PAGE 1
T. ROWE PRICE
PROSPECTUS
MAY 1, 1994
TABLE OF CONTENTS
FUND INFORMATION
INVESTMENT OBJECTIVES. . . . . . . . . . . . . . . . . 2
SUMMARY OF FUNDS' FEES
AND EXPENSES. . . . . . . . . . . . . . . . . . . 3
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . 4
INVESTING IN THE STOCK MARKET. . . . . . . . . . . . . 6
INVESTMENT PROGRAMS. . . . . . . . . . . . . . . . . . 6
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . 10
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . 18
ORGANIZATION OF THE FUNDS. . . . . . . . . . . . . . . 19
NAV, PRICING, AND EFFECTIVE DATE . . . . . . . . . . . 21
RECEIVING YOUR PROCEEDS. . . . . . . . . . . . . . . . 21
DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . 21
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 22
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . 23
EXPENSES AND MANAGEMENT FEE. . . . . . . . . . . . . . 25
HOW TO INVEST
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . 25
CONDITIONS OF YOUR PURCHASE. . . . . . . . . . . . . . 26
COMPLETING THE NEW ACCOUNT FORM. . . . . . . . . . . . 28
OPENING A NEW ACCOUNT. . . . . . . . . . . . . . . . . 29
PURCHASING ADDITIONAL SHARES . . . . . . . . . . . . . 30
EXCHANGING AND REDEEMING SHARES. . . . . . . . . . . . 31
Investment Summary
Prime Reserve Fund
The Fund is a money market fund which is managed to maintain a stable share
price of $1.00. The Fund is designed for investors seeking the highest
available current income, consistent with the liquidity and preservation of
capital standards prescribed for the Fund. It is one of the oldest and largest
money market funds in the United States. 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.
Short-Term Bond Fund
The Fund invests primarily in short and intermediate-term debt securities. It
is designed for investors seeking the highest level of income consistent with
minimum fluctuation in principal value and liquidity.
Equity Income Fund
The Fund seeks to provide substantial dividend income and also capital
appreciation by investing primarily in dividend-paying common stocks of
established companies. Dividends, if any, are paid quarterly.
International Stock Fund
The Fund seeks to provide long-term growth of capital through investments
primarily in common stocks of established, non-U.S. companies.
_____________________________________________________________________________
T. Rowe Price
100% No Load. The Funds have no sales charges, no redemption fees, and no
12b-1 fees. 100% of your investment is credited to your account.
Services. T. Rowe Price provides easy access to your money through
checkwriting, if applicable, bank wires, or telephone redemptions and offers
easy exchange to other T. Rowe Price Funds.
T. Rowe Price Associates, Inc. (T. Rowe Price) was founded in 1937 by the late
Thomas Rowe Price, Jr. As of December 31, 1993, the firm and its affiliates
managed over $50 billion, including more than $4 billion in conservative,
dividend-focused equity investments, for approximately three million
individual and institutional investor accounts.
_____________________________________________________________________________
This prospectus contains information you should know about the Funds before
you invest. Please keep it for future reference. A Statement of Additional
Information for the Funds (dated May 1, 1994) has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
prospectus. It is available at no charge by calling: 1-800-638-5660.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENT
OBJECTIVES
Prime Reserve Fund. The Fund's investment objectives are preservation of
capital, liquidity, and, consistent with these objectives, the highest
possible current income. To achieve its objectives, the Fund invests in a
diversified portfolio of domestic and foreign U.S. dollar-denominated money
market securities rated within the two highest credit categories assigned by
established rating agencies or, if not rated, of equivalent investment quality
as determined by the Fund's investment manager, T. Rowe Price.
Short-Term Bond Fund. The Fund's investment objective is to seek the highest
level of income consistent with minimum fluctuation in principal value and
liquidity.
Equity Income Fund. The Fund's investment objective is to seek to provide
substantial dividend income and also capital appreciation by investing
primarily in dividend-paying common stocks of established companies. In
pursuing its objective, the Fund emphasizes companies with favorable prospects
for increasing dividend income, and secondarily, capital appreciation. Over
time, the income component (dividends and interest earned) of the Fund's
investments is expected to be a significant contributor to the Fund's total
return. The Fund's income yield is expected to be significantly above that of
the Standard & Poor's 500 Stock Index.
International Stock Fund. The Fund's investment objective is long-term growth
of capital through investments primarily in common stocks of established,
non-U.S. companies.
The share price of each Fund (with the exception of the Prime Reserve
Fund which is managed to maintain a stable share price) and the yield of the
Prime Reserve and Short-Term Bond Funds will fluctuate with changing market
and economic conditions, and your investment may be worth more or less when
redeemed than when purchased. The Funds should not be relied upon as a
complete investment program, nor used to play short-term swings in the stock
or bond markets. The Funds cannot guarantee they will achieve their
objectives. The International Stock Fund is subject to risks unique to
international investing; including fluctuations in foreign exchange rates. See
extensive discussion under Risk Factors beginning on page 9. Further, there is
no assurance the favorable trends discussed on page 8 will continue.
SUMMARY OF
FUNDS' FEES
AND EXPENSES
The Funds are 100% no-load . . . you pay no fees to purchase, exchange or
redeem shares, nor any ongoing marketing (12b-1) expenses. Lower expenses
benefit you by increasing your investment return from each Fund.
Shown below are all expenses and fees the Funds incurred during each
Fund's fiscal year. Where applicable, expenses were restated to reflect
current fees. Expenses are expressed as a percent of fiscal year 1993 (Prime
Reserve and Short-Term Bond Funds) and current fiscal year (Equity Income and
International Stock Funds) average Fund net assets. More information about
these expenses may be found below and under Expenses and Management Fee and in
the Statement of Additional Information under Management Fee and Limitation on
Fund Expenses.
Short-
Prime Term Equity International
Reserve Bond Income Stock
Fund Fund Fund Fund
______ _____ _____ ____________
Shareholder Transaction Expenses
Sales load "charge" on purchases None None None None
Sales load "charge" on reinvested None None None None
dividends
Redemption fees None None None None
Exchange fees None None None None
Annual Fund Expenses
Management fee 0.40% 0.45% 0.60% 0.70%
Total other (Shareholder servicing, 0.35% 0.31% 0.31% 0.31%
custodial, auditing, etc.)!
Distribution fees (12b-1) None None None None
_____ _____ _____ _____
Total Fund Expenses 0.75% 0.76% 0.91% 1.01%
!The Funds charge a $5.00 fee for wire redemptions under $5,000, subject to
change without notice.
EXAMPLE OF
FUND EXPENSES.
The following example illustrates the expenses you would incur on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the
end of each period shown. For example, expenses for the first year in the
Prime Reserve Fund would be $8. This is an illustration only. Actual expenses
and performance may be more or less than shown.
Fund 1 Year 3 Years 5 Years 10 Years
_____ _______ _______ _______ ________
Prime Reserve $ 8 $ 24 $ 42 $ 93
Short-Term Bond $ 8 $ 24 $ 42 $ 94
Equity Income $ 9 $ 29 $ 50 $112
International Stock $ 10 $ 32 $ 56 $124
Management Fee. Each Fund pays T. Rowe Price or Rowe Price-Fleming
International, Inc. (Price-Fleming) an investment management fee consisting of
a flat Individual Fund Fee of each Fund's net assets of .05% for the Prime
Reserve Fund, .10% for the Short-Term Bond Fund, .25% for the Equity Income
Fund and 0.35% for the International Stock Fund, and a Group Fee, defined on
page 25 under Expenses and Management Fee, of 0.35% as of December 31, 1993.
Thus, the total combined management fee would be 0.40% for the Prime Reserve
Fund, 0.45% for the Short-Term Bond Fund, 0.60% for the Equity Income Fund,
and 0.70% for the International Stock Fund.
Transfer Agent, Shareholder Servicing, and Administrative Costs. The Funds
paid fees to: (i) T. Rowe Price Services, Inc. (TRP Services) for transfer and
dividend disbursing agent functions and shareholder services for all accounts;
(ii) T. Rowe Price Retirement Plan Services, Inc. for subaccounting and
recordkeeping services for certain retirement accounts; and (iii) T. Rowe
Price for calculating the daily share price and maintaining the portfolio and
general accounting records of each Fund. For the fiscal year ended February
28, 1993 (Prime Reserve and Short-Term Bond Funds), and the year ended
December 31, 1993 (Equity Income and International Stock Funds), the
approximate fees are set forth in the following chart.
Subaccounting
Fund Transfer Agent Services Accounting
____ _______________ _____________ ___________
Prime Reserve $5,494,000 $4,900,000 $ 85,000
Short-Term Bond $ 673,000 $ 105,000 $ 105,000
Equity Income $1,911,000 $3,490,000 $ 85,000
International Stock $2,374,000 $1,252,000 $ 92,000
_____________________________________________________________________________
FINANCIAL
HIGHLIGHTS
The following table provides information about each Fund's financial history.
It is based on a single share outstanding throughout each fiscal year (which
ends on the last day of February for the Prime Reserve and Short-Term Bond
Funds, the last day of December for the Equity Income Fund, and the last day
of December for years 1984-1992 and the last day of October 1993 for the
International Stock Fund). The most recent five years of each respective table
is part of each Fund's financial statements which are included in each Fund's
annual report and incorporated by reference into the Statement of Additional
Information, which is available to shareholders. The financial statements in
the annual report have been audited by the Funds' independent accountants
whose respective unqualified reports cover the most recent five-year period.
