfolio
T. Rowe Price Fixed Income Series, Inc.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. Rowe Price Personal Strategy Funds, Inc.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
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 Domestic Equity Funds, Inc.
Mid-Cap Equity Growth Fund
T. Rowe Price Diversified Small-Cap Growth Fund, Inc.
T. Rowe Price Financial Services Fund, Inc.
T. Rowe Price Real Estate Fund, Inc.
T. Rowe Price Small Cap Stock Fund, Inc.
T. Rowe Price Small Cap Stock Fund
T. Rowe Price Media & Telecommunications Fund, Inc.
T. Rowe Price Tax Efficient Balanced Fund, Inc.
Reserve Investment Funds, Inc.
Government Reserve Investment Fund
Reserve Investment Fund
Signature attested to: Executed on Behalf of each Fund:
/s/Suzanne E. Fraunhoffer /s/Carmen Deyesu
By: _____________________ By: _____________________
Name: Suzanne E. Fraunhoffer Name: Carmen Deyesu
Title: Legal Assistant Title: Treasurer for each of
the foregoing
Signature Attested to: State Street Bank and Trust
Company
/s/Glenn Ciotti /s/Ronald E. Logue
By: ____________________ By: _____________________
Name: Glenn Ciotti Name: Ronald E. Logue
Title: VP & Assoc. Counsel Title: Executive Vice
President
Schedule A
Country Subcustodian Central Depository
United Kingdom State Street Bank None;
and Trust Company The Bank of England,
The Central Gilts Office (CGO);
The Central Moneymarkets
Office (CMO)
Euroclear (The Euroclear System)/ State Street London Limited
Appendix A
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 International Funds, Inc.
T. Rowe Price International Bond Fund
T. Rowe Price International Stock Fund
T. Rowe Price International Discovery Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Bond Fund
T. Rowe Price Emerging Markets Stock Fund
T. Rowe Price Global Stock Fund
T. Rowe Price Growth & Income Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Tax-Free Income Fund, Inc.
T. Rowe Price Tax-Exempt Money Fund, Inc.
T. Rowe Price Tax-Free Short-Intermediate Fund, Inc.
T. Rowe Price High Yield Fund, Inc.
T. Rowe Price Tax-Free High Yield Fund, Inc.
T. Rowe Price New America Growth Fund
T. Rowe Price Equity Income Fund
T. Rowe Price GNMA Fund
T. Rowe Price Capital Appreciation Fund
T. Rowe Price State Tax-Free Income Trust
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
T. Rowe Price California Tax-Free Income Trust
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. Rowe Price Science & Technology Fund, Inc.
T. Rowe Price Small-Cap Value Fund, Inc.
Institutional International Funds, Inc.
Foreign Equity Fund
T. Rowe Price U.S. Treasury Funds, Inc.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. Rowe Price Index Trust, Inc.
T. Rowe Price Equity Index 500 Fund
T. Rowe Price Extended Equity Market Index Fund
T. Rowe Price Total Equity Market Index Fund
T. Rowe Price Spectrum Fund, Inc.
Spectrum Growth Fund
Spectrum Income Fund
Spectrum International Fund
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 Tax-Free Insured Intermediate Bond Fund, Inc.
T. Rowe Price Dividend Growth Fund, Inc.
T. Rowe Price Blue Chip Growth Fund, Inc.
T. Rowe Price Summit Funds, Inc.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond 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 Fund
T. Rowe Price Summit Municipal Income Fund
T. Rowe Price Equity Series, Inc.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. Rowe Price International Series, Inc.
T. Rowe Price International Stock Portfolio
T. Rowe Price Fixed Income Series, Inc.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. Rowe Price Personal Strategy Funds, Inc.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
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 Domestic Equity Funds, Inc.
Mid-Cap Equity Growth Fund
T. Rowe Price Diversified Small-Cap Growth Fund, Inc.
T. Rowe Price Financial Services Fund, Inc.
T. Rowe Price Real Estate Fund, Inc.
T. Rowe Price Small Cap Stock Fund, Inc.
T. Rowe Price Small Cap Stock Fund
T. Rowe Price Media & Telecommunications Fund, Inc.
T. Rowe Price Tax Efficient Balanced Fund, Inc.
Reserve Investment Funds, Inc.
Government Reserve Investment Fund
Reserve Investment Fund
The Transfer Agency and Service Agreement between T. Rowe Price Services,
Inc. and T. Rowe Price Funds, dated January 1, 1998, as amended.
TRANSFER AGENCY AND SERVICE AGREEMENT
between
T. ROWE PRICE SERVICES, INC.
and
EACH OF THE PARTIES INDICATED ON APPENDIX A
<PAGE>
TABLE OF CONTENTS
Page
Article A Terms of Appointment . . . . . . . . . . . . . . . . . . . 2
Article B Duties of Price Services . . . . . . . . . . . . . . . . . 3
1. Receipt of Orders/Payments. . . . . . . . . . . . . . 3
2. Redemptions . . . . . . . . . . . . . . . . . . . . . 5
3. Transfers . . . . . . . . . . . . . . . . . . . . . . 7
4. Confirmations . . . . . . . . . . . . . . . . . . . . 7
5. Returned Checks and ACH Debits. . . . . . . . . . . . 7
6. Redemption of Shares under Ten Day Hold . . . . . . . 8
7. Dividends, Distributions and Other
Corporate Actions . . . . . . . . . . . . . . . . . .10
8. Unclaimed Payments and Certificates . . . . . . . . .11
9. Books and Records . . . . . . . . . . . . . . . . . .11
10. Authorized Issued and Outstanding Shares. . . . . . .14
11. Tax Information . . . . . . . . . . . . . . . . . . .14
12. Information to be Furnished to the Fund . . . . . . .14
13. Correspondence. . . . . . . . . . . . . . . . . . . .15
14. Lost or Stolen Securities . . . . . . . . . . . . . .15
15. Telephone Services. . . . . . . . . . . . . . . . . .15
16. Collection of Shareholder Fees. . . . . . . . . . . .16
17. Form N-SAR. . . . . . . . . . . . . . . . . . . . . .16
18. Cooperation With Accountants. . . . . . . . . . . . .16
19. Blue Sky. . . . . . . . . . . . . . . . . . . . . . .16
20. Other Services. . . . . . . . . . . . . . . . . . . .16
21. Fees and Out-of-Pocket Expenses . . . . . . . . . . .17
Article C Representations and Warranties of the Price
Services . . . . . . . . . . . . . . . . . . . . . . . . .19
Article D Representations and Warranties of the Fund . . . . . . . .19
Article E Standard of Care/Indemnification . . . . . . . . . . . . .20
Article F Dual Interests . . . . . . . . . . . . . . . . . . . . . .22
Article G Documentation. . . . . . . . . . . . . . . . . . . . . . .22
Article H References to Price Services . . . . . . . . . . . . . . .24
Article I Compliance with Governmental Rules and
Regulations. . . . . . . . . . . . . . . . . . . . . . . .25
Article J Ownership of Software and Related Material . . . . . . . .25
Article K Quality Service Standards. . . . . . . . . . . . . . . . .25
Article L As of Transactions . . . . . . . . . . . . . . . . . . . .25
Article M Term and Termination of Agreement. . . . . . . . . . . . .29
Article N Notice . . . . . . . . . . . . . . . . . . . . . . . . . .29
Article O Assignment . . . . . . . . . . . . . . . . . . . . . . . .29
Article P Amendment/Interpretive Provisions. . . . . . . . . . . . .30
Article Q Further Assurances . . . . . . . . . . . . . . . . . . . .30
Article R Maryland Law to Apply. . . . . . . . . . . . . . . . . . .30
Article S Merger of Agreement. . . . . . . . . . . . . . . . . . . .30
Article T Counterparts . . . . . . . . . . . . . . . . . . . . . . .30
Article U The Parties. . . . . . . . . . . . . . . . . . . . . . . .30
Article V Directors, Trustees, Shareholders and Massachusetts
Business Trust . . . . . . . . . . . . . . . . . . . . . .31
Article W Captions . . . . . . . . . . . . . . . . . . . . . . . . .31
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the first day of January, 1998, by and
between T. ROWE PRICE SERVICES, INC., a Maryland corporation
having its principal office and place of business at 100 East
Pratt Street, Baltimore, Maryland 21202 ("Price Services"), and
EACH FUND WHICH IS LISTED ON APPENDIX A (as such Appendix may be
amended from time to time) and which evidences its agreement to
be bound hereby by executing a copy of this Agreement (each such
Fund individually hereinafter referred to as "the Fund", whose
definition may be found in Article U);
WHEREAS, the Fund desires to appoint Price Services as its
transfer agent, dividend disbursing agent and agent in connection
with certain other activities, and Price Services desires to
accept such appointment;
WHEREAS, Price Services represents that it is registered
with the Securities and Exchange Commission as a Transfer Agent
under Section 17A of the Securities Exchange Act of 1934 ("'34
Act") and will notify each Fund promptly if such registration is
revoked or if any proceeding is commenced before the Securities
and Exchange Commission which may lead to such revocation;
WHEREAS, Price Services has the capability of providing
shareholder services on behalf of the Funds for the accounts of
shareholders in the Funds, including banks and brokers on behalf
of underlying clients;
WHEREAS, certain of the Funds are named investment options
under various tax-sheltered retirement plans including, but not
limited to, individual retirement accounts, Sep-IRA's, SIMPLE
plans, deferred compensation plans, 403(b) plans, and profit
sharing, thrift, and money purchase pension plans for self-employed
individuals and professional partnerships and
corporations, (collectively referred to as "Retirement Plans");
WHEREAS, Price Services also has the capability of providing
special services, on behalf of the Funds, for the accounts of
shareholders participating in these Retirement Plans ("Retirement
Accounts").
WHEREAS, Price Services may subcontract or jointly contract
with other parties, on behalf of the Funds to perform certain of
the functions and services described herein including services to
Retirement Plans and Retirement Accounts;
WHEREAS, Price Services may also enter into, on behalf of
the Funds, certain banking relationships to perform various
banking services including, but not limited to, check deposits,
check disbursements, automated clearing house transactions
("ACH") and wire transfers.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereto agree as follows:
A. Terms of Appointment
Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints Price Services to
act, and Price Services agrees to act, as the Fund's transfer
agent, dividend disbursing agent and agent in connection with:
(1) the Fund's authorized and issued shares of its common stock
or shares of beneficial interest (all such stock and shares to be
referred to as "Shares"); (2) any dividend reinvestment or other
services provided to the shareholders of the Fund
("Shareholders"), including, without limitation, any periodic
investment plan or periodic withdrawal program; and (3) certain
Retirement Plan and Retirement Accounts as agreed upon by the
parties.
The parties to the Agreement hereby acknowledge that from
time to time, Price Services and T. Rowe Price Trust Company may
enter into contracts ("Other Contracts") with employee benefit
plans and/or their sponsors for the provision of certain plan
participant services to Retirement Plans and Retirement Accounts.