<TABLE>
<CAPTION>
_____________________________________________________________________________
Investment Activities Distributions
_____________________________________________________________________________
Net
Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest- Real- Total
Year Ended, ning ment Invest- Activi- ment ized Distri-
February 28 of Year Income ments ties Income Gain butions
_____________________________________________________________________________
Prime Reserve Fund
<C> <C> <C> <C> <C> <C> <C> <C>
1984* $1.000 $ .088 - $ .088 $(.088) - $ (.088)
1985 1.000 .099 - .099 (.099) - (.099)
1986 1.000 .075 - .075 (.075) - (.075)
1987 1.000 .059 - .059 (.059) - (.059)
1988* 1.000 .063 - .063 (.063) - (.063)
1989 1.000 .072 - .072 (.072) - (.072)
1990 1.000 .085 - .085 (.085) - (.085)
1991 1.000 .073 - .073 (.073) - (.073)
1992* 1.000 .051 - .051 (.051) - (.051)
1993 1.000 .030 - .030 (.030) - (.030)
_____________________________________________________________________________
<CAPTION>
_____________________________________________________________________________
End of Period
_____________________________________________________________________________
Ratio of
Net
Invest-
Net ment
Asset Net Ratio of Income to
Value, Assets Expenses Average Portfolio
Year Ended, End Total (in to Average Net Turnover
February 28 of Year Return thousands) Net Assets Assets Rate
_____________________________________________________________________________
Prime Reserve Fund
<C> <C> <C> <C> <C> <C> <C>
1984* $1.000 9.1% $2,709,723 0.63% 8.79% -
1985 1.000 10.3% 3,183,523 0.61% 9.90% -
1986 1.000 7.9% 2,812,921 0.65% 7.61% -
1987 1.000 6.0% 2,633,001 0.76% 5.89% -
1988* 1.000 6.5% 3,424,753 0.79% 6.37% -
1989 1.000 7.5% 4,063,417 0.79% 7.29% -
1990 1.000 8.8% 4,841,954 0.75% 8.45% -
1991 1.000 7.6% 4,753,267 0.75% 7.33% -
1992* 1.000 5.3% 4,115,224 0.78% 5.14% -
1993 1.000 3.1% 3,596,590 0.75% 3.04% -
_____________________________________________________________________________
<CAPTION>
_____________________________________________________________________________
Investment Activities Distributions
_____________________________________________________________________________
Net
Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest- Real- Total
Year Ended, ning of ment Invest- Activi- ment ized Distri-
December 31 Period Income ments ties Income Gain butions
_____________________________________________________________________________
Short-Term Bond Fund^
<C> <C> <C> <C> <C> <C> <C> <C>
1985^^ $5.00 $ .53 $ (.03) $ .50 $ (.53) - $ (.53)
1986 4.97 .47 .20 .67 (.47) - (.47)
1987 5.17 .40 .04 .44 (.40) - (.40)
1988* 5.21 .39 (.13) .26 (.39) - (.39)
1989 5.08 .41 (.20) .21 (.41) - (.41)
1990 4.88 .42 .03 .45 (.42) - (.42)
1991 4.91 .39 .06 .45 (.39) $ (.03) (.42)
1992* 4.94 .35 .11 .46 (.35) - (.35)
1993 5.05 .33 .04 .37 (.33) - (.33)
_____________________________________________________________________________
<CAPTION>
_____________________________________________________________________________
End of Period
_____________________________________________________________________________
Ratio of
Net
Ratio of Invest-
Net Total Expenses ment
Asset Return Net to Income to
Value, (Includes Assets Average Average Portfolio
Year Ended, End of Reinvested ($ Net Net Turnover
December 31 Period Dividends) thousands) Assets Assets Rate
_____________________________________________________________________________
Short-Term Bond Fund^
<C> <C> <C> <C> <C> <C> <C>
1985^^ $4.97 10.6%! $ 41,978 0.90%!! 10.73% 73.3%
1986 5.17 14.0% 96,152 1.31% 9.12% 20.6%
1987 5.21 8.8% 218,006 0.94% 7.58% 6.8%
1988* 5.08 5.4% 284,237 0.91% 7.85% 203.0%
1989 4.88 4.3% 231,573 0.94% 8.27% 309.1%
1990 4.91 9.4% 209,711 0.95% 8.43% 161.1%
1991 4.94 9.6% 218,634 0.93% 7.90% 980.4%
1992* 5.05 9.7% 396,980 0.88% 7.07% 380.7%
1993 5.09 7.6% 556,330 0.76% 6.59% 68.4%
_____________________________________________________________________________
<CAPTION>
_____________________________________________________________________________
Investment Activities Distributions
_____________________________________________________________________________
Net
Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest- Real- Total
Year Ended, ning of ment Invest- Activi- ment ized Distri-
December 31 Period Income ments ties Income Gain butions
_____________________________________________________________________________
Equity Income Fund
<C> <C> <C> <C> <C> <C> <C> <C>
1985~ $10.00 $ .14 $ .86 $ 1.00 - - -
1986 11.00 .66 2.21 2.87 $(.65) $ (.26) $ (.91)
1987 12.96 .64 (.14) .50 (.82) (1.35) (2.17)
1988 11.29 .63 2.46 3.09 (.62) (.38) (1.00)
1989 13.38 .77 1.06 1.83 (.76) (.39) (1.15)
1990 14.06 .67 (1.62) (.95) (.65) (.19) (.84)
1991 12.27 .62 2.44 3.06 (.61) (.10) (.71)
1992 14.62 .62 1.41 2.03 (.63) (.39) (1.02)
1993 15.63 .54 1.74 2.28 (.54) (.72) (1.26)
_____________________________________________________________________________
<CAPTION>
_____________________________________________________________________________
End of Period
_____________________________________________________________________________
Ratio of
Net
Ratio of Invest-
Net Total Expenses ment
Asset Return Net to Income to
Value, (Includes Assets Average Average Portfolio
Year Ended, End of Reinvested ($ Net Net Turnover
December 31 Period Dividends) thousands) Assets Assets Rate
_____________________________________________________________________________
Equity Income Fund
<C> <C> <C> <C> <C> <C> <C>
1985~ $ 11.00 10.0% $ 16,623 1.00%~~ 7.62% 36.6%
1986 12.96 26.8% 93,991 1.00%~~ 5.16% 72.5%
1987 11.29 3.5% 185,096 1.10%~~~ 4.58% 79.8%
1988 13.38 27.6% 500,922 1.30% 4.83% 36.4%
1989 14.06 13.7% 968,441 1.11% 5.31% 34.4%
1990 12.27 (6.8)% 862,059 1.13% 5.09% 24.4%
1991 14.62 25.3% 1,335,400 1.05% 4.44% 33.5%
1992 15.63 14.1% 2,091,535 0.97% 3.95% 30.0%
1993 16.65 14.8% 2,851,347 0.91% 3.23% 31.2%
_____________________________________________________________________________
<CAPTION>
_____________________________________________________________________________
Investment Activities Distributions
_____________________________________________________________________________
Net
Real-
ized and
Net Unreal- Total
Asset ized Gain from
Value, Net (Loss) Invest- Net Net
Begin- Invest- on ment Invest- Real- Total
Year Ended, ning of ment Invest- Activi- ment ized Distri-
December 31 Period Income ments ties Income Gain butions
_____________________________________________________________________________
International Stock Fund#
<C> <C> <C> <C> <C> <C> <C> <C>
1984 $7.16 $ .15 $ (.56) $ (.41) $(.08) $ (.08) $ (.16)
1985 6.59 .11 2.71 2.82 (.15) (.22) (.37)
1986 9.04 .11 5.23 5.34 (.11) (1.38) (1.49)
1987 12.89 .12 .74 .86 (.23) (4.98) (5.21)
1988 8.54 .16 1.36 1.52 (.16) (.93) (1.09)
1989 8.97 .16 1.94 2.10 (.16) (.67) (.83)
1990 10.24 .22 (1.13) (.91) (.16) (.36) (.52)
1991 8.81 .15 1.22 1.37 (.15) (.49) (.64)
1992 9.54 .14 (.47) (.33) (.16) (.16) (.32)
1993## 8.89 .10 2.75 2.85 - - -
_____________________________________________________________________________
<CAPTION>
_____________________________________________________________________________
End of Period
_____________________________________________________________________________
Ratio of
Net
Ratio of Invest-
Net Total Expenses ment
Asset Return Net to Income to
Value, (Includes Assets Average Average Portfolio
Year Ended, End of Reinvested (in Net Net Turnover
December 31 Period Dividends) thousands) Assets Assets Rate
_____________________________________________________________________________
International Stock Fund#
<C> <C> <C> <C> <C> <C> <C>
1984 $ 6.59 (5.9)% $ 180,705 1.11% 2.29% 37.7%
1985 9.04 45.3% 376,843 1.11% 1.54% 61.9%
1986 12.89 61.3% 790,020 1.10% 0.89% 56.4%
1987 8.54 8.0% 642,463 1.14% 0.93% 76.5%
1988 8.97 17.9% 630,114 1.16% 1.78% 42.4%
1989 10.24 23.7% 970,214 1.10% 1.63% 47.8%
1990 8.81 (8.9)% 1,030,848 1.09% 2.16% 47.1%
1991 9.54 15.9% 1,476,309 1.10% 1.51% 45.0%
1992 8.89 (3.5)% 1,949,631 1.05% 1.49% 37.8%
1993## 11.74 32.1%@ 3,746,055 1.01%** 1.52%** 29.8%**
_____________________________________________________________________________
<FN>
* Year ended February 29.
** Annualized.
@ Not annualized.
^ Portfolio turnover rate prior to February 28, 1986 excludes long-term
U.S. government securities.
^^ For the period March 2, 1984 (commencement of operations) to February
28, 1985.
! An annualized, not actual, return. The Fund's average monthly return
from inception to fiscal year-end was multiplied by 12 to
provide an annualized (not compounded) return.
!! Excludes investment management fees in excess of the 0.90% voluntary
expense limitation in effect through February 28, 1985.
~ For the period October 31, 1985 (commencement of operations) to
December 31, 1985.
~~ Excludes expenses in excess of a 1.00% voluntary expense limitation
in effect through December 31, 1986.
~~~ Excludes expenses in excess of a state expense limitation.
# All share and per-share figures reflect the 2-for-1 stock split
effective August 31, 1987.
## The Fund's fiscal year-end was changed to October 31.
</TABLE>
_____________________________________________________________________________
INVESTING IN THE STOCK MARKET
Equity Income and International Stock Funds. Common stocks offer a way to
invest for long-term growth of capital. As the economy of a country expands,
corporate profits generally grow, and share values rise.
Economic growth has been punctuated by periodic declines. Share prices
of even the best managed, most profitable corporations are subject to market
risk, which means their stock prices can decline. In addition, swings in
investor psychology and/or significant trading by large institutional
investors can result in price fluctuations. For this reason, equity investors
should have a long-term investment horizon and be willing to wait out bear
markets.
_____________________________________________________________________________
INVESTMENT
PROGRAMS
Prime Reserve Fund. The Fund will invest at least 95% of its total assets in
prime money market instruments - that is, securities which are rated within
the highest credit category assigned by at least two established rating
agencies (or one rating agency if the security is rated by only one, or, if
not rated, T. Rowe Price's equivalent). A security is considered rated if the
security itself, the issuer, or a comparable security of the issuer is rated.
T. Rowe Price subjects all securities eligible for investment to its own
credit analysis and considers all securities purchased by the Fund to present
minimal credit risks. Certain of the Fund's securities may have adjustable
rates of interest with periodic demand features.
The Fund is a money market fund which has a policy of maintaining a
stable net asset value of $1.00. This policy has been maintained since its
inception; however, the $1.00 price is not guaranteed or insured, nor is the
Fund's yield fixed. The Fund generally purchases securities which mature in 13
months or less, although the Fund may purchase U.S. government securities with
a maturity of up to 25 months. The average maturity of the Fund will not be
greater than 90 days. Since the Fund is managed to maintain a constant share
price, its total return should be composed entirely of income.
Short-Term Bond Fund. The following table summarizes the quality, yield, price
characteristics, and maturity of the Fund which might be expected under normal
circumstances.
Share price Expected
Credit Quality Yield fluctuation (NAV) average maturity
_____________________________________________________________________________
3 highest Higher than a Moderate Not greater
(see below) money market fund than 3 years
_____________________________________________________________________________
The Fund will invest in a diversified portfolio of short and
intermediate-term securities. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in short-term bonds. In this regard, the
Fund's dollar weighted average effective maturity will not exceed three years,
and the Fund will not purchase any security whose effective maturity, average
life or tender date, measured from the date of settlement, exceeds seven
years. The Fund will purchase securities rated within the three highest credit
categories by an established public rating agency (or, if unrated, T. Rowe
Price's equivalent). (Effective July 1, 1994, the Fund will be able to
purchase securities within the four highest credit categories.) Short and
intermediate-term securities typically yield more than money market
securities, but less than longer term securities. Also, share price
fluctuations should be lower than a mutual fund investing in longer term
securities.
Debt Securities
Total Return Components. The Fund's total return consists of (1) the change in
its net asset value per share and (2) the income it generates. The net asset
value of the Fund will be affected primarily by changes in interest rate
levels, the maturity of individual portfolio holdings, and the quality of the
securities held.
A GENERAL EXPLANATION.
Interest Rates. A bond is a contractual debt obligation to repay a stated debt
amount (the principal) on a specified date (the maturity) plus a specified
rate of interest for the use of the money. Most bonds pay a fixed rate of
interest known as the coupon rate, which is fixed for the term of the bond. A
bond's yield reflects the fixed annual interest as a percent of its current
price. This price (the bond's market value) must increase or decrease in order
to adjust the bond's yield to current interest rate levels. Therefore, bond
prices generally move in the opposite direction of interest rates.
Maturity. Movements in interest rates typically have a greater effect on the
prices of longer term bonds than on those with shorter maturities. The
following table illustrates the effect of a change in interest rates on a
$1,000 bond with a 7% coupon.
Principal value if rates:
___________________________________
Bond - Maturity Increase 1% Decrease 1%
_____________________________________________________________________________
Short - 2 years $982 $1,019
Intermediate - 5 years $959 $1,043
Long-term - 20 years $901 $1,116
_____________________________________________________________________________
This table is for illustrative purposes only and should not be taken as
representative of expected changes in the share price of the Fund.
T. Rowe Price will actively manage the Fund's portfolio maturity,
consistent with the Fund's objective, according to its interest rate outlook.
During periods of rising interest rates, a shorter average maturity may be
adopted to cushion the effect of falling bond prices on the Fund's share
price. When rates are falling and bond prices are rising, a longer average
maturity may be sought.
Credit Analysis. The quality of a bond is measured by credit risk - the
ability of the issuer to meet interest and principal payments on a timely
basis. Issuers who are believed to be good credit risks receive high quality
ratings, and those believed to be poor credit risks receive low quality
ratings. High-quality bonds involve less credit risk and typically offer a
lower yield than bonds of low quality. In determining the quality of an
issuer, T. Rowe Price considers publicly available ratings, but places primary
emphasis on its own credit analysis. This analysis may differ from the
evaluations of public rating agencies, such as Moody's Investors Service, Inc.
or Standard & Poor's Corporation. T. Rowe Price may also buy bonds from
unrated issuers, which are not necessarily of lower quality, but may be less
marketable.
INVESTING IN HIGH
DIVIDEND-PAYING
COMPANIES.
Equity Income Fund. The investment program of the Fund is based on several
premises. First, T. Rowe Price believes that, over time, dividend income can
account for a significant component of the total return from equity
investments. Second, dividends are normally a more stable and predictable
source of return than capital appreciation. While the price of a company's
stock generally increases or decreases in response to short-term earnings and
market fluctuations, its dividends are generally less volatile. Finally, T.
Rowe Price believes that stocks which distribute a high level of current
income tend to have less price volatility than those which pay below average
dividends.
To achieve its objective, the Fund, under normal circumstances, will
invest at least 65% of its assets in income-producing common stocks, whose
prospects for dividend growth and capital appreciation are considered
favorable by T. Rowe Price. To enhance capital appreciation potential, the
Fund also uses a value-oriented approach, which means it invests in stocks it
believes are currently undervalued. The Fund's investments will generally be
made in companies which share some of the following characteristics:
o established operating histories;
o above-average current dividend yields relative to the S&P 500;
o low price/earnings ratios relative to the S&P 500;
o sound balance sheets and other financial characteristics; and
o low stock price relative to company's underlying value as
measured by assets, earnings, cash flow or business franchises.
The Fund may also invest its assets in fixed income securities
(corporate, government, and municipal bonds of various maturities). The Fund
would invest in municipal bonds when the expected total return from such bonds
appears to exceed the total returns obtainable from corporate or government
bonds of similar credit quality. Interest earned on municipal bonds purchased
by the Fund will be taxable income to Fund shareholders. Although the Fund
will invest primarily in U.S. common stocks, it may also purchase other types
of securities, for example, foreign securities, convertible securities and
warrants, when considered consistent with the Fund's investment objective and
program. The Fund may also engage in a variety of investment management
practices, such as buying and selling futures and options.
INVESTING OVERSEAS FOR
GROWTH AND INCOME.
International Stock Fund. Over the last 30 years, many foreign economies have
grown faster than the United States' economy, and the return from equity
investments in these countries has often exceeded the return on similar
investments in the United States. Moreover, there has normally been a wide and
largely unrelated variation in performance between international equity
markets over this period. Although there can be no assurance that these
conditions will continue, the Fund's investment manager, Price-Fleming, within
the framework of diversification, seeks to identify and invest in companies
participating in the faster growing foreign economies and markets.
Price-Fleming believes that investment in foreign securities offers
significant potential for long-term capital appreciation and an opportunity to
achieve investment diversification.
The Fund intends to diversify investments broadly among countries and
to normally have at least three different countries represented in the
portfolio. The Fund may invest in countries of the Far East and Europe as well
as South Africa, Australia, Canada, and other areas (including developing
countries). Under unusual circumstances, however, the Fund may invest
substantially all its assets in one or two countries.
Portfolio Diversification. Today, more than one-half of the world's stock
market value is traded abroad. Investing overseas can help diversify a
portfolio otherwise invested solely in U.S. securities. Foreign stock markets
often do not parallel the performance of U.S. markets, which means that, over
time, diversifying investments across several countries can help reduce
portfolio volatility.
In seeking its objective, the Fund invests primarily in common stocks
of established foreign companies which have the potential for growth of
capital. However, the Fund may also invest in a variety of other equity
related securities such as preferred stocks, warrants and convertible
securities, as well as corporate and governmental debt securities, when
considered consistent with the Fund's investment objective and program. The
Fund may also engage in a variety of investment management practices, such as
buying and selling futures and options. Also, the Fund may enter into forward
foreign currency exchange contracts in order to protect against uncertainty in
the level of future foreign exchange rates. Under normal conditions, the
Fund's investments in securities other than common stocks is limited to no
more than 35% of total assets. Under exceptional economic or market conditions
abroad, however, the Fund may temporarily invest all or a major portion of its
assets in U.S. government obligations or debt obligations of U.S. companies.
Risk Factors
Foreign stock prices are subject to many of the same influences as U.S.
stocks, such as general economic conditions, company and industry earnings
prospects, and investor psychology. International investing also involves
additional risks which can increase the potential for the losses in the Fund.
Currency Fluctuations. Transactions in foreign securities are conducted in
local currencies, so dollars must be exchanged for another currency each time
a stock is bought or sold or a dividend is paid. Likewise, share-price
quotations and total return information reflect conversion into dollars.
Fluctuations in foreign exchange rates can significantly increase or decrease
the dollar value of a foreign investment, boosting or offsetting its local
market return. For example, if a French stock rose 10% in price during a year,
but the U.S. dollar gained 5% against the French franc during that time, the
U.S. investor's return would be reduced to 5%. This is because the franc would
"buy" fewer dollars at the end of the year than at the beginning, or,
conversely, a dollar would buy more francs. Exchange rate movements can be
large and endure for extended periods of time.
Costs. It is more expensive for U.S. investors to trade in foreign markets
than in the U.S. Mutual funds offer a very efficient way for individuals to
invest abroad, but the overall expense ratios of international funds are
usually somewhat higher than those of typical domestic stock funds.
Political and Economic Factors. The economies, markets and political
structures of a number of countries in which the Fund can invest do not
compare favorably with the United States and other mature economies in terms
of wealth and stability. Therefore, investments in these countries may be
riskier, and will be subject to erratic and abrupt price movements.
Some economies are less well developed and less diverse (for example,
Latin America, Eastern Europe, and certain Asian countries), and more
vulnerable to the ebb and flow of international trade, trade barriers and
other protectionist or retaliatory measures (for example, Japan, Southeast
Asia, and Latin America). Some countries, particularly in Latin America, are
grappling with severe inflation and high levels of national debt. Investments
in countries that have recently begun moving away from central planning and
state-owned industries toward free markets, such as the Eastern European or
Chinese economies, should be regarded as speculative.
Certain countries have histories of instability and upheaval (Latin
America) and internal politics that could cause their governments to act in a
detrimental or hostile manner toward private enterprise or foreign investment.
Any such actions, for example nationalizing an industry or company, could have
a severe and adverse affect on security prices and impair the Fund's ability
to repatriate capital or income.
While certain countries have made progress in economic growth,
liberalization, fiscal discipline, and political and social stability, there
is no assurance these trends will continue.
Legal, Regulatory and Operational. Certain countries lack uniform accounting,
auditing, and financial reporting standards, have less governmental
supervision of financial markets than in the U.S., do not honor legal rights
enjoyed in the U.S. and have settlement practices which include delays and
subject the Fund to risks of loss not customary in U.S. markets.
Pricing. Portfolio securities may be listed on foreign exchanges that are open
on days (such as Saturdays) when the Fund does not compute its prices. As a
result, the Fund's net asset value may be significantly affected by trading on
days when shareholders cannot make transactions.
_____________________________________________________________________________
INVESTMENT POLICIES
FUND MANAGERS HAVE
CONSIDERABLE LEEWAY IN
CHOOSING INVESTMENT
STRATEGIES AND SELECTING
SECURITIES THEY BELIEVE
WILL HELP THE FUNDS
ACHIEVE THEIR OBJECTIVES.
Equity Income and International Stock Funds
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. The Funds'
investment programs are 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.
Types of Portfolio Securities
In seeking to meet their investment objectives, the Funds may invest in any
type of security whose investment characteristics are consistent with the
Funds' investment programs. These and some of the other investment techniques
the Funds may use are described in the following pages.
Prime Reserve Fund
The Fund may purchase any type of money market instrument including, but not
limited to: (1) Asset-Backed Securities; (2) Canadian Government Securities,
limited to 10% of the Fund's assets; (3) Commercial Paper; (4) Foreign
Securities (U.S. dollar-denominated money market securities issued by foreign
issuers, foreign branches of U.S. banks, and U.S. branches of foreign banks);
(5) Obligations of the U.S. Government or its Agencies; (6) Securities of
Certain Supranational Organizations; (7) Short-Term Corporate Debt Securities;
(8) U.S. Bank and Savings and Loan Obligations; and (9) Repurchase Agreements
involving these securities (other than Foreign Securities). Certain of these
investments and others are described below.
Adjustable Rate Securities. Adjustable rate securities have interest rates
that are adjusted periodically according to a set formula in order to minimize
fluctuation in the principal value of the investments. The maturity of such
securities may be shortened under certain specified conditions. "Variable
rate" securities are domestic certificates of deposit which provide for the
establishment of a new interest rate on predetermined dates or whenever a
specific interest rate (such as the bank prime lending rate) changes.
"Floating rate" securities are corporate, bank holding company, or
asset-backed notes or Eurodollar certificates of deposit with reset provisions
similar to those for variable rate instruments.
Foreign Securities. Subject to the credit standards for its portfolio
securities, the Fund may invest a majority or a substantial portion of its
assets, without limitation, in the foreign securities (as previously
described) of issuers located in one or more foreign countries. The Fund will
invest in foreign securities when T. Rowe Price believes that such investments
offer a credit and/or yield advantage over investments in domestic securities.
While investments in foreign securities are intended to reduce risk by
providing further diversification, such investments involve sovereign risk in
addition to the credit and market risks. Sovereign risk includes local
political or economic developments, potential nationalization, and withholding
taxes on dividend or interest payments. Foreign companies may have less public
or less reliable information available about them and may be subject to less
governmental regulation than U.S. companies. Securities of foreign companies
may be less liquid or more volatile than securities of U.S. companies.
Rule 144A Securities. The Fund may purchase securities eligible for resale
under Rule 144A of the Securities Act of 1933. This rule permits otherwise
restricted securities to be sold to certain institutional buyers. The Fund
will limit its purchases of these securities to those which T. Rowe Price,
under the supervision of the Fund's Board of Directors, determines to be
readily marketable.
Portfolio Diversification. The Fund will not purchase any security (other than
a U.S. government security) if it would cause the Fund to have more than: (1)
5% of its total assets in securities of that issuer, where the securities are
prime securities (other than for certain temporary, limited purposes); or (2)
where the securities are not prime securities, 5% of its total assets in such
securities and 1% of its total assets in the securities of that issuer.