Compensation paid to Price Services pursuant to this Agreement is
with respect to the services described herein and not with
respect to services provided under Other Contracts.
B. Duties of Price Services
Price Services agrees that it will perform the following
services:
1. Receipt of Orders/Payments
Receive for acceptance, orders/payments for the
purchase of Shares and promptly deliver payment and
appropriate documentation thereof to the authorized
custodian of the Fund (the "Custodian"). Upon receipt of
any check or other instrument drawn or endorsed to it as
agent for, or identified as being for the account of, the
Fund, Price Services will process the order as follows:
o Examine the check to determine if the check conforms to
the Funds' acceptance procedures (including certain
third-party check procedures). If the check conforms,
Price Services will endorse the check and include the
date of receipt, will process the same for payment, and
deposit the net amount to the parties agreed upon
designated bank account prior to such deposit in the
Custodial account, and will notify the Fund and the
Custodian, respectively, of such deposits (such
notification to be given on a daily basis of the total
amount deposited to said accounts during the prior
business day);
o Subject to guidelines mutually agreed upon by the Funds
and Price Services, excess balances, if any, resulting
from deposit in these designated bank accounts will be
invested and the income therefrom will be used to
offset fees which would otherwise be charged to the
Funds under this Agreement;
o Ensure that any documentation received from Shareholder
is in "good order" and all appropriate documentation is
received to establish an account.
o Open a new account, if necessary, and credit the
account of the investor with the number of Shares to be
purchased according to the price of the Fund's Shares
in effect for purchases made on that date, subject to
any instructions which the Fund may have given to Price
Services with respect to acceptance of orders for
Shares;
o Maintain a record of all unpaid purchases and report
such information to the Fund daily;
o Process periodic payment orders, as authorized by
investors, in accordance with the payment procedures
mutually agreed upon by both parties;
o Receive monies from Retirement Plans and determine the
proper allocation of such monies to the Retirement
Accounts based upon instructions received from
Retirement Plan participants or Retirement Plan
administrators ("Administrators");
o Process orders received from recordkeepers and banks
and brokers for omnibus accounts in accordance with
internal policies and procedures established in
executed agency agreements and other agreements
negotiated with banks and brokers; and
o Process telephone orders for purchases of Fund shares
from the Shareholder's bank account (via wire or ACH)
to the Fund in accordance with procedures mutually
agreed upon by both parties.
Upon receipt of funds through the Federal Reserve Wire
System that are designated for purchases in Funds which declare
dividends at 12:00 p.m. (or such time as set forth in the Fund's
current prospectus), Price Services shall promptly notify the
Fund and the Custodian of such deposit.
2. Redemptions
Receive for acceptance redemption requests, including
telephone redemptions and requests received from
Administrators for distributions to participants or their
designated beneficiaries or for payment of fees due the
Administrator or such other person, including Price
Services, and deliver the appropriate documentation thereof
to the Custodian. Price Services shall receive and stamp
with the date of receipt, all requests for redemptions of
Shares (including all certificates delivered to it for
redemption) and shall process said redemption requests as
follows, subject to the provisions of Section 6 hereof:
o Examine the redemption request and, for written
redemptions, the supporting documentation, to determine
that the request is in good order and all requirements
have been met;
o Notify the Fund on the next business day of the total
number of Shares presented and covered by all such
requests;
o For those Funds that impose redemption fees, calculate
the fee owed on the redemption in accordance with the
guidelines established between the Fund and Price
Services;
o As set forth in the prospectus of the Fund, and in any
event, on or prior to the seventh (7th) calendar day
succeeding any such request for redemption, Price
Services shall, from funds available in the accounts
maintained by Price Services as agent for the Funds,
pay the applicable redemption price in accordance with
the current prospectus of the Fund, to the investor,
participant, beneficiary, Administrator or such other
person, as the case may be;
o Instruct custodian to wire redemption proceeds to a
designated bank account of Price Services. Subject to
guidelines mutually agreed upon by the Funds and Price
Services, excess balances, if any, resulting from
deposit in these bank accounts will be invested and the
income therefrom will be used to offset fees which
would otherwise be charged to the Funds under this
Agreement;
o If any request for redemption does not comply with the
Fund's requirements, Price Services shall promptly
notify the investor of such fact, together with the
reason therefore, and shall effect such redemption at
the price in effect at the time of receipt of all
appropriate documents;
o Make such withholdings as may be required under
applicable Federal tax laws;
o In the event redemption proceeds for the payment of
fees are to be wired through the Federal Reserve Wire
System or by bank wire, Price Services shall cause such
proceeds to be wired in Federal funds to the bank
account designated by Shareholder; and
o Process periodic redemption orders as authorized by the
investor in accordance with the periodic withdrawal
procedures for Systematic Withdrawal Plan ("SWP") and
systematic ACH redemptions mutually agreed upon by both
parties.
Procedures and requirements for effecting and accepting
redemption orders from investors by telephone, Tele*Access,
computer, or written instructions shall be established by
mutual agreement between Price Services and the Fund
consistent with the Fund's current prospectus.
3. Transfers
Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions and
documentation and examine such instructions for conformance
with appropriate procedures and requirements. In this
regard, Price Services, upon receipt of a proper request for
transfer, including any transfer involving the surrender of
certificates of Shares, is authorized to transfer, on the
records of the Fund, Shares of the Fund, including
cancellation of surrendered certificates, if any, to credit
a like amount of Shares to the transferee.
4. Confirmations
Mail all confirmations and other enclosures requested
by the Fund to the shareholder, and in the case of
Retirement Accounts, to the Administrators, as may be
required by the Funds or by applicable Federal or state law.
5. Returned Checks and ACH Debits
In order to minimize the risk of loss to the Fund by
reason of any check being returned unpaid, Price Services
will promptly identify and follow-up on any check or ACH
debit returned unpaid. For items returned, Price Services
may telephone the investor and/or redeposit the check or
debit for collection or cancel the purchase, as deemed
appropriate. Price Services and the Funds will establish
procedures for the collection of money owed the Fund from
investors who have caused losses due to these returned
items.
6. Redemption of Shares under Ten Day Hold
o Uncollected Funds
Shares purchased by personal, corporate, or
governmental check, or by ACH will be considered
uncollected until the tenth calendar date following the
trade date of the trade ("Uncollected Funds");
<PAGE>
o Good Funds
Shares purchased by treasurer's, cashier, certified, or
official check, or by wire transfer will be considered
collected immediately ("Good Funds"). Absent
information to the contrary (i.e., notification from
the payee institution), Uncollected Funds will be
considered Good Funds on the tenth calendar day
following trade date.
o Redemption of Uncollected Funds
o Shareholders making telephone requests for
redemption of shares purchased with Uncollected
Funds will be given two options:
1. The Shareholder will be permitted to exchange
to a money market fund to preserve principal until
the payment is deemed Good Funds;
2. The redemption can be processed utilizing the
same procedures for written redemptions described
below.
o If a written redemption request is made for shares
where any portion of the payment for said shares
is in Uncollected Funds, and the request is in
good order, Price Services will promptly obtain
the information relative to the payment necessary
to determine when the payment becomes Good Funds.
The redemption will be processed in accordance
with normal procedures, and the proceeds will be
held until confirmation that the payment is Good
Funds. On the seventh (7th) calendar day after
trade date, and each day thereafter until either
confirmation is received or the tenth (10th)
calendar day, Price Services will call the paying
institution to request confirmation that the check
or ACH in question has been paid. On the tenth
calendar day after trade date, the redemption
proceeds will be released, regardless of whether
confirmation has been received.
o Checkwriting Redemptions.
o Daily, all checkwriting redemptions $10,000 and
over reported as Uncollected Funds or insufficient
funds will be reviewed. An attempt will be made
to contact the shareholder to make good the funds
(through wire, exchange, transfer). Generally by
12:00 p.m. the same day, if the matter has not
been resolved, the redemption request will be
rejected and the check returned to the
Shareholder.
o All checkwriting redemptions under $10,000
reported as Uncollected or insufficient funds will
be rejected and the check returned to the
Shareholder. The Funds and Services may agree to
contact shareholders presenting checks under
$10,000 reported as insufficient to obtain
alternative instructions for payment.
o Confirmations of Available Funds
The Fund expects that situations may develop whereby it
would be beneficial to determine if a person who has
placed an order for Shares has sufficient funds in his
or her checking account to cover the payment for the
Shares purchased. When this situation occurs, Price
Services may call the bank in question and request that
it confirm that sufficient funds to cover the purchase
are currently credited to the account in question.
Price Services will maintain written documentation or a
recording of each telephone call which is made under
the procedures outlined above. None of the above
procedures shall preclude Price Services from inquiring
as to the status of any check received by it in payment
for the Fund's Shares as Price Services may deem
appropriate or necessary to protect both the Fund and
Price Services. If a conflict arises between Section 2
and this Section 6, Section 6 will govern.
7. Dividends, Distributions and Other Corporate Actions
o The Fund will promptly inform Price Services of the
declaration of any dividend, distribution, stock split
or any other distributions of a similar kind on account
of its Capital Stock.
o Price Services shall act as Dividend Disbursing Agent
for the Fund, and as such, shall prepare and make
income and capital gain payments to investors. As
Dividend Disbursing Agent, Price Services will on or
before the payment date of any such dividend or
distribution, notify the Custodian of the estimated
amount required to pay any portion of said dividend or
distribution which is payable in cash, and the Fund
agrees that on or about the payment date of such
distribution, it shall instruct the Custodian to make
available to Price Services sufficient funds for the
cash amount to be paid out. If an investor is entitled
to receive additional Shares by virtue of any such
distribution or dividend, appropriate credits will be
made to his or her account.
8. Unclaimed Payments and Certificates
In accordance with procedures agreed upon by both
parties, report abandoned property to appropriate state and
governmental authorities of the Fund. Price Services shall,
90 days prior to the annual reporting of abandoned property
to each of the states, make reasonable attempts to locate
Shareholders for which (a) checks or share certificates have
been returned; (b) for which accounts have aged outstanding
checks; or (c) accounts with unissued shares that have been
coded with stop mail and meet the dormancy period guidelines
specified in the individual states. Price Services shall
make reasonable attempts to contact shareholders for those
accounts which have significant aged outstanding checks and
those checks meet a specified dollar threshold.
9. Books and Records
Maintain records showing for each Shareholder's
account, Retirement Plan or Retirement Account, as the case
may be, the following:
o Names, address and tax identification number;
o Number of Shares held;
o Certain historical information regarding the
account of each Shareholder, including dividends
and distributions distributed in cash or invested
in Shares;
o Pertinent information regarding the establishment
and maintenance of Retirement Plans and Retirement
Accounts necessary to properly administer each
account;
o Information with respect to the source of
dividends and distributions allocated among income
(taxable and nontaxable income), realized short-term gains
and realized long-term gains;
o Any stop or restraining order placed against a
Shareholder's account;
o Information with respect to withholdings on
domestic and foreign accounts;
o Any instructions from a Shareholder including, all
forms furnished by the Fund and executed by a
Shareholder with respect to (i) dividend or
distribution elections, and (ii) elections with
respect to payment options in connection with the
redemption of Shares;
o Any correspondence relating to the current
maintenance of a Shareholder's account;
o Certificate numbers and denominations for any
Shareholder holding certificates;
o Any information required in order for Price
Services to perform the calculations contemplated
under this Agreement.
Price Services shall maintain files and furnish
statistical and other information as required under this
Agreement and as may be agreed upon from time to time by
both parties or required by applicable law. However, Price
Services reserves the right to delete, change or add any
information to the files maintained; provided such
deletions, changes or additions do not contravene the terms
of this Agreement or applicable law and do not materially
reduce the level of services described in this Agreement.
Price Services shall also use its best efforts to obtain
additional statistical and other information as each Fund
may reasonably request for additional fees as may be agreed
to by both parties.
Any such records maintained pursuant to Rule 31a-1
under the Investment Company Act of 1940 ("the Act") will be
preserved for the periods and maintained in a manner
prescribed in Rule 31a-2 thereunder. Disposition of such
records after such prescribed periods shall be as mutually
agreed upon by the Fund and Price Services. The retention
of such records, which may be inspected by the Fund at
reasonable times, shall be at the expense of the Fund. All
records maintained by Price Services in connection with the
performance of its duties under this Agreement will remain
the property of the Fund and, in the event of termination of
this Agreement, will be delivered to the Fund as of the date
of termination or at such other time as may be mutually
agreed upon.
All books, records, information and data pertaining to
the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of
this Agreement shall remain confidential, and shall not be
voluntarily disclosed to any other person, except after
prior notification to and approval by the other party
hereto, which approval shall not be unreasonably withheld
and may not be withheld where Price Services or the Fund may
be exposed to civil or criminal contempt proceedings for
failure to comply; when requested to divulge such
information by duly constituted governmental authorities; or
after so requested by the other party hereto.
10. Authorized Issued and Outstanding Shares
Record the issuance of Shares of the Fund and maintain,
pursuant to Rule 17Ad-10(e) of the '34 Act, a record of the
total number of Shares of the Fund which are authorized,
issued and outstanding, based upon data provided to it by
the Fund. Price Services shall also provide the Fund on a
regular basis the total number of Shares which are
authorized and issued and outstanding. Price Services shall
have no obligation, when recording the issuance of Shares,
to monitor the issuance of such Shares or to take cognizance
of any laws relating to the issuance or sale of such Shares.
11. Tax Information
Prepare and file with the Internal Revenue Service and
with other appropriate state agencies and, if required, mail
to investors, those returns for reporting dividends and
distributions paid as required to be so filed and mailed,
and shall withhold such sums required to be withheld under
applicable Federal income tax laws, rules, and regulations.
Additionally, Price Services will file and, as applicable,
mail to investors, any appropriate information returns
required to be filed in connection with Retirement Plan
processing, such as 1099R, 5498, as well as any other
appropriate forms that the Fund or Price Services may deem
necessary. The Fund and Price Services shall agree to
procedures to be followed with respect to Price Services'
responsibilities in connection with compliance with back-up
withholding and other tax laws.
12. Information to be Furnished to the Fund
Furnish to the Fund such information as may be agreed
upon between the Fund and Price Services including any
information that the Fund and Price Services agree is
necessary to the daily operations of the business.
13. Correspondence
Promptly and fully answer correspondence from
shareholders and Administrators relating to Shareholder
Accounts, Retirement Accounts, transfer agent procedures,
and such other correspondence as may from time to time be
mutually agreed upon with the Funds. Unless otherwise
instructed, copies of all correspondence will be retained by
Price Services in accordance with applicable law and
procedures.
14. Lost or Stolen Securities
Pursuant to Rule 17f-1 of the '34 Act, report to the
Securities Information Center and/or the FBI or other
appropriate person on Form X-17-F-1A all lost, stolen,
missing or counterfeit securities. Provide any other
services relating to lost, stolen or missing securities as
may be mutually agreed upon by both parties.
15. Telephone Services
Maintain a Telephone Servicing Staff of representatives
("Representatives") sufficient to timely respond to all
telephonic inquiries reasonably foreseeable. The
Representatives will also effect telephone purchases,
redemptions, exchanges, and other transactions mutually
agreed upon by both parties, for those Shareholders who have
authorized telephone services. The Representatives shall
require each Shareholder effecting a telephone transaction
to properly identify himself/herself before the transaction
is effected, in accordance with procedures agreed upon
between by both parties. Procedures for processing
telephone transactions will be mutually agreed upon by both
parties. Price Services will also be responsible for
providing Tele*Access, PC*Access and such other Services as
may be offered by the Funds from time to time. Price
Services will maintain a special Shareholder Servicing staff
to service certain Shareholders with substantial
relationships with the Funds.
16. Collection of Shareholder Fees
Calculate and notify shareholders of any fees owed the
Fund, its affiliates or its agents. Such fees include the
small account fee IRA custodial fee and wire fee.
17. Form N-SAR
Maintain such records, if any, as shall enable the Fund
to fulfill the requirements of Form N-SAR.
18. Cooperation With Accountants
Cooperate with each Fund's independent public
accountants and take all reasonable action in the
performance of its obligations under the Agreement to assure
that the necessary information is made available to such
accountants for the expression of their opinion without any
qualification as to the scope of their examination,
including, but not limited to, their opinion included in
each such Fund's annual report on Form N-SAR and annual
amendment to Form N-1A.
19. Blue Sky
Provide to the Fund or its agent, on a daily, weekly,
monthly and quarterly basis, and for each state in which the
Fund's Shares are sold, sales reports and other materials
for blue sky compliance purposes as shall be agreed upon by
the parties.
20. Other Services
Provide such other services as may be mutually agreed
upon between Price Services and the Fund.
21. Fees and Out-of-Pocket Expenses
Each Fund shall pay to Price Services and/or its agents
for its Transfer Agent Services hereunder, fees computed as
set forth in Schedule A attached. Except as provided below,
Price Services will be responsible for all expenses relating
to the providing of Services. Each Fund, however, will
reimburse Price Services for the following out-of-pocket
expenses and charges incurred in providing Services:
o Postage. The cost of postage and freight for
mailing materials to Shareholders and Retirement
Plan participants, or their agents, including
overnight delivery, UPS and other express mail
services and special courier services required to
transport mail between Price Services locations
and mail processing vendors.
o Proxies. The cost to mail proxy cards and other
material supplied to it by the Fund and costs
related to the receipt, examination and tabulation
of returned proxies and the certification of the
vote to the Fund.
o Communications
o Print. The printed forms used internally and
externally for documentation and processing
Shareholder and Retirement Plan participant,
or their agent's inquiries and requests;
paper and envelope supplies for letters,
notices, and other written communications
sent to Shareholders and Retirement Plan
participants, or their agents.
o Print & Mail House. The cost of internal
and third party printing and mail house
services, including printing of statements
and reports.
o Voice and Data. The cost of equipment
(including associated maintenance), supplies
and services used for communicating to and
from the Shareholders of the Fund and
Retirement Plan participants, or their
agents, the Fund's transfer agent, other Fund
offices, and other agents of either the Fund
or Price Services. These charges shall
include:
o telephone toll charges (both incoming
and outgoing, local, long distance and
mailgrams); and
o data and telephone lines and associated
equipment such as modems, multiplexers,
and facsimile equipment.
o Record Retention. The cost of maintenance
and supplies used to maintain, microfilm,
copy, record, index, display, retrieve, and
store, in microfiche or microfilm form,
documents and records.
o Disaster Recovery. The cost of services,
equipment, facilities and other charges
necessary to provide disaster recovery for
any and all services listed in this
Agreement.
Out-of-pocket costs will be billed at cost to the Funds.
Allocation of monthly costs among the Funds will generally be
made based upon the number of Shareholder and Retirement Accounts
serviced by Price Services each month. Some invoices for these
costs will contain costs for both the Funds and other funds
serviced by Price Services. These costs will be allocated based
on a reasonable allocation methodology. Where possible, such as
in the case of inbound and outbound WATS charges, allocation will
be made on the actual distribution or usage.
C. Representations and Warranties of Price Services
Price Services represents and warrants to the Fund that:
1. It is a corporation duly organized and existing and in
good standing under the laws of Maryland;
2. It is duly qualified to carry on its business in
Maryland, California and Florida;
3. It is empowered under applicable laws and by its
charter and by-laws to enter into and perform this
Agreement;
4. All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement;
5. It is registered with the Securities and Exchange
Commission as a Transfer Agent pursuant to Section 17A of
the '34 Act; and
6. It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its
duties and obligations under this Agreement.
D. Representations and Warranties of the Fund
The Fund represents and warrants to Price Services that:
1. It is a corporation or business trust duly organized
and existing and in good standing under the laws of Maryland
or Massachusetts, as the case may be;
2. It is empowered under applicable laws and by its
Articles of Incorporation or Declaration of Trust, as the
case may be, and By-Laws to enter into and perform this
Agreement;
3. All proceedings required by said Articles of
Incorporation or Declaration of Trust, as the case may be,
and By-Laws have been taken to authorize it to enter into
and perform this Agreement;
4. It is an investment company registered under the Act;
and
5. A registration statement under the Securities Act of
1933 ("the '33 Act") is currently effective and will remain
effective, and appropriate state securities law filings have
been made and will continue to be made, with respect to all
Shares of the Fund being offered for sale.
E. Standard of Care/Indemnification
Notwithstanding anything to the contrary in this Agreement:
1. Price Services shall not be liable to any Fund for any
act or failure to act by it or its agents or subcontractors
on behalf of the Fund in carrying or attempting to carry out
the terms and provisions of this Agreement provided Price
Services has acted in good faith and without negligence or
willful misconduct and selected and monitored the
performance of its agents and subcontractors with reasonable
care.
2. The Fund shall indemnify and hold Price Services
harmless from and against all losses, costs, damages,
claims, actions and expenses, including reasonable expenses
for legal counsel, incurred by Price Services resulting
from: (i) any action or omission by Price Services or its
agents or subcontractors in the performance of their duties
hereunder; (ii) Price Services acting upon instructions
believed by it to have been executed by a duly authorized
officer of the Fund; or (iii) Price Services acting upon
information provided by the Fund in form and under policies
agreed to by Price Services and the Fund. Price Services
shall not be entitled to such indemnification in respect of
actions or omissions constituting negligence or willful
misconduct of Price Services or where Price Services has not
exercised reasonable care in selecting or monitoring the
performance of its agents or subcontractors.
3. Except as provided in Article L of this Agreement,
Price Services shall indemnify and hold harmless the Fund
from all losses, costs, damages, claims, actions and
expenses, including reasonable expenses for legal counsel,
incurred by the Fund resulting from the negligence or
willful misconduct of Price Services or which result from
Price Services' failure to exercise reasonable care in
selecting or monitoring the performance of its agents or
subcontractors. The Fund shall not be entitled to such
indemnification in respect of actions or omissions
constituting negligence or willful misconduct of such Fund
or its agents or subcontractors; unless such negligence or
misconduct is attributable to Price Services.