Portfolio Management. To meet the Fund's objective of a stable net asset value
per share, T. Rowe Price will follow an investment management approach whose
key elements are prudent maturity structuring and high credit quality. Average
portfolio maturity will be managed according to the Fund's outlook for
short-term interest rates. During periods of rising rates, a shorter average
maturity may be expected, while a longer maturity may be more appropriate when
rates are falling. Typically securities will be bought and held until
maturity, although opportunities to enhance returns, significant changes in
the investment environment and other factors may result in the sale of
securities prior to their maturity.
Short-Term Bond Fund
The Fund may purchase any type of income producing security including, but not
limited to, asset-backed securities, bank obligations, collateralized mortgage
obligations (CMOs), commercial paper, corporate debt securities, foreign
securities, mortgage-backed securities, private placements, savings and loan
obligations, securities of supranational organizations, and U.S. government
and agency obligations. The Fund may also purchase income producing securities
on a when-issued basis. Certain of the Fund's portfolio securities may have
adjustable rates and periodic demand features. Certain of these investments
and others are described below.
Banking Industry. The Fund will, as a matter of fundamental policy, normally
concentrate 25% or more of its assets in the securities of the banking
industry when the Fund's position in issues maturing in one year or less
equals 35% or more of the Fund's total assets. Investments in the banking
industry may be affected by general economic conditions as well as exposure to
credit losses arising from possible financial difficulties of borrowers. In
addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. T. Rowe Price believes
that any risk to the Fund which might result from concentrating in the banking
industry will be minimized by diversification of the Fund's investments and T.
Rowe Price's credit research.
Collateralized Mortgage Obligations (CMOs). The Fund may invest in CMOs which
are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the same schedule
as they are received, although certain classes of CMOs have priority over
others with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which the Fund invests, the investment may be
subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities. CMOs may also be less marketable than other
securities. CMOs with an effective maturity of no more than seven years are
eligible for purchase by the Fund regardless of their stated maturity.
CMO securities may pay fixed or variable rates of interest. Variable
rate securities may be structured to adjust inversely with and more rapidly
than short-term interest rates. As a result, the market value of such
securities tends to be more volatile than other CMO securities the Fund may
buy. The Fund will not invest more than 10% of its total assets in this type
of CMO security.
Foreign Currency Transactions. Foreign securities of the Fund are subject to
currency risk, that is, the risk that the U.S. dollar value of these
securities may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations. To manage this risk
and facilitate the purchase and sale of foreign securities, the Fund will
engage in foreign currency transactions involving the purchase and sale of
forward currency exchange contracts.
The Fund will normally conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the prevailing rate in the
foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. The Fund will generally not enter into
a forward contract with a term greater than one year. 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. Generally, the Fund would
use such contracts when: (1) the Fund desires to "lock in" the U.S. dollar
price of a foreign security which the Fund has agreed to buy or sell; (2) T.
Rowe Price believes that the currency of a particular foreign country may
suffer or enjoy a substantial movement against another currency, the Fund may
enter into a forward contract to sell or buy the amount of the former currency
(or another currency which acts as a proxy for the currency) approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. (This second investment practice is generally referred to as
"cross hedging." T. Rowe Price does not intend to enter into forward contracts
under this second circumstance if, as a result, the Fund will have more than
10% of the value of its net assets committed to the consummation of such
contracts.); or (3) the Fund wishes to hedge out of the dollar into a foreign
currency in order to create a synthetic bond or money market
instrument - the security would be issued by a U.S. issuer but the dollar
component would be transformed into a foreign currency through a forward
contract.
The Fund may enter into forward contracts for other purposes as well.
Although foreign currency transactions will be used primarily to protect the
Fund from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the Fund's
total return could be adversely affected as a result.
Foreign Securities. The Fund may invest without limitation, in U.S.
dollar-denominated debt securities issued by foreign issuers, foreign branches
of U.S. banks, and U.S. branches of foreign banks. The Fund may also invest up
to 10% of its net assets in non-U.S. dollar-denominated fixed income
securities principally traded in financial markets outside the United States.
While investments in foreign securities are intended to reduce risk by
providing further diversification, such investments involve sovereign risk in
addition to credit and market risks. Sovereign risk includes local political
or economic developments, potential nationalization, withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the United States). Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Foreign companies may have less public or less reliable
information available about them and may be subject to less governmental
regulation than U.S. companies. Securities of foreign companies may be less
liquid or more volatile than securities of U.S. companies.
Hybrid Investments. As part of its investment program and to maintain greater
flexibility, the Fund may invest in instruments which have the characteristics
of futures and securities. Such instruments may take a variety of forms, such
as debt instruments with interest or principal payments determined by
reference to the value of a currency or commodity at a future point in time.
The risks of such investments would reflect both the risks of investing in
futures and the risks of investing in securities, including volatility and
illiquidity.
Illiquid Securities. The Fund may acquire illiquid securities (no more than
10% of net assets). Because an active trading market does not exist for such
securities, the sale of such securities may be subject to delay and additional
costs.
Futures and Options. The Fund may enter into interest rate or currency
futures contracts (or options thereon) as a hedge against changes in
prevailing levels of interest rates or currency exchange rates. Such hedging
techniques are intended to "lock in" (or establish more definitely) the
effective return on securities or currencies held or intended to be acquired
by the Fund or as an efficient means of adjusting its exposure to the bond and
currency markets. The Fund will not use futures contracts for speculation. The
Fund will limit its use of futures contracts so that no more than 5% of the
Fund's total assets would be committed to initial margin deposits or premiums
on such contracts. The Fund may also write covered call and put options and
purchase put and call options on securities, currencies and financial indices.
The aggregate market value of the Fund's currencies or portfolio securities
covering call or put options will not exceed 25% of the Fund's net assets.
Futures contracts and options can be highly volatile and could reduce the
Fund's total return and the Fund's attempt to use such investments for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates, and
other economic factors. The Funds' potential losses from the use of futures
extends beyond their initial investment in such contracts. Also, losses from
options and futures could be significant if the Fund is unable to close out
its position due to disruptions in the market or lack of liquidity.
Mortgage-Backed Securities. The Fund may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, or institutions such as banks, insurance companies, and
savings and loans. Some government securities, such as GNMA certificates, are
backed by the full faith and credit of the U.S. Treasury while others, such as
Freddie Mac certificates, are not. Such securities may have fixed or variable
rates of interest. They may have stated maturities of up to 30 years but be
eligible for purchase by the Fund if their effective maturity is no more than
seven years.
Mortgage-backed securities represent interests in a pool of mortgages.
Principal and interest payments made on the mortgages in the underlying
mortgage pool are passed through to the Fund. Unscheduled prepayments of
principal shorten the securities' weighted average life and may lower their
total return. The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the federal agency or
private institution that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Stripped Mortgage Securities. The Fund may invest up to 10% of its total
assets in stripped mortgage securities. With such securities, the principal
and interest payments on a pool of mortgages in a CMO are separated or
"stripped" to create two classes of securities. In general, the interest-only,
or "IO" class of stripped securities, receives all interest and no principal
payments, while the principal-only, or "PO" class, is entitled to receive all
principal and no interest payments. Stripped mortgage securities can be
extremely volatile and are expected to be acutely sensitive to fluctuations in
interest rates and prepayment rates on the mortgages underlying stripped
securities. There is, of course, no guarantee the Fund's use of these
investments will be successful and the Fund's total return could be adversely
affected as a result.
Utility Industry Concentration. As a matter of fundamental policy, the Fund
will, under certain conditions, invest up to 50% of its assets in any one of
the following industries: gas utility, gas transmission utility, electric
utility, telephone utility, and petroleum. Investments in any of these
industries may be affected by environmental conditions, energy conservation
programs, fuel shortages, availability of capital to finance operations and
construction programs, and federal and state legislative and regulatory
actions. T. Rowe Price believes that any risk to the Fund which might result
from concentrating in any such industry will be minimized by diversification
of the Fund's investments.
Prime Reserve and Short-Term Bond Funds
Asset-Backed Securities. Asset-backed securities represent a participation in,
or are secured by and payable from, a stream of payments generated by
particular assets, for example, credit card, automobile or trade receivables.
Asset-backed commercial paper, one type of asset-backed security, is issued by
a special purpose entity, organized solely to issue the commercial paper and
to purchase interests in the assets. The credit quality of these securities
depends primarily upon the quality of the underlying assets and the level of
credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If
the credit support or enhancement is exhausted, losses or delays in payment
may result if the required payments of principal and interest are not made.
The value of these securities also may change because of changes in the
market's perception of the creditworthiness of the servicing agent for the
pool, the originator of the pool, or the financial institution providing the
credit support enhancement.
Lending of Portfolio Securities. As a fundamental policy, for the purpose of
realizing additional income, each Fund may lend securities with a value of up
to 30% of its total assets to broker-dealers or institutional investors and,
with respect to the Short-Term Bond Fund, other persons. Any such loan will be
continuously secured by collateral at least equal to the value of the security
loaned. Such lending could result in delays in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially.
Repurchase Agreements. While the Prime Reserve Fund normally achieves
liquidity through the purchase of overnight commercial paper, it and the other
Funds may enter into repurchase agreements with a well-established securities
dealer or a bank which is a member of the Federal Reserve System. In the event
of a bankruptcy or default of certain sellers of repurchase agreements, the
Funds could experience costs and delays in liquidating the underlying
security, which is held as collateral, and the Funds might incur a loss if the
value of the collateral held declines during this period.
Prime Reserve Fund
Fundamental Investment Restrictions. As a matter of fundamental policy, the
Fund will not: (1) own more than 10% of the outstanding voting securities of
any company, except for obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; (2) purchase any security if it
would cause the Fund's holdings of that issuer to amount to more than 5% of
the Fund's total assets, except for obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities; (3) purchase securities
that are not readily marketable or invest more than 10% of the value of its
net assets in repurchase agreements which do not provide for payment within
seven days; (4) borrow money except temporarily from banks to facilitate
redemption requests in amounts not exceeding the lesser of 10% of its total
assets valued at cost or 5% of its total assets valued at market; (5) in any
manner transfer as collateral any securities owned by the Fund except as may
be necessary in connection with permissible borrowings, which in no event will
exceed 15% of its assets valued at cost (but as an operating policy no more
than 10% of net assets valued at market); and (6) purchase additional
securities when money borrowed exceeds 5% of the Fund's total assets.
Short-Term Bond Fund
Fundamental Investment Restrictions. As a matter of fundamental policy (1) the
Fund will not, among other things: (a) purchase a security of any issuer if,
as a result, it would, with respect to 75% of its assets, cause the Fund's
holdings of that issuer to amount to more than 5% of the Fund's total assets
or cause the Fund to own more than 10% of the outstanding voting securities of
the issuer; provided that, as an operating policy, the Fund will not purchase
a security if, as a result, more than 10% of the outstanding voting securities
of any issuer would be held by the Fund; (b) borrow money except temporarily
from banks to facilitate redemption requests in amounts not exceeding 30% of
the Fund's total assets valued at market; or (2) in any manner transfer as
collateral for indebtedness any securities owned by the Fund except in
connection with permissible borrowings, which in no event will exceed 30% of
the Fund's total assets valued at market.
Other Investment Policies. As a matter of operating policy, each Fund will
not, among other things: (1) purchase a security of any issuer if, as a
result, more than 5% of the value of each Fund's total assets would be
invested in the securities of unseasoned issuers which at the time of purchase
have been in operation for less than three years, including predecessors and
unconditional guarantors; and (2) purchase additional securities when money
borrowed exceeds 5% of each Fund's total assets.