4. In determining Price Services' liability, an isolated
error or omission will normally not be deemed to constitute
negligence when it is determined that:
o Price Services had in place "appropriate procedures;"
o the employee(s) responsible for the error or omission
had been reasonably trained and were being
appropriately monitored; and
o the error or omission did not result from wanton or
reckless conduct on the part of the employee(s).
It is understood that Price Services is not obligated to
have in place separate procedures to prevent each and every
conceivable type of error or omission. The term
"appropriate procedures" shall mean procedures reasonably
designed to prevent and detect errors and omissions. In
determining the reasonableness of such procedures, weight
will be given to such factors as are appropriate, including
the prior occurrence of any similar errors or omissions when
such procedures were in place and transfer agent industry
standards in place at the time of the occurrence.
5. In the event either party is unable to perform its
obligations under the terms of this Agreement because of
acts of God, strikes or other causes reasonably beyond its
control, such party shall not be liable to the other party
for any loss, cost, damage, claim, action or expense
resulting from such failure to perform or otherwise from
such causes.
6. In order that the indemnification provisions contained
in this Article E shall apply, upon the assertion of a claim
for which either party may be required to indemnify the
other, the party seeking indemnification shall promptly
notify the other party of such assertion, and shall keep the
other party advised with respect to all developments
concerning such claim. The party who may be required to
indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim,
or to defend against said claim in its own name or in the
name of the other party. The party seeking indemnification
shall in no case confess any claim or make any compromise in
any case in which the other party may be required to
indemnify it except with the other party's prior written
consent.
7. Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of
this Agreement.
F. Dual Interests
It is understood that some person or persons may be
directors, officers, or shareholders of both the Funds and Price
Services (including Price Services's affiliates), and that the
existence of any such dual interest shall not affect the validity
of this Agreement or of any transactions hereunder except as
otherwise provided by a specific provision of applicable law.
<PAGE>
G. Documentation
o As requested by Price Services, the Fund shall promptly
furnish to Price Services the following:
o A certified copy of the resolution of the
Directors/Trustees of the Fund authorizing the
appointment of Price Services and the execution
and delivery of this Agreement;
o A copy of the Articles of Incorporation or
Declaration of Trust, as the case may be, and By-Laws
of the Fund and all amendments thereto;
o As applicable, specimens of all forms of
outstanding and new stock/share certificates in
the forms approved by the Board of
Directors/Trustees of the Fund with a certificate
of the Secretary of the Fund as to such approval;
o All account application forms and other documents
relating to Shareholders' accounts;
o An opinion of counsel for the Fund with respect to
the validity of the stock, the number of Shares
authorized, the status of redeemed Shares, and the
number of Shares with respect to which a
Registration Statement has been filed and is in
effect; and
o A copy of the Fund's current prospectus.
The delivery of any such document for the purpose of any
other agreement to which the Fund and Price Services are or were
parties shall be deemed to be delivery for the purposes of this
Agreement.
o As requested by Price Services, the Fund will also
furnish from time to time the following documents:
o Each resolution of the Board of Directors/Trustees of
the Fund authorizing the original issue of its Shares;
o Each Registration Statement filed with the Securities
and Exchange Commission and amendments and orders
thereto in effect with respect to the sale of Shares
with respect to the Fund;
o A certified copy of each amendment to the Articles of
Incorporation or Declaration of Trust, and the By-Laws
of the Fund;
o Certified copies of each vote of the Board of
Directors/Trustees authorizing officers to give
instructions to the Transfer Agent;
o Such other documents or opinions which Price Services,
in its discretion, may reasonably deem necessary or
appropriate in the proper performance of its duties;
and
o Copies of new prospectuses issued.
Price Services hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for
safekeeping of stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the preparation or
use, and for keeping account of, such certificates, forms and
devices.
H. References to Price Services
Each Fund agrees not to circulate any printed matter which
contains any reference to Price Services without the prior
approval of Price Services, excepting solely such printed matter
that merely identifies Price Services as agent of the Fund. The
Fund will submit printed matter requiring approval to Price
Services in draft form, allowing sufficient time for review by
Price Services and its legal counsel prior to any deadline for
printing.
I. Compliance With Governmental Rules and Regulations
Except as otherwise provided in the Agreement and except for
the accuracy of information furnished to the Fund by Price
Services, each Fund assumes full responsibility for the
preparation, contents and distribution of its prospectuses and
compliance with all applicable requirements of the Act, the '34
Act, the '33 Act, and any other laws, rules and regulations of
governmental authorities having jurisdiction over the Fund.
Price Services shall be responsible for complying with all laws,
rules and regulations of governmental authorities having
jurisdiction over transfer agents and their activities.
J. Ownership of Software and Related Material
All computer programs, magnetic tapes, written procedures
and similar items purchased and/or developed and used by Price
Services in performance of the Agreement shall be the property of
Price Services and will not become the property of the Fund.
K. Quality Service Standards
Price Services and the Fund may from time to time agree to
certain quality service standards, as well as incentives and
penalties with respect to Price Services' hereunder.
L. As Of Transactions
For purposes of this Article L, the term "Transaction" shall
mean any single or "related transaction" (as defined below)
involving the purchase or redemption of Shares (including
exchanges) that is processed at a time other than the time of the
computation of the Fund's net asset value per Share next computed
after receipt of any such transaction order by Price Services due
to an act or omission of Price Services. "As Of
Processing" refers to the processing of these Transactions. If
more than one Transaction ("Related Transaction") in the Fund is
caused by or occurs as a result of the same act or omission, such
transactions shall be aggregated with other transactions in the
Fund and be considered as one Transaction.
o Reporting
Price Services shall:
1. Utilize a system to identify all Transactions, and
shall compute the net effect of such Transactions upon
the Fund on a daily, monthly and rolling 365 day basis.
The monthly and rolling 365 day periods are hereafter
referred to as "Cumulative".
2. Supply to the Fund, from time to time as mutually
agreed upon, a report summarizing the Transactions and
the daily and Cumulative net effects of such
Transactions both in terms of aggregate dilution and
loss ("Dilution") or gain and negative dilution
("Gain") experienced by the Fund, and the impact such
Gain or Dilution has had upon the Fund's net asset
value per Share.
3. With respect to any Transaction which causes
Dilution to the Fund of $100,000 or more, immediately
provide the Fund: (i) a report identifying the
Transaction and the Dilution resulting therefrom, (ii)
the reason such Transaction was processed as described
above, and (iii) the action that Price Services has or
intends to take to prevent the reoccurrence of such as
of processing ("Report").
o Liability
1. It will be the normal practice of the Funds not to
hold Price Services liable with respect to any
Transaction which causes Dilution to any single Fund of
less than $25,000. Price Services will, however,
closely monitor for each Fund the daily and Cumulative
Gain/Dilution which is caused by Transactions of less
than $25,000. When the Cumulative Dilution to any Fund
exceeds 3/10 of 1% per share, Price Services, in
consultation with counsel to the Fund, will make
appropriate inquiry to determine whether it should take
any remedial action. Price Services will report to the
Board of Directors/Trustees of the Fund ("Board") any
action it has taken.
2. Where a Transaction causes Dilution to a Fund
greater than $25,000 ("Significant Transaction"), but
less than $100,000, Price Services will review with
Counsel to the Fund the circumstances surrounding the
underlying Transaction to determine whether the
Transaction was caused by or occurred as a result of a
negligent act or omission by Price Services. If it is
determined that the Dilution is the result of a
negligent action or omission by Price Services, Price
Services and outside counsel for the Fund will
negotiate settlement. All such Significant
Transactions will be reported to the Audit Committee at
its annual meeting (unless the settlement fully
compensates the Fund for any dilution). Any
significant Transaction, however, causing Dilution in
excess of the lesser of $100,000 or a penny per share
will be PROMPTLY reported to the Board and resolved at
the next scheduled Board Meeting. Settlement for
significant Transactions causing Dilution of $100,000
or more will not be entered into until approved by the
Board. The factors to consider in making any
determination regarding the settlement of a Significant
Transaction would include but not be limited to:
o Procedures and controls adopted by Price Services
to prevent As Of Processing;
o Whether such procedures and controls were being
followed at the time of the Significant
Transaction;
o The absolute and relative volume of all
transactions processed by Price Services on the
day of the Significant Transaction;
o The number of Transactions processed by Price
Services during prior relevant periods, and the
net Dilution/Gain as a result of all such
Transactions to the Fund and to all other Price
Funds;
o The prior response of Price Services to
recommendations made by the Funds regarding
improvement to the Transfer Agent's As Of
Processing procedures.
3. In determining Price Services' liability with respect
to a Significant Transaction, an isolated error or
omission will normally not be deemed to constitute
negligence when it is determined that:
o Price Services had in place "appropriate
procedures".
o the employee(s) responsible for the error or
omission had been reasonably trained and were
being appropriately monitored; and
o the error or omission did not result from wanton
or reckless conduct on the part of the
employee(s).
It is understood that Price Services is not obligated
to have in place separate procedures to prevent each
and every conceivable type of error or omission. The
term "appropriate procedures" shall mean procedures
reasonably designed to prevent and detect errors and
omissions. In determining the reasonableness of such
procedures, weight will be given to such factors as are
appropriate, including the prior occurrence of any
similar errors or omissions when such procedures were
in place and transfer agent industry standards in place
at the time of the occurrence.
M. Term and Termination of Agreement
o This Agreement shall run for a period of one (1) year from
the date first written above and will be renewed from year
to year thereafter unless terminated by either party as
provided hereunder.
o This Agreement may be terminated by the Fund upon one
hundred twenty (120) days' written notice to Price Services;
and by Price Services, upon three hundred sixty-five (365)
days' writing notice to the Fund.
o Upon termination hereof, the Fund shall pay to Price
Services such compensation as may be due as of the date of
such termination, and shall likewise reimburse for out-of-pocket
expenses related to its services hereunder.
N. Notice
Any notice as required by this Agreement shall be
sufficiently given (i) when sent to an authorized person of the
other party at the address of such party set forth above or at
such other address as such party may from time to time specify in
writing to the other party; or (ii) as otherwise agreed upon by
appropriate officers of the parties hereto.
O. Assignment
Neither this Agreement nor any rights or obligations
hereunder may be assigned either voluntarily or involuntarily, by
operation of law or otherwise, by either party without the prior
written consent of the other party, provided this shall not
preclude Price Services from employing such agents and
subcontractors as it deems appropriate to carry out its
obligations set forth hereunder.
P. Amendment/Interpretive Provisions
The parties by mutual written agreement may amend this
Agreement at any time. In addition, in connection with the
operation of this Agreement, Price Services and the Fund may
agree from time to time on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their
joint opinion be consistent with the general tenor of this
Agreement. Any such interpretive or additional provisions are to
be signed by all parties and annexed hereto, but no such
provision shall contravene any applicable Federal or state law or
regulation and no such interpretive or additional provision shall
be deemed to be an amendment of this Agreement.
Q. Further Assurances
Each party agrees to perform such further acts and execute
such further documents as are necessary to effectuate the
purposes hereof.
R. Maryland Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of Maryland.
S. Merger of Agreement
This Agreement, including the attached Appendices and
Schedules supersedes any prior agreement with respect to the
subject hereof, whether oral or written.
T. Counterparts
This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken
together shall be deemed to constitute one and the same
instruments.
U. The Parties
All references herein to "the Fund" are to each of the Funds
listed on Appendix A individually, as if this Agreement were
between such individual Fund and Price Services. In the case of
a series Fund or trust, all references to "the Fund" are to the
individual series or portfolio of such Fund or trust, or to such
Fund or trust on behalf of the individual series or portfolio, as
appropriate. The "Fund" also includes any T. Rowe Price Funds
which may be established after the execution of this Agreement.
Any reference in this Agreement to "the parties" shall mean Price
Services and such other individual Fund as to which the matter
pertains.
V. Directors, Trustees and Shareholders and Massachusetts
Business Trust
It is understood and is expressly stipulated that neither
the holders of Shares in the Fund nor any Directors or Trustees
of the Fund shall be personally liable hereunder.
With respect to any Fund which is a party to this Agreement
and which is organized as a Massachusetts business trust, the
term "Fund" means and refers to the trustees from time to time
serving under the applicable trust agreement (Declaration of
Trust) of such Trust as the same may be amended from time to
time. It is expressly agreed that the obligations of any such
Trust hereunder shall not be binding upon any of the trustees,
shareholders, nominees, officers, agents or employees of the
Trust, personally, but bind only the trust property of the Trust,
as provided in the Declaration of Trust of the Trust. The
execution and delivery of this Agreement has been authorized by
the trustees and signed by an authorized officer of the Trust,
acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed
to have been made by any of them, but shall bind only the trust
property of the Trust as provided in its Declaration of Trust.
W. Captions
The captions in the Agreement are included for convenience
of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or
effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under
their seals by and through their duly authorized officers.
T. ROWE PRICE SERVICES, INC. T. ROWE PRICE FUNDS
/s/James S. Riepe /s/Carmen F. Deyesu
BY: __________________________ BY: ________________________
James S. Riepe Carmen F. Deyesu
DATED: ________________________ DATED: _______________________
<PAGE>
APPENDIX A
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. ROWE PRICE GNMA FUND
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
INSTITUTIONAL EQUITY FUNDS, INC.
Mid-Cap Equity Growth Fund
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Bond Fund
T. Rowe Price Emerging Markets Stock Fund
T. Rowe Price Global Stock Fund
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE MID-CAP VALUE FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUNDS, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
<PAGE>
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE REAL ESTATE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
Reserve Investment Fund
Government Reserve Investment Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
Spectrum International Fund
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
New Jersey Tax-Free Bond Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
Georgia Tax-Free Bond Fund
T. ROWE PRICE TAX-EFFICIENT BALANCED FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE SUMMIT FUNDS, INC. on behalf of the:
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
on behalf of the:
T. Rowe Price Summit Municipal Money Market Fund
T. Rowe Price Summit Municipal Intermediate Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE VALUE FUND, INC.
<PAGE>
AMENDMENT NO. 1
TRANSFER AGENCY AND SERVICE AGREEMENT
Between
T. ROWE PRICE SERVICES, INC.
And
THE T. ROWE PRICE FUNDS
The Transfer Agency and Service Agreement of January 1,
1998, between T. Rowe Price Services, Inc., and each of the
Parties listed on Appendix A thereto is hereby amended, as of
January 21, 1998, by adding thereto T. Rowe Price Index Trust,
Inc., on behalf of T. Rowe Price Extended Market Index Fund and
T. Rowe Price Total Market Index Fund.
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. ROWE PRICE GNMA FUND
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. Rowe Price Extended Equity Market Index Fund
T. Rowe Price Total Equity Market Index Fund
INSTITUTIONAL EQUITY FUNDS, INC.
Mid-Cap Equity Growth Fund
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
<PAGE>
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Bond Fund
T. Rowe Price Emerging Markets Stock Fund
T. Rowe Price Global Stock Fund
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE MID-CAP VALUE FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUNDS, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE REAL ESTATE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
Reserve Investment Fund
Government Reserve Investment Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
Spectrum International Fund
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
New Jersey Tax-Free Bond Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
Georgia Tax-Free Bond Fund
T. ROWE PRICE TAX-EFFICIENT BALANCED FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND
FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE SUMMIT FUNDS, INC. on behalf of the:
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
on behalf of the:
T. Rowe Price Summit Municipal Money Market Fund
T. Rowe Price Summit Municipal Intermediate Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE VALUE FUND, INC.
Attest:
/s/Patricia S. Butcher /s/Carmen F. Deyesu
______________________ ______________________________
Patricia S. Butcher, By: Carmen F. Deyesu
Assistant Secretary Treasurer
Attest: T. ROWE PRICE SERVICES, INC.
/s/Barbara A. Van Horn /s/Henry H. Hopkins
______________________ ______________________________
Barbara A. Van Horn, By: Henry H. Hopkins,
Assistant Secretary Vice President
The Agreement between T. Rowe Price Associates, Inc. and T. Rowe Price
Funds for Fund Accounting Services, dated January 1, 1998, as amended.
AGREEMENT
between
T. ROWE PRICE ASSOCIATES, INC.
and
THE T. ROWE PRICE FUNDS
for
FUND ACCOUNTING SERVICES
<PAGE>
TABLE OF CONTENTS
Page
Article A Terms of Appointment/Duties of Price Associates. . . . . . .1
Article B Fees and Out-of-Pocket Expenses. . . . . . . . . . . . . . .3
Article C Representations and Warranties of Price Associates . . . . .3
Article D Representations and Warranties of the Fund . . . . . . . . .4
Article E Ownership of Software and Related Material . . . . . . . . .4
Article F Quality Service Standards. . . . . . . . . . . . . . . . . .4
Article G Standard of Care/Indemnification . . . . . . . . . . . . . .4
Article H Dual Interests . . . . . . . . . . . . . . . . . . . . . . .7
Article I Documentation. . . . . . . . . . . . . . . . . . . . . . . .7
Article J Recordkeeping/Confidentiality. . . . . . . . . . . . . . . .7
Article K Compliance with Governmental Rules and Regulations . . . . .8
Article L Terms and Termination of Agreement . . . . . . . . . . . . .8
Article M Notice . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Article N Assignment . . . . . . . . . . . . . . . . . . . . . . . . .9
Article O Amendment/Interpretive Provisions. . . . . . . . . . . . . .9
Article P Further Assurances . . . . . . . . . . . . . . . . . . . . 10
Article Q Maryland Law to Apply. . . . . . . . . . . . . . . . . . . 10
Article R Merger of Agreement. . . . . . . . . . . . . . . . . . . . 10
Article S Counterparts . . . . . . . . . . . . . . . . . . . . . . . 10
Article T The Parties. . . . . . . . . . . . . . . . . . . . . . . . 10
Article U Directors, Trustee and Shareholders and
Massachusetts Business Trust . . . . . . . . . . . . . . . 10
Article V Captions . . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
AGREEMENT made as of the first day of January, 1998, by and
between T. ROWE PRICE ASSOCIATES, INC., a Maryland corporation
having its principal office and place of business at 100 East
Pratt Street, Baltimore, Maryland 21202 ("Price Associates"), and
each Fund which is listed on Appendix A (as such Appendix may be
amended from time to time) and which evidences its agreement to
be bound hereby by executing a copy of this Agreement (each such
Fund individually hereinafter referred to as "the Fund", whose
definition may be found in Article T);
WHEREAS, Price Associates has the capability of providing
the Funds with certain accounting services ("Accounting
Services");
WHEREAS, the Fund desires to appoint Price Associates to
provide these Accounting Services and Price Associates desires to
accept such appointment;
WHEREAS, the Board of Directors of the Fund has authorized
the Fund to utilize various pricing services for the purpose of
providing to Price Associates securities prices for the
calculation of the Fund's net asset value.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereto agree as follows:
A. Terms of Appointment/Duties of Price Associates
Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints Price Associates
to provide, and Price Associates agrees to provide, the following
Accounting Services:
a. Maintain for each Fund a daily trial balance, a general
ledger, subsidiary records and capital stock accounts;
b. Maintain for each Fund an investment ledger, including
amortized bond and foreign dollar denominated costs
where applicable;
c. Maintain for each Fund all records relating to the
Fund's income and expenses;
d. Provide for the daily valuation of each Fund's
portfolio securities and the computation of each Fund's
daily net asset value per share. Such daily valuations
shall be made in accordance with the valuation policies
established by each of the Fund's Board of Directors
including, but not limited to, the utilization of such
pricing valuation sources and/or pricing services as
determined by the Boards. Price Associates shall have
no liability for any losses or damages incurred by the
Fund as a result of erroneous portfolio security
evaluations provided by such designated sources and/or
pricing services; provided that, Price Associates
reasonably believes the prices are accurate, has
adhered to its normal verification control procedures,
and has otherwise met the standard of care as set forth
in Article G of this Agreement;
e. Provide daily cash flow and transaction status
information to each Fund's adviser;
f. Authorize the payment of Fund expenses, either through
instruction of custodial bank or utilization of
custodian's automated transfer system;
g. Prepare for each Fund such financial information that
is reasonably necessary for shareholder reports,
reports to the Board of Directors and to the officers
of the Fund, and reports to the Securities and Exchange
Commission, the Internal Revenue Service and other
Federal and state regulatory agencies;
h. Provide each Fund with such advice that may be
reasonably necessary to properly account for all
financial transactions and to maintain the Fund's
accounting procedures and records so as to insure
compliance with generally accepted accounting and tax
practices and rules;
i. Maintain for each Fund all records that may be
reasonably required in connection with the audit
performed by each Fund's independent accountant, the
Securities and Exchange Commission, the Internal
Revenue Service or such other Federal or state
regulatory agencies; and
j. Cooperate with each Fund's independent public
accountants and take all reasonable action in the
performance of its obligations under the Agreement to
assure that the necessary information is made available
to such accountants for the expression of their opinion
without any qualification as to the scope of their
examination including, but not limited to, their
opinion included in each such Fund's annual report on
Form N-SAR and annual amendment to Form N-1A.
B. Fees and Out-of-Pocket Expenses
Each Fund shall pay to Price Associates for its Accounting
Services hereunder, fees as set forth in the Schedule attached
hereto. In addition, each Fund will reimburse Price Associates
for out-of-pocket expenses such as postage, printed forms, voice
and data transmissions, record retention, disaster recovery,
third party vendors, equipment leases and other similar items as
may be agreed upon between Price Associates and the Fund. Some
invoices will contain costs for both the Funds and other funds
serviced by Price Associates. In these cases, a reasonable
allocation methodology will be used to allocate these costs to
the Funds.