Short-Term Bond, Equity Income, and International Stock Funds
Portfolio Turnover. The Funds will not generally trade in securities for
short-term profits but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The Short-Term
Bond Fund has, at times, had a very high portfolio turnover rate. A high
portfolio turnover may increase transaction costs and may affect taxes paid by
shareholders to the extent short-term gains are distributed. The Short-Term
Bond Fund's portfolio turnover rates for the fiscal years ended February 28,
1993, February 29, 1992, and February 28, 1991, were 68.4%, 380.7%, and
980.4%, respectively. The annualized portfolio turnover rates for the Equity
Income and International Stock Funds for the years ended 1993, 1992, and 1991,
were 31.2%, 30.0%, and 33.5% and 29.8%, 37.8%, and 45.0%, respectively.
Equity Income and International Stock Funds
Fundamental Policy. The Funds will not purchase a security if, as a result,
with respect to 75% of a Fund's total assets, more than 5% of its total assets
would be invested in securities of the issuer or, more than 10% of the voting
securities of the issuer would be held by the Fund.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments
and on assets should the company be liquidated. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to
help it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest
appreciation and depreciation potential of all corporate securities. While
most preferred stocks pay a dividend, the Funds may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Convertible Securities and Warrants. The Funds may invest in debt or preferred
equity securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent
years, convertibles have been developed which combine higher or lower current
income with options and other features. Warrants are options to buy a stated
number of shares of common stock at a specified price any time during the life
of the warrants (generally, two or more years).
Fixed Income Securities. The International Stock Fund may invest in debt
securities. The Equity Income Fund may invest in debt securities of any type
without regard to quality or rating. Such securities would be purchased in
companies which meet the investment criteria for the Funds. The price of a
bond fluctuates with changes in interest rates, rising when interest rates
fall and falling when interest rates rise.
Hybrid Instruments. These instruments can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of a security could be related to the market price of some
commodity, currency or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under
certain conditions, the redemption value of such an investment could be zero.
Hybrids can have volatile prices and limited liquidity and their use by the
Funds may not be successful.
Operating Policy. Each Fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements (Restricted Securities). These securities are sold directly
to a small number of investors, usually institutions. Unlike public offerings,
such securities are not registered with the SEC. Although certain of these
securities may be readily sold, for example, under Rule 144A, the sale of
others may involve substantial delays and additional costs.
Operating Policy. Each Fund will not invest more than 15% of its net assets in
illiquid securities, but not more than 5% in restricted securities (other than
Rule 144A securities).
Types of Management Practices
Cash Position. Each Fund will hold a certain portion of its assets in money
market securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less. For temporary, defensive purposes, a
Fund may invest without limitation in such securities. This reserve position
provides flexibility in meeting redemptions, expenses, and the timing of new
investments, and serves as a short-term defense during periods of unusual
market volatility.
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 a Fund's investment objective
and program. Such borrowings may be collateralized with Fund assets, subject
to restrictions.
Fundamental Policy. Borrowings may not exceed 33 1/3% of total Fund assets.
Operating Policies. 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. A Fund may not purchase additional securities when borrowings
exceed 5% of total assets.
Futures and Options. Futures 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. Options give the investor the right, but not the obligation, to buy or
sell an asset at a predetermined price in the future. The Funds may buy and
sell futures contracts (and options on such contracts) to manage their
exposure to changes in securities prices and foreign currencies and as an
efficient means of adjusting their overall exposure to certain markets. The
Funds may purchase, sell, or write call and put options on securities,
financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges;
their prices can be highly volatile; using them could lower a Fund's total
return; and the potential loss from the use of futures can exceed a Fund's
initial investment in such contracts.
Operating Policies. Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of a Fund's net
asset value. Options on securities: The total market value of securities
against which a Fund has written call or put options may not exceed 25% of its
total assets. A Fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
Lending of Portfolio Securities. Like other mutual funds, the Funds may lend
securities to broker-dealers, other institutions, or other persons to earn
additional income. The principal risk is the potential insolvency of the
broker-dealer or other borrower. In this event, the Funds could experience
delays in recovering securities and possibly capital losses.
Fundamental Policy. The value of loaned securities may not exceed 331_3% of a
Fund's total assets.
Equity Income Fund
Foreign Securities. The Fund may invest in foreign securities. These include
non-dollar denominated securities traded outside of the U.S. and dollar
denominated securities traded in the U.S. (such as ADRs). Such investments
increase a portfolio's diversification and may enhance return, but they also
involve some special risks such as exposure to potentially adverse local
political and economic developments; nationalization and exchange controls;
potentially lower liquidity and higher volatility; possible problems arising
from accounting, disclosure, settlement, and regulatory practices that differ
from U.S. standards; and the chance that fluctuations in foreign exchange
rates will decrease the investment's value (favorable changes can increase its
value).
Operating Policy. The Fund may invest up to 25% of its total assets in foreign
securities.
High Yield/High Risk Investing. The total return and yield of lower quality
(high yield/high risk) bonds, commonly referred to as "junk bonds," can be
expected to fluctuate more than the total return and yield of higher quality,
shorter-term bonds, but not as much as common stocks. Junk bonds are regarded
as predominantly speculative with respect to the issuer's continuing ability
to meet principal and interest payments.
Operating Policy. The Fund will not purchase a non-investment grade debt
security (or junk bond) if immediately after such purchase the Fund would have
more than 10% of its total assets invested in such securities.
Managing Foreign Currency Risk. Investors in foreign securities may "hedge"
their exposure to potentially unfavorable currency changes by purchasing a
contract to exchange one currency for another on some future date at a
specified exchange rate. In certain circumstances, a "proxy currency" may be
substituted for the currency in which the investment is denominated, a
strategy known as "proxy hedging." Although foreign currency transactions
will be used primarily to protect the Fund's foreign securities from adverse
currency movements relative to the dollar, they involve the risk that
anticipated currency movements will not occur and the Fund's total return
could be reduced.
International Stock Fund
Foreign Currency Transactions. The Fund will normally conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward contracts to purchase or sell foreign currencies. The Fund will
generally not enter into a forward with a term of greater than one year.
The Fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. 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.
Second, when Price-Fleming believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another currency,
it may enter into a forward contract to sell or buy the former foreign
currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Under certain circumstances, the Fund
may commit a substantial portion or the entire value of its portfolio to the
consummation of these contracts. Price-Fleming will consider the effect such a
commitment of its portfolio to forward contracts would have on the investment
program of the Fund and the flexibility of the Fund to purchase additional
securities. Although forward contracts will be used primarily to protect the
Fund from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the Fund's
total return could be adversely affected as a result.
There are certain markets where it is not possible to engage in
effective foreign currency hedging. This may be true, for example, for the
currencies of various countries where the foreign exchange markets are not
sufficiently developed to permit hedging activity to take place.
_____________________________________________________________________________
PERFORMANCE
INFORMATION
Short-Term Bond, Equity Income, and International Stock Funds
Total Return. The Funds may advertise total return figures on both a
cumulative and compound average annual basis and compare them to various
indices (e.g., the S&P 500), other mutual funds or other performance measures.
The total return of the Equity Income Fund will consist primarily of dividend
income and secondarily of capital appreciation (or depreciation).
International Stock Fund's total return consists of the change in its net
asset value per share and the net income it earns. Cumulative total return
compares the amount invested at the beginning of a period with the amount
redeemed at the end of the period, assuming the reinvestment of all dividends
and capital gain distributions. The compound average annual total return
indicates a yearly compound average of each Fund's performance, derived from
the cumulative total return. The annual compound rate of return for each Fund
may vary from any average. Further information about each Fund's performance
is contained in its annual report which is available free of charge.
Yield (Prime Reserve Fund). From time to time the Fund may advertise its
"current yield" and "effective yield." The "current yield" of the Fund refers
to the annualized income generated by an investment in the Fund over a
seven-day period. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "current
yield" because of the compounding effect of this assumed reinvestment.
Yield (Short-Term Bond Fund). The Fund may advertise a yield figure derived by
dividing its net investment income per share (as defined by applicable SEC
regulations) during a 30-day base period by the per-share price on the last
day of the base period.
_____________________________________________________________________________
ORGANIZATION
OF THE FUNDS
The Prime Reserve and Short-Term Bond Funds are Maryland corporations
organized in 1975 and 1983, respectively, and the Equity Income Fund, for tax
and business reasons, was organized as a Massachusetts business trust in 1985.
The International Stock Fund is a series of the T. Rowe Price International
Funds, Inc. (the Corporation) which was originally organized in 1979 as a
Maryland corporation. Effective May 1, 1986, the Corporation converted from a
Maryland corporation to a Massachusetts business trust known as the T. Rowe
Price International Trust (Trust). On May 1, 1990, the Trust converted back to
a Maryland corporation. The Prime Reserve, Short-Term Bond, and Equity Income
Funds and the Corporation 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." Mutual funds, such as
these, enable shareholders to: (1) obtain professional management of
investments, including T. Rowe Price's or Price-Fleming's proprietary
research; (2) diversify their portfolio to a greater degree than would be
generally possible if they were investing as individuals and thereby reduce,
but not eliminate risks, and (3) simplify the recordkeeping and reduce
transaction costs associated with investments.
The Prime Reserve Fund has an Investment Advisory Committee composed of
the following members: Edward A. Wiese, Chairman, Patrice L. Berchtenbreiter,
Paul W. Boltz, Brian E. Burns, Robert P. Campbell, Michael J. Conelius,
Christy M. DiPietro, Laura L. McAree, James M. McDonald, Joan R. Potee and
Robert M. Rubino. Mr. Wiese joined T. Rowe Price in 1984 and has been managing
investments since 1985.
The Short-Term Bond Fund has an Investment Advisory Committee composed
of the following members: Veena A. Kutler, Chairman, Paul W. Boltz, Robert P.
Campbell, George J. Collins, Christy M. DiPietro, Heather R. Landon, Joan R.
Potee, Robert M. Rubino, Edward A. Wiese. The Committee Chairman has
day-to-day responsibility for managing the Fund and works with the Committee
in developing and executing the Fund's investment program. Ms. Kutler has been
Chairman of the Committee since 1992. She has been managing investments since
joining T. Rowe Price in 1987.
The Equity Income Fund has an Investment Advisory Committee composed of
the following members: Brian C. Rogers, Chairman, Thomas H. Broadus, Jr.,
Richard P. Howard, and William J. Stromberg. The Committee Chairman has
day-to-day responsibility for managing the Fund and works with the Committee
in developing and executing the Fund's investment program. Mr. Rogers has been
Chairman of the Committee since 1993. He has been managing investments since
joining T. Rowe Price in 1982.
The International Stock Fund has an investment advisory group that has
day-to-day responsibility for managing the portfolio and developing and
executing the Fund's investment program. The Fund's advisory group is composed
of the following members: Martin G. Wade, Christopher D. Alderson, Peter B.
Askew, Richard J. Bruce, Mark J.T. Edwards, John R. Ford, Robert C. Howe,
James B.M. Seddon, Benedict R.F. Thomas, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 25 years of experience
with the Fleming Group in research, client service and investment management.
(Fleming Group includes Robert Fleming and/or Jardine Fleming Group Limited).
Christopher Alderson joined Price-Fleming in 1988, and has eight years of
experience with the Fleming Group in research and portfolio management. Peter
Askew joined Price-Fleming in 1988 and has 19 years of experience managing
multicurrency fixed income portfolios. Richard Bruce joined Price-Fleming in
1991 and has six years of experience in investment management with the Fleming
Group in Tokyo. Mark Edwards joined Price-Fleming in 1986 and has 13 years of
experience in financial analysis. John Ford joined Price-Fleming in 1982 and
has 14 years of experience with Fleming Group in research and portfolio
management. Robert Howe joined Price-Fleming in 1986 and has 13 years of
experience in economic research, company research and portfolio management.
James Seddon joined Price-Fleming in 1987 and has seven years of experience in
investment management. Benedict Thomas joined Price-Fleming in 1988 and has
five years of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 14 years of experience in equity research, fixed
income research and portfolio management.
Shareholder Rights
Equity Income Fund. The Fund has a Declaration of Trust which permits its
Board of Trustees to issue an unlimited number of full and fractional shares
of a single class. The Declaration of Trust also provides that the Board of
Trustees may issue additional series or classes of shares. Each share
represents an equal proportionate beneficial interest in that 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. Shares have no preemptive or conversion
rights; nor do they have cumulative voting rights. All shares of the Fund have
equal voting rights and may be voted in the election or removal of trustees
and on other matters submitted to the vote of shareholders. The Fund does not
routinely hold annual meetings of shareholders.
International Stock Fund. Currently, the Corporation consists of nine series,
each representing a separate class of shares having different objectives and
investment policies. The nine series and the years in which each was
established are as follows: International Stock Fund, 1979; International Bond
Fund, 1986; International Discovery Fund, 1988; European Stock Fund, New Asia
Fund, and Global Government Bond Fund, 1990; Japan Fund, 1991; Short-Term
Global Income Fund, 1992; and Latin America Fund, 1993. The Corporation's
Charter provides that the Board of Directors may issue additional series of
shares and/or additional classes of shares for each series.
Prime Reserve, Short-Term Bond and International Stock Funds. All shares of
each Fund and the Corporation have equal rights with regard to voting,
redemptions, dividends, distributions, and liquidations. Fractional shares
have voting rights and participate in any distributions and dividends.
Shareholders have no preemptive or conversion rights; nor do they have
cumulative voting rights. When shares of each Fund and the Corporation are
issued, they are fully paid and nonassessable. All shares of the Corporation
may be voted in the election or removal of directors and on other matters
submitted to the vote of shareholders of the Corporation. On matters affecting
an individual series of the Corporation, a separate vote of the particular
series is required. Each Fund and the individual series of the Corporation do
not routinely hold annual meetings of shareholders. However, if shareholders
representing at least 10% of all votes of each Fund or the Corporation
entitled to be cast so desire, they may call a special meeting of shareholders
of each Fund or the Corporation for the purpose of voting on the question of
the removal of any director(s). The total authorized capital stock of the
Prime Reserve and Short-Term Bond Funds and the Corporation consists of
15,000,000,000, 1,000,000,000, and 2,000,000,000 shares, respectively, each
having a par value of $.01. As of December 31, 1993 there were 443,790
shareholders in the Prime Reserve Fund, 54,394 shareholders in the Short-Term
Bond Fund, 319,394 shareholders in the Equity Income Fund, 301,837
shareholders in the International Stock Fund and 1,973,606 shareholders in the
other 53 T. Rowe Price Funds.
Although each Fund is offering only its own shares, it is possible that
a Fund might become liable for any misstatement in the prospectus about
another Fund. The Board of each Fund has considered this factor in approving
the use of a single combined prospectus.
NAV,
PRICING, AND
EFFECTIVE
DATE
Net Asset Value Per Share (NAV). The NAV per share, or share price, for each
Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the New
York Stock Exchange is open. The NAV for the Prime Reserve Fund is also
calculated at 12:00 noon ET every day the Exchange is open. Each Fund's share
price is calculated by subtracting its liabilities from its total assets and
dividing the result by the total number of shares outstanding. Among other
things, each Fund's liabilities include accrued expenses and dividends
payable, and its total assets include portfolio securities valued at market as
well as income accrued but not yet received. The Prime Reserve Fund utilizes
amortized cost value on those securities with remaining maturities of 60 days
or less.
IF YOUR ORDER IS RECEIVED
IN GOOD ORDER BEFORE
4:00 PM ET, YOU WILL
RECEIVE THAT DAY'S NAV.
Purchased shares are priced at that day's NAV if your request is
received before 4:00 pm ET in good order. (See Completing the New Account Form
and Opening a New Account.) If received later than 4:00 pm ET, shares will be
priced at the next business day's NAV.
Redemptions are priced at that day's NAV if your request is received
before 4:00 pm ET in good order at the transfer agent's offices at T. Rowe
Price Account Services, P.O. Box 89000, Baltimore, MD 21289-0220. If received
after 4:00 pm ET, shares will be priced at the next business day's NAV.
Also, we cannot accept requests which specify a particular date for a
purchase or redemption or which specify any special conditions. If your
purchase or redemption request cannot be accepted, you will be notified and
given further instructions.
Exchanges are normally priced in the same manner as purchases and
redemptions. However, if you are exchanging into a bond or money fund and the
release of your exchange proceeds is delayed for the allowable five business
days (see Receiving Your Proceeds), you will not begin to earn dividends until
the sixth business day after the exchange.
Each Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the New York Stock Exchange closes at
a time other than 4:00 pm ET or an emergency exists.
_____________________________________________________________________________
RECEIVING
YOUR
PROCEEDS
Redemption proceeds are mailed to the address or sent by wire or ACH transfer
to the bank account designated on your New Account Form. They are generally
sent the next business day after your redemption request is received in good
order. Proceeds sent by bank wire should be credited to your bank account the
next business day and proceeds sent by ACH transfer should be credited the
second day after the sale. In addition, under certain conditions and when
deemed to be in the best interests of a Fund, redemption proceeds may not be
sent for up to five business days after your request is received to allow for
the orderly liquidation of securities. Requests by mail for wire redemptions
(unless previously authorized) must have a signature guarantee.
_____________________________________________________________________________
DIVIDENDS AND
DISTRIBUTIONS
The Funds distribute all net investment income and capital gains to
shareholders. Dividends for the Prime Reserve and Short-Term Bond Funds are
declared daily and paid monthly. Capital gain distributions, if any, are
normally paid in January and/or March. For the Equity Income Fund, dividends
from net investment income are declared and paid quarterly. Distributions from
capital gains, if any, are normally declared in December. For the
International Stock Fund, dividends and capital gain distributions, if any,
are normally declared and paid in December. However, dividends from net
investment income for the Equity Income Fund will be declared and paid
quarterly. Dividends and distributions declared by the Funds will be
reinvested unless you choose an alternative payment option on the New Account
Form. Dividends not reinvested are paid by check or transmitted to your bank
account via ACH.
If the U.S. Postal Service cannot deliver your check, or if your check remains
uncashed for six months, each Fund reserves the right to reinvest your
distribution check in your account at the then current NAV and to reinvest all
subsequent distributions in shares of the Fund.
Purchases (Prime Reserve and Short-Term Bond Funds). Each day, the Prime
Reserve Fund declares a dividend to shareholders of record as of 12:00 noon ET
on that day; and the Short-Term Bond Fund declares a dividend to shareholders
of record as of 4:00 pm ET on the previous day. For the Prime Reserve Fund,
wire purchase orders effective before 12:00 noon ET receive the dividend for
that day; other purchase orders receive the dividend for the next business day
after receipt. For the Short-Term Bond Fund, you will begin to earn dividends
on the first business day after shares are purchased unless shares were not
paid for, in which case dividends are not earned until the next business day
after payment is received.
Redemptions (Prime Reserve and Short-Term Bond Funds). 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.
_____________________________________________________________________________
TAXES
FORM 1099-DIV
WILL BE MAILED
TO YOU IN JANUARY.
Dividends and Distributions. In January, the Funds will mail you Form 1099-DIV
indicating the federal tax status of your dividends and capital gain
distributions. Generally, dividends and distributions are taxable in the year
they are paid. However, any dividends and distributions paid in January but
declared during the prior three months are taxable in the year they are
declared. Dividends and distributions are taxable to you regardless of whether
they are taken in cash or reinvested. Dividends and short-term capital gain
distributions are taxable as ordinary income; long-term capital gain
distributions are taxable as long-term capital gains. The capital gain holding
period is determined by the length of time a Fund has held the securities, not
the length of time you owned Fund shares.
Shares Sold (Excluding Prime Reserve Fund). A redemption or exchange of Fund
shares is treated as a sale for tax purposes which will result in a short or
long-term capital gain or loss, depending on how long you have owned the
shares. In January, the Funds will mail you Form 1099-B indicating the trade
date and proceeds from all sales and exchanges.
Undistributed Income and Gains (Excluding Prime Reserve Fund). At the time of
purchase, the share price of each Fund may reflect undistributed income (other
than the Short-Term Bond Fund), capital gains or unrealized appreciation of
securities. Any income or capital gains from these amounts which are later
distributed to you are fully taxable.
Tax-Qualified Retirement Plans. Tax-qualified retirement plans generally will
not be subject to federal tax liability on either distributions from each Fund
or redemption of shares of the Funds. Rather, participants in such plans will
be taxed when they begin taking distributions from the plans.
Foreign Transactions (Short-Term Bond, Equity Income, and International Stock
Funds). Distributions resulting from the sale of certain foreign currencies
and debt securities, to the extent of foreign exchange gains, are taxed as
ordinary income or loss. If these transactions result in reducing the
Short-Term Bond Fund's net income, a portion of the dividends may be
classified as a return of capital (which lowers your tax base). If any of the
Funds pay nonrefundable taxes to foreign governments during the year, the
taxes will reduce that Fund's dividends, and with respect to the International
Stock Fund will still be included in your taxable income. However, you may be
able to claim an offsetting credit or deduction on your tax return for your
portion of foreign taxes paid by the International Stock Fund.
Corporations (Equity Income and International Stock Funds). All or part of the
Equity Income Fund's dividends will be eligible for the 70% deduction for
dividends received by corporations; however, none of the International Stock
Fund's dividends will be eligible for this deduction.
International Stock Fund
Passive Foreign Investment Companies. The Fund may purchase the securities of
certain foreign investment funds or trusts called passive foreign investment
companies. Although the situation could change at any time, such funds are the
only or primary means by which the Fund may invest in certain countries. In
addition to bearing their proportionate share of the fund's expenses
(management fees and operating expenses) shareholders will also bear
indirectly similar expenses of such funds. Capital gains on the sale of such
holdings will be deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition, the Fund may be subject to corporate income
tax and an interest charge on certain dividends and capital gains earned from
these investments, regardless of whether such income and gains are distributed
to shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such gains
will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
Tax Consequences of Hedging. Under applicable tax law, the Fund may be
required to limit its gains from hedging in foreign currency forwards, futures
and options. Although it is anticipated the Fund will comply with such limits,
the extent to which these limits apply is subject to tax regulations which
have not yet been issued. Hedging may also result in the application of the
mark-to-market straddle provisions of the Internal Revenue Code. These
provisions could result in an increase (or decrease) in the amount of taxable
dividends paid by the Fund as well as affect whether dividends paid by the
Fund are classified as capital gains or ordinary income.
_____________________________________________________________________________
MANAGEMENT
OF THE FUNDS
Investment Managers. T. Rowe Price is responsible for selection and management
of the Prime Reserve, Short-Term Bond, and Equity Income Funds' portfolio
investments. T. Rowe Price serves as investment manager to a variety of
individual and institutional investors, including limited and real estate
partnerships and other mutual funds.
Price-Fleming is responsible for selection and management of the
International Stock Fund's portfolio investments. As of December 31, 1993,
Price-Fleming managed approximately $15.4 billion of assets, substantially all
of which were invested in foreign securities. Price-Fleming's U.S. office is
located at 100 East Pratt Street, Baltimore, Maryland 21202.