C. Representations and Warrantees of Price Associates
Price Associates represents and warrants to the Fund that:
1. It is a corporation duly organized and existing in good
standing under the laws of Maryland.
2. It is duly qualified to carry on its business in
Maryland.
3. It is empowered under applicable laws and by its
charter and By-Laws to enter into and perform this Agreement.
4. All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
5. It has, and will continue to have, access to the
necessary facilities, equipment and personnel to perform its
duties and obligations under this Agreement.
D. Representations and Warrantees of the Fund
The Fund represents and warrants to Price Associates that:
1. It is a corporation or business trust, as the case may
be, duly organized and existing and in good standing under the
laws of Maryland or Massachusetts, as the case may be.
2. It is empowered under applicable laws and by its
Articles of Incorporation or Declaration of Trust, as the case
may be, and By-Laws have been taken to authorize it to enter into
and perform this Agreement.
3. All proceedings required by said Articles of
Incorporation or Declaration of Trust, as the case may be, and
By-Laws have been taken to authorize it to enter into and perform
this Agreement.
E. Ownership of Software and Related Material
All computer programs, magnetic tapes, written procedures,
and similar items purchased and/or developed and used by Price
Associates in performance of the Agreement shall be the property
of Price Associates and will not become the property of the
Funds.
<PAGE>
F. Quality Service Standards
Price Associates and the Fund may, from time to time, agree
to certain quality service standards, with respect to Price
Associates' services hereunder.
G. Standard of Care/Indemnification
Notwithstanding anything to the contrary in this Agreement:
1. Where a Pricing Error results in loss or dilution to a
Fund of less than $10,000, the determination of liability for the
error will be made by Price Associates. Where a Pricing Error
results in loss or dilution to a Fund of $10,000 or more but less
than $100,000, liability for the error will be resolved through
negotiations between Fund Counsel and Price Associates. Where a
Pricing Error results in loss or dilution to a Fund of the lesser
of 1/2 of 1% of NAV or $100,000 or more, the error will be
promptly reported to the Board of Directors of the Fund (unless
the Fund is fully compensated for the loss or dilution), provided
that final settlement with respect to such errors will not be
made until approved by the Board of Directors of the Fund. A
summary of all Pricing Errors and their effect on the Funds will
be reported to the Funds' Audit Committee on an annual basis. In
determining the liability of Price Associates for a Pricing
Error, an error or omission will not be deemed to constitute
negligence when it is determined that:
o Price Associates had in place "appropriate procedures
and an adequate system of internal controls;"
o the employee responsible for the error or omission had
been reasonably trained and was being appropriately
monitored; and
o the error or omission did not result from wanton or
reckless conduct on the part of the employee.
It is understood that Price Associates is not obligated to
have in place separate procedures to prevent each and every
conceivable type of error or omission. The term "appropriate
procedures and adequate system of internal controls" shall
mean procedures and controls reasonably designed to prevent
and detect errors and omissions. In determining the
reasonableness of such procedures and controls, weight will
be given to such factors as are appropriate, including the
prior occurrence of any similar errors or omissions, when
such procedures and controls were in place and fund
accounting industry standards in place at the time of the
error.
2. The Fund shall indemnify and hold Price Associates
harmless from and against all losses, costs, damages, claims,
actions, and expenses, including reasonable expenses for legal
counsel, incurred by Price Associates resulting from: (i) any
action or omission by Price Associates or its agents or
subcontractors in the performance of their duties hereunder; (ii)
Price Associates acting upon instructions believed by it to have
been executed by a duly authorized officer of the Fund; or (iii)
Price Associates acting upon information provided by the Fund in
form and under policies agreed to by Price Associates and the
Fund. Price Associates shall not be entitled to such
indemnification in respect of actions or omissions constituting
negligence or willful misconduct of Price Associates or where
Price Associates has not exercised reasonable care in selecting
or monitoring the performance of its agents or subcontractors.
3. Price Associates shall indemnify and hold harmless the
Fund from all losses, costs, damages, claims, actions and
expenses, including reasonable expenses for legal counsel,
incurred by the Fund resulting from the negligence or willful
misconduct of Price Associates or which result from Price
Associates' failure to exercise reasonable care in selecting or
monitoring the performance of its agents or subcontractors. The
Fund shall not be entitled to such indemnification with respect
to actions or omissions constituting negligence or willful
misconduct of such Fund or its agents or subcontractors; unless
such negligence or misconduct is attributable to Price
Associates.
4. In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of
God, strikes or other causes reasonably beyond its control, such
party shall not be liable to the other party for any loss, cost,
damage, claim, action or expense resulting from such failure to
perform or otherwise from such causes.
5. In order that the indemnification provisions contained
in this Article G shall apply, upon the assertion of a claim for
which either party may be required to indemnify the other, the
party seeking indemnification shall promptly notify the other
party of such assertion, and shall keep the other party advised
with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to
participate with the party seeking indemnification in the defense
of such claim, or to defend against said claim in its own name or
in the name of the other party. The party seeking
indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required
to indemnify it except with the other party's prior written
consent.
6. Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this
Agreement.
H. Dual Interests
It is understood that some person or persons may be
directors, officers, or shareholders of both the Fund and Price
Associates (including Price Associates' affiliates), and that the
existence of any such dual interest shall not affect the validity
of this Agreement or of any transactions hereunder except as
otherwise provided by a specific provision of applicable law.
I. Documentation
As requested by Price Associates, the Fund shall promptly
furnish to Price Associates such documents as it may reasonably
request and as are necessary for Price Associates to carry out
its responsibilities hereunder.
J. Recordkeeping/Confidentiality
1. Price Associates shall keep records relating to the
services to be performed hereunder, in the form and manner as it
may deem advisable, provided that Price Associates shall keep all
records in such form and in such manner as required by applicable
law, including the Investment Company Act of 1940 ("the Act") and
the Securities Exchange Act of 1934 ("the '34 Act").
2. Price Associates and the Fund agree that all books,
records, information and data pertaining to the business of the
other party which are exchanged or received pursuant to the
negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other
person, except: (a) after prior notification to and approval in
writing by the other party hereto, which approval shall not be
unreasonably withheld and may not be withheld where Price
Associates or Fund may be exposed to civil or criminal contempt
proceedings for failure to comply; (b) when requested to divulge
such information by duly constituted governmental authorities; or
(c) after so requested by the other party hereto.
K. Compliance With Governmental Rules and Regulations
Except as otherwise provided in the Agreement and except for
the accuracy of information furnished to the Funds by Price
Associates, each Fund assumes full responsibility for the
preparation, contents and distribution of its prospectuses, and
for complying with all applicable requirements of the Act, the
'34 Act, the Securities Act of 1933 (the "33 Act"), and any laws,
rules and regulations of governmental authorities having
jurisdiction over the Funds.
L. Term and Termination of Agreement
1. This Agreement shall run for a period of one (1) year
from the date first written above and will be renewed from year
to year thereafter unless terminated by either party as provided
hereunder.
2. This Agreement may be terminated by the Fund upon sixty
(60) days' written notice to Price Associates; and by Price
Associates, upon three hundred sixty-five (365) days' writing
notice to the Fund.
3. Upon termination hereof, the Fund shall pay to Price
Associates such compensation as may be due as of the date of such
termination, and shall likewise reimburse for out-of-pocket
expenses related to its services hereunder.
M. Notice
Any notice as required by this Agreement shall be
sufficiently given (i) when sent to an authorized person of the
other party at the address of such party set forth above or at
such other address as such party may from time to time specify in
writing to the other party; or (ii) as otherwise agreed upon by
appropriate officers of the parties hereto.
N. Assignment
Neither this Agreement nor any rights or obligations
hereunder may be assigned either voluntarily or involuntarily, by
operation of law or otherwise, by either party without the prior
written consent of the other party, provided this shall not
preclude Price Associates from employing such agents and
subcontractors as it deems appropriate to carry out its
obligations set forth hereunder.
O. Amendment/Interpretive Provisions
The parties by mutual written agreement may amend this
Agreement at any time. In addition, in connection with the
operation of this Agreement, Price Associates and the Fund may
agree from time to time on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their
joint opinion be consistent with the general tenor of this
Agreement. Any such interpretive or additional provisions are to
be signed by all parties and annexed hereto, but no such
provision shall contravene any applicable Federal or state law or
regulation and no such interpretive or additional provision shall
be deemed to be an amendment of this Agreement.
P. Further Assurances
Each party agrees to perform such further acts and execute
such further documents as are necessary to effectuate the
purposes hereof.
Q. Maryland Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of Maryland.
<PAGE>
R. Merger of Agreement
This Agreement, including the attached Appendix and Schedule
supersedes any prior agreement with respect to the subject
hereof, whether oral or written.
S. Counterparts
This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken
together shall be deemed to constitute one and the same
instruments.
T. The Parties
All references herein to "the Fund" are to each of the Funds
listed on Appendix A individually, as if this Agreement were
between such individual Fund and Price Associates. In the case
of a series Fund or trust, all references to "the Fund" are to
the individual series or portfolio of such Fund or trust, or to
such Fund or trust on behalf of the individual series or
portfolio, as appropriate. The "Fund" also includes any T. Rowe
Price Funds which may be established after the execution of this
Agreement. Any reference in this Agreement to "the parties"
shall mean Price Associates and such other individual Fund as to
which the matter pertains.
U. Directors, Trustees and Shareholders and Massachusetts
Business Trust
It is understood and is expressly stipulated that neither
the holders of shares in the Fund nor any Directors or Trustees
of the Fund shall be personally liable hereunder.
With respect to any Fund which is a party to this Agreement
and which is organized as a Massachusetts business trust, the
term "Fund" means and refers to the trustees from time to time
serving under the applicable trust agreement (Declaration of
Trust) of such Trust as the same may be amended from time to
time. It is expressly agreed that the obligations of any such
Trust hereunder shall not be binding upon any of the trustees,
shareholders, nominees, officers, agents or employees of the
Trust, personally, but bind only the trust property of the Trust,
as provided in the Declaration of Trust of the Trust. The
execution and delivery of this Agreement has been authorized by
the trustees and signed by an authorized officer of the Trust,
acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed
to have been made by any of them, but shall bind only the trust
property of the Trust as provided in its Declaration of Trust.
<PAGE>
V. Captions
The captions in the Agreement are included for convenience
of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or
effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under
their seals by and through their duly authorized officers.
T. ROWE PRICE ASSOCIATES, INC. T. ROWE PRICE FUNDS
/s/Alvin Younger, Jr. /s/Carmen F. Deyesu
BY: ____________________ BY: _____________________
Alvin Younger, Jr. Carmen F. Deyesu
DATED: __________________ DATED: _______________________
<PAGE>
APPENDIX A
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. ROWE PRICE GNMA FUND
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
INSTITUTIONAL EQUITY FUNDS, INC.