PRICE-FLEMING HAS OFFICES
IN BALTIMORE, LONDON,
TOKYO, AND HONG KONG.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture
between T. Rowe Price and Robert Fleming Holdings Limited (Flemings). Flemings
is a diversified investment organization which participates in a global
network of regional investment offices in New York, London, Zurich, Geneva,
Tokyo, Hong Kong, Manila, Kuala Lumpur, South Korea, and Taiwan.
T. Rowe Price was incorporated in Maryland in 1947 as successor to the
investment counseling business founded by the late Thomas Rowe Price, Jr., in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. As of December 31, 1992,
Flemings managed the U.S. equivalent of approximately $45 billion.
T. Rowe Price, Flemings, and Jardine Fleming are owners of Price-Fleming. The
common stock of Price-Fleming is 50% owned by a wholly-owned subsidiary of T.
Rowe Price, 25% by a subsidiary of Flemings and 25% by Jardine Fleming Group
Limited (Jardine Fleming). (Half of Jardine Fleming is owned by Flemings and
half by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to
elect a majority of the board of directors of Price-Fleming, and Flemings has
the right to elect the remaining directors, one of whom will be nominated by
Jardine Fleming.
Research and Administration. Certain administrative support is provided by T.
Rowe Price which receives from Price-Fleming a fee of .15% of the market value
of all assets in equity accounts, .15% of the market value of all assets in
active fixed income accounts and .035% of the market value of all assets in
passive fixed income accounts under Price-Fleming's management. Additional
investment research and administrative support for equity investments is
provided to Price-Fleming by Fleming Investment Management Limited (FIM) and
Jardine Fleming Investment Holdings Limited (JFIH) for which each receives
from Price-Fleming a fee of .075% of the market value of all assets in equity
accounts under Price-Fleming's management. FIM and JFIH are wholly-owned
subsidiaries of Flemings and Jardine Fleming, respectively. JFIH receives a
fee of .075% of the market value of all assets in active fixed income accounts
and .0175% of such market value in passive fixed income accounts under
Price-Fleming's management.
Board of Directors/Trustees. The management of each Fund's business and
affairs is the responsibility of each Fund's Board of Directors/Trustees.
Portfolio Transactions. Decisions with respect to the purchase and sale of
each Fund's portfolio securities are made by T. Rowe Price, with respect to
the Prime Reserve, Short-Term Bond, and Equity Income Funds, and
Price-Fleming, with respect to the International Stock Fund. The Board of
Directors of the Short-Term Bond Fund and the Board of Trustees of the Equity
Income Fund have authorized T. Rowe Price to utilize certain brokers
indirectly related to T. Rowe Price in the capacity of broker in connection
with the execution of each Fund's portfolio transactions. The International
Stock Fund's Board of Directors has authorized Price-Fleming to utilize
affiliates of Flemings and Jardine Fleming in the capacity of broker in
connection with the execution of the Fund's portfolio transactions if
Price-Fleming believes that doing so would result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained by the Fund.
Investment Services. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, is the distributor for the Funds as well as all
other T. Rowe Price Funds.
Transfer and Dividend Disbursing Agent, Shareholder Servicing and
Administrative. TRP Services, a wholly-owned subsidiary of T. Rowe Price,
serves the Funds as transfer and dividend disbursing agent. T. Rowe Price
Retirement Plan Services, Inc., a wholly-owned subsidiary of T. Rowe Price,
performs subaccounting and recordkeeping services for shareholder accounts in
certain retirement plans investing in the Price Funds. T. Rowe Price
calculates the daily share price and maintains the portfolio and general
accounting records of the Funds. The address for TRP Services and T. Rowe
Price Retirement Plan Services, Inc. is 100 East Pratt Street, Baltimore,
Maryland 21202.
_____________________________________________________________________________
EXPENSES AND
MANAGEMENT
FEE
Each Fund bears all expenses of its operations other than those incurred by T.
Rowe Price or Price-Fleming under its Investment Management Agreement with T.
Rowe Price or Price-Fleming. Fund expenses include: the management fee;
shareholder servicing fees and expenses; custodian and accounting fees and
expenses; legal and auditing fees; expenses of preparing and printing
prospectuses and shareholder reports; registration fees and expenses; proxy
and annual meeting expenses, if any; and directors'/trustees' fees and
expenses.
Management Fee. The Funds pay T. Rowe Price or Price-Fleming an investment
management fee consisting of an Individual Fund Fee and a Group Fee. See
Summary of Funds' Fees and Expenses for the Individual Fund Fee. The Group Fee
varies and is based on the combined net assets of all mutual funds sponsored
and managed by T. Rowe Price and Price-Fleming, excluding T. Rowe Price
Spectrum Fund, Inc., and any institutional or private label mutual funds, and
distributed by T. Rowe Price Investment Services, Inc.
Each Fund pays, as its portion of the Group Fee, an amount equal to the
ratio of its daily net assets to the daily net assets of all the Price Funds.
The table below shows the annual Group Fee rate at various asset levels of the
combined Price Funds:
0.480% First $1 billion 0.350% Next $2 billion
0.450% Next $1 billion 0.340% Next $5 billion
0.420% Next $1 billion 0.330% Next $10 billion
0.390% Next $1 billion 0.320% Next $10 billion
0.370% Next $1 billion 0.310% Thereafter
0.360% Next $2 billion
Based on combined Price Funds' assets of approximately $34.7 billion at
December 31, 1993, the Group Fee was 0.35%.
_____________________________________________________________________________
SHAREHOLDER
SERVICES
The following is a brief summary of services available to shareholders in the
T. Rowe Price Funds, some of which may be restricted or unavailable to
retirement plan accounts. You must authorize most of these services on a New
Account or Shareholder Services Form. Services may be modified or withdrawn at
any time without notice. Please verify all transactions on your confirmation
statements promptly after receiving them. Any discrepancies must be reported
to Shareholder Services immediately.
Automatic Asset Builder. You can have us move $50 or more on the same day each
month from your bank account or invest $50 or more from your paycheck into any
T. Rowe Price Fund.
Checkwriting Service (Prime Reserve and Short-Term Bond Funds). There is no
charge for this service and you may write an unlimited number of checks.
Minimum check amount is $500. Remember that a checkwriting redemption in the
Short-Term Bond Fund will be treated as a capital gain or loss transaction for
tax purposes.
This service is subject to State Street Bank's rules and regulations
and is governed by Massachusetts Uniform Commercial Code. Stop payment
instructions must be given by calling Shareholder Services.
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
Discount Brokerage Service. You can trade stocks, bonds, options, CDs,
Treasury Bills, and precious metals at substantial savings through our
Discount Brokerage Service. Call Investor Services for more information.
Exchange Service. You can move money from one account to an existing
identically registered account or open a new identically registered account.
Remember that, for tax purposes, an exchange is treated as a redemption and a
new purchase. Exchanges into a state tax-free fund are limited to investors
residing in states where those funds are qualified for sale. Some of the T.
Rowe Price Funds may impose a redemption fee of .50-2%, payable to such Funds,
on shares held for less than twelve months, or in some Funds, six months.
Retirement Plans. For details on IRAs, please call Investor Services at
1-800-638-5660. For details on all other retirement plans, please call our
Trust Company at 1-800-492-7670.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Telephone Services. The following services are explained fully in the Services
Guide, which is mailed to new T. Rowe Price investors. If you don't have a
copy, please call Shareholder Services. (All telephone calls to Shareholder
Services and Investor Services are recorded in order to protect you, the Fund,
and its agents.)
24-Hour Account Information. Tele*Access(registered trademark) provides
information on yields, prices, latest dividends, account balances, and
last transaction, as well as the ability to request prospectuses and
account forms, and initiate purchase, redemption and exchange orders
(if you have established Telephone Services). Just call 1-800-638-2587
and press the appropriate codes into your touch-tone phone.
PC*Access(registered trademark) provides the same information as
Tele*Access, but on a personal computer.
Electronic Transfers. We offer three free methods for purchasing or
redeeming Fund shares in amounts of $100 to $100,000 through ACH
transfers between your bank and Fund accounts:
- By calling Shareholder Services during business hours
(Tele-Connect(registered trademark));
- By touch-tone phone any day, any time (Tele*Access);
- By personal computer any day, any time (PC*Access).
If your bank checking and Fund account are not identically registered,
you will need a signature guarantee to establish this service.
Wire Transfers. Wire transfers can be processed through bank wires (a
$5 charge applies to redemption amounts under $5,000, and your bank may
charge you for receiving wires). While this is usually the quickest
transfer method, the Fund reserves the right to temporarily suspend
wires under unusual circumstances.
_____________________________________________________________________________
CONDITIONS
OF YOUR
PURCHASE
Account Balance. If your account drops below $1,000 for three months or more,
each Fund has the right to close your account, after giving 60 days' notice,
unless you make additional investments to bring your account value to $1,000
or more.
Broker-Dealers. Purchases or redemptions through broker-dealers, banks, and
other institutions may be subject to service fees imposed by those entities.
No such fees are charged by T. Rowe Price Investment Services or the Funds if
shares are purchased or redeemed directly from the Funds.
Excessive Trading and Exchange Limitations. To protect each Fund's
shareholders against disruptions in portfolio management which might occur as
a result of too frequent buy and sell activity and to minimize Fund expenses
associated with such transaction activity, each Fund prohibits excessive
trading in any account (or group of accounts managed by the same person).
Within any 120 consecutive-day period, investors may not exchange between
Price Funds more than twice or buy and sell the Price Funds more than once, if
the transactions involve substantial assets or a substantial portion of the
assets in the account or accounts. This policy is applied on a multi-fund
basis. Any transactions above and beyond these guidelines will be considered
to be excessive trading, and the investor may be prohibited from making
additional purchases or exercising the exchange privilege.
This policy does not apply to exchanges solely between, or purchases and sales
solely of, the Price Money Funds, nor does it apply to simple redemptions from
any Fund.
Nonpayment. If your check, wire or ACH transfer does not clear, or if payment
is not received for any telephone purchase, the transaction will be canceled
and you will be responsible for any loss the Funds or Investment Services
incurs. If you are already a shareholder, each Fund can redeem shares from any
identically registered account in that Fund or any other T. Rowe Price Fund as
reimbursement for any loss incurred. You may be prohibited or restricted from
making future purchases in any of the T. Rowe Price Funds.
U.S. Dollars. All purchases must be paid for in U.S. dollars, and checks must
be drawn on U.S. banks.
Redemptions in Excess of $250,000. Redemption proceeds are normally paid in
cash. However, if you redeem more than $250,000, or 1% of a Fund's net assets,
in any 90-day period, the Fund may in its discretion: (1) pay the difference
between the redemption amount and the lesser of these two figures with
securities of the Fund or (2) delay the transmission of your proceeds for up
to five business days after your request is received.
Signature Guarantees. A signature guarantee is designed to protect you and the
Funds by verifying your signature. You will need one to:
(1) Establish certain services after the account is opened.
(2) Redeem over $50,000 by written request (unless you have
authorized Telephone Services).
(3) Redeem shares when proceeds are: (i) being mailed to an address
other than the address of record, (ii) made payable to other than
the registered owner(s), or (iii) being sent to a bank account
other than the bank account listed on your fund account.
(4) Transfer shares to another owner.
(5) Send us written instructions asking us to wire redemption
proceeds (unless previously authorized).
(6) Establish Electronic Transfers when your bank checking and fund
account are not identically registered.
These requirements may be waived or modified in certain instances.