Mid-Cap Equity Growth Fund
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Bond Fund
T. Rowe Price Emerging Markets Stock Fund
T. Rowe Price Global Stock Fund
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE MID-CAP VALUE FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUNDS, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE REAL ESTATE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
Reserve Investment Fund
Government Reserve Investment Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
Spectrum International Fund
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
New Jersey Tax-Free Bond Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
Georgia Tax-Free Bond Fund
T. ROWE PRICE TAX-EFFICIENT BALANCED FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond 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 Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE VALUE FUND, INC.
<PAGE>
AMENDMENT NO. 1
AGREEMENT
between
T. ROWE PRICE ASSOCIATES, INC.
and
THE T. ROWE PRICE FUNDS
for
FUND ACCOUNTING SERVICES
The Agreement for Fund Accounting Services of January 1,
1998, between T. Rowe Price Associates, Inc. and each of the
Parties listed on Appendix A thereto is hereby amended, as of
January 21, 1998, by adding thereto T. Rowe Price Index Trust,
Inc., on behalf of T. Rowe Price Extended Market Index Fund and
T. Rowe Price Total Market Index Fund.
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
California Tax-Free Bond Fund
California Tax-Free Money Fund
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Equity Income Portfolio
T. Rowe Price New America Growth Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. ROWE PRICE GNMA FUND
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index Fund
T. Rowe Price Extended Market Index Fund
T. Rowe Price Total Market Index Fund
INSTITUTIONAL EQUITY FUNDS, INC.
Mid-Cap Equity Growth Fund
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
<PAGE>
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Bond Fund
T. Rowe Price International Discovery Fund
T. Rowe Price International Stock Fund
T. Rowe Price European Stock Fund
T. Rowe Price New Asia Fund
T. Rowe Price Global Government Bond Fund
T. Rowe Price Japan Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Bond Fund
T. Rowe Price Emerging Markets Stock Fund
T. Rowe Price Global Stock Fund
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE MID-CAP VALUE FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUNDS, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund
T. Rowe Price Personal Strategy Income Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. ROWE PRICE REAL ESTATE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
Reserve Investment Fund
Government Reserve Investment Fund
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE SPECTRUM FUND, INC.
Spectrum Growth Fund
Spectrum Income Fund
Spectrum International Fund
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
New Jersey Tax-Free Bond Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
Georgia Tax-Free Bond Fund
T. ROWE PRICE TAX-EFFICIENT BALANCED FUND, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
<PAGE>
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond 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 Fund
T. Rowe Price Summit Municipal Income Fund
T. ROWE PRICE VALUE FUND, INC.
Attest:
/s/Patricia S. Butcher /s/Carmen F. Deyesu
________________________ ___________________________________
Patricia S. Butcher, By: Carmen F. Deyesu
Assistant Secretary Treasurer
Attest: T. ROWE PRICE ASSOCIATES, INC.
/s/Barbara A. Van Horn /s/Henry H. Hopkins
________________________ ___________________________________
Barbara A. Van Horn, By: Henry H. Hopkins,
Assistant Secretary Managing Director
<PAGE>
PAGE 29
Page 1 of 5
June 15, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: T. Rowe Price Tax-Exempt Money Fund, Inc. (the Registrant)
File Nos.: 002-67029/811-3055
Commissioners:
We are counsel to the above-referenced Registrant which proposes to file,
pursuant to paragraph (b) of Rule 485 (the "Rule"), Post-Effective Amendment No.
33 (the "Amendment") to its registration statement under the Securities Act of
1933, as amended.
Pursuant to paragraph (b)(4) of the Rule, we represent that the Amendment
does not contain disclosures which would render it ineligible to become
effective pursuant to paragraph (b) of the Rule.
Sincerely,
/s/Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
<PAGE>
PAGE 30
Page 2 of 5
June 15, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: T. Rowe Price Tax-Free Short-Intermediate Fund, Inc. (the Registrant)
File Nos.: 002-87059/811-3872
Commissioners:
We are counsel to the above-referenced Registrant which proposes to file,
pursuant to paragraph (b) of Rule 485 (the "Rule"), Post-Effective Amendment No.
26 (the "Amendment") to its registration statement under the Securities Act of
1933, as amended.
Pursuant to paragraph (b)(4) of the Rule, we represent that the Amendment
does not contain disclosures which would render it ineligible to become
effective pursuant to paragraph (b) of the Rule.
Sincerely,
/s/Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
<PAGE>
PAGE 31
Page 3 of 5
June 15, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc. (the
Registrant)
File Nos.: 033-49117/811-7051
Commissioners:
We are counsel to the above-referenced Registrant which proposes to file,
pursuant to paragraph (b) of Rule 485 (the "Rule"), Post-Effective Amendment No.
8 (the "Amendment") to its registration statement under the Securities Act of
1933, as amended.
Pursuant to paragraph (b)(4) of the Rule, we represent that the Amendment
does not contain disclosures which would render it ineligible to become
effective pursuant to paragraph (b) of the Rule.
Sincerely,
/s/Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
<PAGE>
PAGE 32
Page 4 of 5
June 15, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: T. Rowe Price Tax-Free Income Fund, Inc. (the Registrant)
File Nos.: 002-57265/811-2684
Commissioners:
We are counsel to the above-referenced Registrant which proposes to file,
pursuant to paragraph (b) of Rule 485 (the "Rule"), Post-Effective Amendment No.
44 (the "Amendment") to its registration statement under the Securities Act of
1933, as amended.
Pursuant to paragraph (b)(4) of the Rule, we represent that the Amendment
does not contain disclosures which would render it ineligible to become
effective pursuant to paragraph (b) of the Rule.
Sincerely,
/s/Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
<PAGE>
PAGE 33
Page 5 of 5
June 15, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: T. Rowe Price Tax-Free High Yield Fund, Inc. (the Registrant)
File Nos.:002-94641/811-4163
Commissioners:
We are counsel to the above-referenced Registrant which proposes to file,
pursuant to paragraph (b) of Rule 485 (the "Rule"), Post-Effective Amendment No.
20 (the "Amendment") to its registration statement under the Securities Act of
1933, as amended.
Pursuant to paragraph (b)(4) of the Rule, we represent that the Amendment
does not contain disclosures which would render it ineligible to become
effective pursuant to paragraph (b) of the Rule.
Sincerely,
/s/Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
<PAGE>
PAGE 34
Page 1 of 5
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
T. Rowe Price Tax-Exempt Money Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment
No. 33 to the Registration Statement of the T. Rowe Price Tax-Exempt Money Fund,
Inc. (the "Fund") on Form N-1A (File Number 002-67029) of our report dated March
18, 1998, on our audit of the financial statements and financial highlights of
the Fund, which report is included in the Annual Report to Shareholders for the
year ended February 28, 1998, which is incorporated by reference in the
Registration Statement. We also consent to the reference to our Firm under the
captions "Financial Highlights" in the Prospectus and "Independent Accountants"
in the Statement of Additional Information.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 17, 1998
<PAGE>
PAGE 35
Page 2 of 5
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
T. Rowe Price Tax-Free Short-Intermediate Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment
No. 26 to the Registration Statement of the T. Rowe Price Tax-Free
Short-Intermediate Fund, Inc. (the "Fund") on Form N-1A (File Number 002-87059)
of our report dated March 18, 1998, on our audit of the financial statements and
financial highlights of the Fund, which report is included in the Annual Report
to Shareholders for the year ended February 28, 1998, which is incorporated by
reference in the Registration Statement. We also consent to the reference to our
Firm under the captions "Financial Highlights" in the Prospectus and
"Independent Accountants" in the Statement of Additional Information.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 17, 1998
<PAGE>
PAGE 36
Page 3 of 5
To the Board of Directors of
T. Rowe Price Tax-Free Insured Intermediate Bond Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment
No. 8 to the Registration Statement of T. Rowe Price Tax-Free Insured
Intermediate Bond Fund, Inc. (the "Fund") on Form N-1A (File Number 033-49117)
of our report dated March 18, 1998, on our audit of the financial statements and
financial highlights of the Fund, which report is included in the Annual Report
to Shareholders for the year ended February 28, 1998, which is incorporated by
reference in the Registration Statement. We also consent to the reference to our
Firm under the captions "Financial Highlights" in the Prospectus and
"Independent Accountants" in the Statement of Additional Information.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 17, 1998
<PAGE>
PAGE 37
Page 4 of 5
To the Board of Directors of
T. Rowe Price Tax-Free Income Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment
No. 44 to the Registration Statement of T. Rowe Price Tax-Free Income Fund, Inc.
(the "Fund") on Form N-1A (File Number 002-57265) of our report dated March 18,
1998, on our audit of the financial statements and financial highlights of the
Fund, which report is included in the Annual Report to Shareholders for the year
ended February 28, 1998, which is incorporated by reference in the Registration
Statement. We also consent to the reference to our Firm under the captions
"Financial Highlights" in the Prospectus and "Independent Accountants" in the
Statement of Additional Information.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 17, 1998
<PAGE>
PAGE 38
Page 5 of 5
To the Board of Directors of
T. Rowe Price Tax-Free High Yield Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment
No. 20 to the Registration Statement of T. Rowe Price Tax-Free High Yield Fund,
Inc. (the "Fund") on Form N-1A (File Number 002-94641) of our report dated March
18, 1998, on our audit of the financial statements and financial highlights of
the Fund, which report is included in the Annual Report to Shareholders for the
year ended February 28, 1998, which is incorporated by reference in the
Registration Statement. We also consent to the reference to our Firm under the
captions "Financial Highlights" in the Prospectus and "Independent Accountants"
in the Statement of Additional Information.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
June 17, 1998
<PAGE>
PAGE 39
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000315748
<NAME> T ROWE PRICE TAX EXEMPT MONEY FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 763262
<INVESTMENTS-AT-VALUE> 763262
<RECEIVABLES> 7008
<ASSETS-OTHER> 924
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 771194
<PAYABLE-FOR-SECURITIES> 28799
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1638
<TOTAL-LIABILITIES> 30437
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 740615
<SHARES-COMMON-STOCK> 740809
<SHARES-COMMON-PRIOR> 678241
<ACCUMULATED-NII-CURRENT> 142
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 740757
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26151
<OTHER-INCOME> 0
<EXPENSES-NET> 3664
<NET-INVESTMENT-INCOME> 22487
<REALIZED-GAINS-CURRENT> 53
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 22540
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 22487
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 691676
<NUMBER-OF-SHARES-REDEEMED> 650346
<SHARES-REINVESTED> 21239
<NET-CHANGE-IN-ASSETS> 62622
<ACCUMULATED-NII-PRIOR> 142
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 171
<GROSS-ADVISORY-FEES> 2989
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3664
<AVERAGE-NET-ASSETS> 703775
<PER-SHARE-NAV-BEGIN> 1.00
<PAGE>
<PER-SHARE-NII> .032
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .032
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000758003
<NAME> T ROWE PRICE TAX FREE HIGH YIELD FUND,INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1137679
<INVESTMENTS-AT-VALUE> 1244234
<RECEIVABLES> 26657
<ASSETS-OTHER> 73
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1270964
<PAYABLE-FOR-SECURITIES> 24111
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4863
<TOTAL-LIABILITIES> 28974
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1143052
<SHARES-COMMON-STOCK> 98116
<SHARES-COMMON-PRIOR> 86904
<ACCUMULATED-NII-CURRENT> 66
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 7683
<ACCUM-APPREC-OR-DEPREC> 106555
<NET-ASSETS> 1241990
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 71175
<OTHER-INCOME> 0
<EXPENSES-NET> 8113
<NET-INVESTMENT-INCOME> 63062
<REALIZED-GAINS-CURRENT> 5076
<APPREC-INCREASE-CURRENT> 44298
<NET-CHANGE-FROM-OPS> 112436
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 63062
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24772
<NUMBER-OF-SHARES-REDEEMED> 17044
<SHARES-REINVESTED> 3484
<NET-CHANGE-IN-ASSETS> 188884
<ACCUMULATED-NII-PRIOR> 67
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 12727
<GROSS-ADVISORY-FEES> 7051
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8113
<AVERAGE-NET-ASSETS> 1128983
<PER-SHARE-NAV-BEGIN> 12.12
<PAGE>
<PER-SHARE-NII> .69
<PER-SHARE-GAIN-APPREC> .54
<PER-SHARE-DIVIDEND> .69
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.66
<EXPENSE-RATIO> .72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000730200
<NAME> T ROWE PRICE TAX FREE SHORT INTERMEDIATE FUND,INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 434147
<INVESTMENTS-AT-VALUE> 443376
<RECEIVABLES> 5648
<ASSETS-OTHER> 184
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 449208
<PAYABLE-FOR-SECURITIES> 9389
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 868
<TOTAL-LIABILITIES> 10257
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 429904
<SHARES-COMMON-STOCK> 81762
<SHARES-COMMON-PRIOR> 82883
<ACCUMULATED-NII-CURRENT> 17
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 199
<ACCUM-APPREC-OR-DEPREC> 9229
<NET-ASSETS> 438951
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 20806
<OTHER-INCOME> 0
<EXPENSES-NET> 2345
<NET-INVESTMENT-INCOME> 18461
<REALIZED-GAINS-CURRENT> 1105
<APPREC-INCREASE-CURRENT> 2661
<NET-CHANGE-FROM-OPS> 22227
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18461
<DISTRIBUTIONS-OF-GAINS> 2474
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18953
<NUMBER-OF-SHARES-REDEEMED> 23189
<SHARES-REINVESTED> 3115
<NET-CHANGE-IN-ASSETS> (4680)
<ACCUMULATED-NII-PRIOR> 17
<ACCUMULATED-GAINS-PRIOR> 1170
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1856
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2345
<AVERAGE-NET-ASSETS> 436930
<PER-SHARE-NAV-BEGIN> 5.35
<PAGE>
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> .05
<PER-SHARE-DIVIDEND> .25
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.37
<EXPENSE-RATIO> .54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000892899
<NAME> T ROWE PRICE TAX FREE INSURED INTERMEDIATE BOND FUND,INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 101889
<INVESTMENTS-AT-VALUE> 106970
<RECEIVABLES> 1410
<ASSETS-OTHER> 67
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 108447
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 191
<TOTAL-LIABILITIES> 191
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103129
<SHARES-COMMON-STOCK> 9784
<SHARES-COMMON-PRIOR> 9185
<ACCUMULATED-NII-CURRENT> 54
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8
<ACCUM-APPREC-OR-DEPREC> 5081
<NET-ASSETS> 108256
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5202
<OTHER-INCOME> 0
<EXPENSES-NET> 666
<NET-INVESTMENT-INCOME> 4536
<REALIZED-GAINS-CURRENT> 579
<APPREC-INCREASE-CURRENT> 2220
<NET-CHANGE-FROM-OPS> 7335
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4536
<DISTRIBUTIONS-OF-GAINS> 288
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2113
<NUMBER-OF-SHARES-REDEEMED> 1848
<SHARES-REINVESTED> 334
<NET-CHANGE-IN-ASSETS> 9080
<ACCUMULATED-NII-PRIOR> 46
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 299
<GROSS-ADVISORY-FEES> 391
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 666
<AVERAGE-NET-ASSETS> 102490
<PER-SHARE-NAV-BEGIN> 10.8
<PAGE>
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> .51
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.06
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000202927
<NAME> T ROWE PRICE TAX FREE INCOME FUND, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 1282339
<INVESTMENTS-AT-VALUE> 1406906
<RECEIVABLES> 25075
<ASSETS-OTHER> 379
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1432360
<PAYABLE-FOR-SECURITIES> 32155
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3917
<TOTAL-LIABILITIES> 36072
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1271943
<SHARES-COMMON-STOCK> 140333
<SHARES-COMMON-PRIOR> 139419
<ACCUMULATED-NII-CURRENT> 659
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 881
<ACCUM-APPREC-OR-DEPREC> 124567
<NET-ASSETS> 1396288
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 79283
<OTHER-INCOME> 0
<EXPENSES-NET> 7422
<NET-INVESTMENT-INCOME> 71861
<REALIZED-GAINS-CURRENT> 8060
<APPREC-INCREASE-CURRENT> 42319
<NET-CHANGE-FROM-OPS> 122240
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 71861
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16209
<NUMBER-OF-SHARES-REDEEMED> 20125
<SHARES-REINVESTED> 4830
<NET-CHANGE-IN-ASSETS> 59662
<ACCUMULATED-NII-PRIOR> 660
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 8933
<GROSS-ADVISORY-FEES> 6428
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7422
<AVERAGE-NET-ASSETS> 1353950
<PER-SHARE-NAV-BEGIN> 9.59
<PAGE>
<PER-SHARE-NII> .52
<PER-SHARE-GAIN-APPREC> .36
<PER-SHARE-DIVIDEND> .52
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.95
<EXPENSE-RATIO> .55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
(on behalf of California Tax-Free Bond Fund
California Tax-Free Money Fund)
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
(on behalf of T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio)
T. ROWE PRICE GNMA FUND
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
(on behalf of Government Reserve Investment Fund
Reserve Investment Fund)
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
(on behalf of Florida Insured Intermediate Tax-Free Fund
Georgia Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
Maryland Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Short-Term Tax-Free Bond Fund
Virginia Tax-Free Bond Fund)
T. ROWE PRICE SUMMIT FUNDS, INC.
(on behalf of T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit GNMA Fund
T. Rowe Price Summit Limited-Term Bond Fund)
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
(on behalf of T. Rowe Price Summit Municipal Income Fund
T. Rowe Price Summit Municipal Intermediate Fund
T. Rowe Price Summit Municipal Money Market Fund)
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
and
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
(on behalf of U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund)
POWER OF ATTORNEY
RESOLVED, that the Corporations/Trusts (collectively the
"Corporations/Trusts" and individually the "Corporation/Trust") and each of its
directors/trustees do hereby constitute and authorize, William T. Reynolds, Joel
H. Goldberg, and Henry H. Hopkins, and each of them individually, their true and
lawful attorneys and agents to
<PAGE>
PAGE 50
take any and all action and execute any and all instruments which said attorneys
and agents may deem necessary or advisable to enable the Corporation/Trust to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, and any rules, regulations, orders or other
requirements of the United States Securities and Exchange Commission thereunder,
in connection with the registration under the Securities Act of 1933, as
amended, of shares of the Corporation/Trust, to be offered by the
Corporation/Trust, and the registration of the Corporation/Trust under the
Investment Company Act of 1940, as amended, including specifically, but without
limitation of the foregoing, power and authority to sign the name of the
Corporation/Trust on its behalf, and to sign the names of each of such
directors/trustees and officers on his behalf as such director/trustee or
officer to any amendment or supplement (including Post-Effective Amendments) to
the Registration Statement on Form N-1A of the Corporation/Trust filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
and the Registration Statement on Form N-1A of the Corporation/Trust under the
Investment Company Act of 1940, as amended, and to any instruments or documents
filed or to be filed as a part of or in connection with such Registration
Statement.
IN WITNESS WHEREOF, the above named Corporations/Trusts have caused these
presents to be signed and the same attested by its Secretary, each thereunto
duly authorized by its Board of Directors/Trustees, and each of the undersigned
has hereunto set his hand and seal as of the day set opposite his name.
ALL CORPORATIONS/TRUSTS
/s/Carmen F. Deyesu
____________________________ Treasurer (Principal Financial Officer)
April 22, 1998
Carmen F. Deyesu
/s/Calvin W. Burnett
____________________________ Director/Trustee April 22, 1998
Calvin W. Burnett
/s/Anthony W. Deering
____________________________ Director/Trustee April 22, 1998
Anthony W. Deering
/s/F. Pierce Linaweaver
____________________________ Director/Trustee April 22, 1998
F. Pierce Linaweaver
/s/John G. Schreiber
____________________________ Director/Trustee April 22, 1998
John G. Schreiber
(Signatures Continued)
JAMES S. RIEPE, Director
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
JAMES S. RIEPE, Vice President and Director/Trustee
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. ROWE PRICE GNMA FUND
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
<PAGE>
PAGE 51
T. ROWE PRICE PRIME RESERVE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
T. ROWE PRICE SUMMIT FUNDS, INC.
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
/s/James S. Riepe
____________________________ April 22, 1998
James S. Riepe
(Signatures Continued)
M. DAVID TESTA, Director/Trustee
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. ROWE PRICE GNMA FUND
T. ROWE PRICE HIGH YIELD FUND, INC.
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
T. ROWE PRICE SUMMIT FUNDS, INC.
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
/s/M. David Testa
____________________________ April 22, 1998
M. David Testa
(Signatures Continued)
WILLIAM T. REYNOLDS, Chairman of the Board (Principal Executive Officer)
T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. ROWE PRICE HIGH YIELD FUND, INC.
<PAGE>
PAGE 52
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PRIME RESERVE FUND, INC.
RESERVE INVESTMENT FUNDS, INC.
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE STATE TAX-FREE INCOME TRUST
T. ROWE PRICE SUMMIT FUNDS, INC.
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.
WILLIAM T. REYNOLDS, Director/Trustee
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
T. ROWE PRICE GNMA FUND
/s/William T. Reynolds
____________________________ April 22, 1998
William T. Reynolds
(Signatures Continued)
T. ROWE PRICE GNMA FUND
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
/s/Peter Van Dyke
____________________________ President April 22, 1998
Peter Van Dyke
T. ROWE PRICE TAX-FREE INSURED INTERMEDIATE BOND FUND, INC.
/s/Charles B. Hill
____________________________ President April 22, 1998
Charles B. Hill
ATTEST:
/s/Patricia S. Butcher
____________________________
Patricia S. Butcher, Secretary
<PAGE>
PAGE 53