Acceptable guarantors are all eligible guarantor institutions as
defined by the Securities Exchange Act of 1934 such as: commercial banks which
are FDIC members, trust companies, firms which are members of a domestic stock
exchange, and foreign branches of any of the above. We cannot accept
guarantees from institutions or individuals who do not provide reimbursement
in the case of fraud, such as notaries public.
Telephone Exchange and Redemption. Telephone exchange and redemption are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. The Funds use
reasonable procedures (including shareholder identity verification) to confirm
that instructions given by telephone are genuine. If these procedures are not
followed, it is the opinion of certain regulatory agencies that a Fund may be
liable for any losses that may result from acting on the instructions given.
All conversations are recorded, and a confirmation is sent within five
business days after the telephone transaction.
Ten-Day Hold. The mailing of proceeds for redemption requests involving any
shares purchased by personal, corporate or government check, or ACH transfer
is generally subject to a 10-calendar day delay to allow the check or transfer
to clear. The 10-day clearing period does not affect the trade date on which
your purchase or redemption order is priced, or any dividends and capital gain
distributions to which you may be entitled through the date of redemption. 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. Prime Reserve and Short-Term Bond Funds'
checkwriting redemption checks received during the 10-day clearing period will
be rejected and marked "uncollected." The 10-day hold does not apply to
purchases made by wire, Automatic Asset Builder-Paycheck, or cashier's,
treasurer's, or certified checks.
Each Fund and its agents reserve the right to: (1) reject any purchase or
exchange, cancel any purchase due to nonpayment, or reject any exchange or
redemption where the Fund has not received payment; (2) waive or lower the
investment minimums; (3) accept initial purchases by telephone or mailgram;
(4) waive the limit on subsequent purchases by telephone; (5) reject any
purchase or exchange prior to receipt of the confirmation statement; (6)
redeem your account (see Tax Identification Number); (7) modify the conditions
of purchase at any time; and (8) reject any check not made directly payable to
the Fund or T. Rowe Price (call Shareholder Services for more information).
_____________________________________________________________________________
COMPLETING THE
NEW ACCOUNT
FORM
Tax Identification Number. We must have your correct social security or
corporate tax identification number and 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. You also will be prohibited from opening another
account by exchange. 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.
YOU MUST PROVIDE YOUR
TAX ID NUMBER AND SIGN
THE NEW ACCOUNT FORM.
Unless you otherwise request, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to those shareholders who have requested that their accounts be
combined with someone else's for financial reporting.
Account Registration. If you own other T. Rowe Price Funds, make certain the
registration (name and account type) is identical to your other funds for easy
exchange. Remember to sign the form exactly as the name appears in the
registration section.
Services. By signing up for services on the New Account Form, rather than
after the account is opened, you will avoid having to complete a separate form
and obtain a signature guarantee (see Conditions of Your Purchase).
_____________________________________________________________________________
OPENING A NEW
ACCOUNT
Minimum initial investment: $2,500; $1,000 for retirement plans and gifts or
transfers to minors (UGMA/UTMA) accounts; $50 per month for Automatic Asset
Builder accounts-see Shareholder Services
CHECKS PAYABLE TO
T. ROWE PRICE FUNDS.
By Mail Send your New Account Form and check to:
Regular Mail Mailgram, Express, Registered,
or Certified Mail
T. Rowe Price T. Rowe Price Account Services
Account Services Services
P.O. Box 17300 10090 Red Run Boulevard
Baltimore, MD 21298-9353 Owings Mills, MD 21117
_____________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
By Wire Call Investor Services for an account number and use Wire
Address below. Then, complete the New Account Form and mail it
to one of the above addresses. (Not applicable to retirement
plans.)
Wire Address Morgan Guaranty Trust Company
(to give to your bank): of New York
ABA# 021000238
T. Rowe Price (fund
name)/AC-00153938
Account name(s) and account number
_____________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Exchange Call 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. See Excessive
Trading and Exchange Limitations under Conditions of Your
Purchase.
_____________________________________________________________________________
In Person Drop off your New Account Form and obtain a receipt at a T.
Rowe Price Investor Center.
101 East Lombard Street T. Rowe Price Financial Center
First Floor First Floor
Baltimore, MD 10090 Red Run Boulevard
Owings Mills, MD
Farragut Square ARCO Tower
First Floor 31st Floor
900 17th Street, N.W. 515 South Flower Street
Washington, DC Los Angeles, CA
_____________________________________________________________________________
PURCHASING
ADDITIONAL
SHARES
Minimum: $100 ($50 for retirement plans and Automatic Asset Builder)
By Wire Call Shareholder Services or use the Wire Address (see Opening
a New Account).
_____________________________________________________________________________
By Mail Indicate your account number and the Fund name on your check.
Mail the check to us at the address below either with a
reinvestment slip or a note indicating the Fund and account
number in which you wish to purchase shares.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD 21289-1500
_____________________________________________________________________________
By ACH Use Tele*Access, PC*Access or call Shareholder Services (if you
Transfer have established Telephone Services) for ACH transfers.
_____________________________________________________________________________
By Automatic Fill out the Automatic Asset Builder section on the New Account
Asset Builder or Shareholder Services Form.
_____________________________________________________________________________
Minimum: $5,000
By Phone Call Shareholder Services.
_____________________________________________________________________________
EXCHANGING
AND REDEEMING
SHARES
By Phone Call Shareholder Services. If you find our phones busy during
unusually volatile markets, please consider placing your order
by express mail, mailgram, Tele*Access or PC*Access if you have
authorized Telephone Services. For exchange policy, see
Excessive Trading and Exchange Limitations under Conditions of
Your Purchase.
Redemption proceeds can be mailed, sent by ACH transfer, or
wired to your bank. The Funds charge a $5.00 fee for wire
redemptions under $5,000, subject to change without notice.
Your bank may also charge you for receiving wires.
_____________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Mail Indicate account name(s) and numbers, fund name(s), and
exchange or redemption amount. For exchanges, indicate the
accounts you are exchanging from and to along with the amount.
We require the signature of all owners exactly as registered,
and possibly a signature guarantee (see Signature Guarantees
under Conditions of Your Purchase).
T. ROWE PRICE
TRUST COMPANY
1-800-492-7670
1-410-625-6585
Note: Distributions from retirement accounts, including IRAs,
must be in writing. Please call Shareholder Services to obtain
an IRA Distribution Request Form. For employer-sponsored
retirement accounts, call T. Rowe Price Trust Company or your
plan administrator for instructions. Shareholders holding
previously issued certificates must conduct transactions by
mail. If you lose a stock certificate, you may incur an expense
to replace it. Call Shareholder Services for further
information.
Mailing addresses:
Regular Mail Mailgram, Express, Registered,
or Certified Mail
Non-Retirement
and IRA Accounts All Accounts
________________ ____________
T. Rowe Price Account Services T. Rowe Price Account Services
P.O. Box 89000 10090 Red Run Boulevard
Baltimore, MD 21289-0220 Owings Mills, MD 21117
Employer-Sponsored
Retirement Accounts
___________________
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
_____________________________________________________________________________
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
To Open an Account: PROSPECTUS
Investor Services T. ROWE PRICE
1-800-638-5660 PRIME RESERVE FUND
547-2308 in Baltimore SHORT-TERM BOND FUND
EQUITY INCOME FUND
Yields & Prices: INTERNATIONAL STOCK FUND
Tele*AccessR
24 hours, 7 days a week
1-800-638-2587
625-7676 in Baltimore
Existing Account:
Shareholder Services
1-800-225-5132
625-6500 in Baltimore
Investor Centers:
101 East Lombard Street
First Floor
Baltimore, Maryland
Farragut Square
First Floor
900 17th Street, NW
Washington, D.C.
T. Rowe Price Financial Center
First Floor
10090 Red Run Boulevard
Owings Mills, Maryland
ARCO Tower
31st Floor
515 South Flower Street
Los Angeles, California
T. ROWE PRICE May 1, 1994
Invest With ConfidenceR
<PAGE>
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price Prime Reserve Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe Price Equity Income Fund
T. Rowe Price International Stock Fund
(the "Funds")
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Funds' prospectus dated May 1, 1994, which may
be obtained from T. Rowe Price Investment Services, Inc., 100 East Pratt
Street, Baltimore, Maryland 21202.
The date of this Statement of Additional Information is May 1, 1994.
<PAGE>
PAGE 3
TABLE OF CONTENTS
Page Page
Adjustable Rate Mortgages . . . . . .3 Investment Restrictions . . . . .35
Adjustable Rate Securities. . . . . 10 Investments in Debt Securities. . 4
Asset-Backed Securities . . . . . . .7 Legal Counsel . . . . . . . . . .87
Covered Call and Put Options. . . . 22 Lending of Portfolio Securities .20
Custodian . . . . . . . . . . . . . 54 Management of Funds . . . . . . .44
Dealer Options. . . . . . . . . . . 26 Net Asset Value Per Share . . . .70
Distributor for Funds . . . . . . . 54 Organization of the Funds . . . .84
Dividends . . . . . . . . . . . . . 71 Portfolio Transactions. . . . . .55
Federal and State Registration of Shares. . . . . . . . . . . . . . . . .87
Pricing of Securities . . . . . . . 68
Foreign Currency Transactions . . . 18 Principal Holders of Securities .50
Foreign Securities. . . . . . . . . 14 Ratings of Commercial Paper . . .89
Futures Contracts . . . . . . . . . 27 Ratings of Corporate Debt Securities89
Illiquid or Restricted Securities . 17 Repurchase Agreements . . . . . .21
Independent Accountants . . . . . . 88 Risk Factors. . . . . . . . . . .43
Industry Concentration. . . . . . . 11 Tax Status. . . . . . . . . . . .71
Investment Management Services. . . 50 Warrants. . . . . . . . . . . . .12
Investment Objectives and Policies. .2 When-Issued Securities. . . . . .11
Investment Performance. . . . . . . 74 Yield Information . . . . . . . .73
Investment Programs . . . . . . . . .2
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in the prospectus. The
International Stock Fund's investment objective is a fundamental policy. The
Prime Reserve, Short-Term Bond, and Equity Income Funds will not make a
material change in their investment objectives without obtaining shareholder
approval. Unless otherwise specified, the investment program and restrictions
of each Fund are not fundamental policies. The operating policies of each
Fund are subject to change by its Board of Directors/Trustees without
shareholder approval. However, shareholders will be notified of a material
change in an operating policy. The fundamental policies of each Fund 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.
INVESTMENT PROGRAMS
In addition to the investments described in each fund's prospectus, each
Fund may invest in the following:
<PAGE>
PAGE 4
Prime Reserve Fund
Adjustable Rate Securities
Generally, the maturity of a money market 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. However,
certain 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 may take the form
of domestic certificates of deposit which provide for the adjustment of
their interest rate on set dates and which, upon adjustment, can
reasonably be expected to have a market value which approximates its par
value. A variable rate instrument, the principal amount of which is
scheduled to be paid in 397 calendar days or less, is deemed to have a
maturity equal to the period remaining until the next readjustment of
the interest rate. A variable rate instrument which is subject to a
demand feature entitles the purchaser to receive the principal amount of
the underlying security or securities, either (i) upon notice of no more
than 30 days, or (ii) at specified intervals not exceeding 397 calendar
days and upon no more than 30 days' notice, 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.
Floating Rate Securities. Floating rate may take the form of corporate
or bank holding company notes or Eurodollar certificates of deposit.
These instruments 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. 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. 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.
There are, of course, other types of securities that are, or may become,
available, which are similar to the foregoing.
Prime Money Market Securities Defined. Prime money market securities
are those which are described as First Tier Securities under Rule 2a-7 of the
Investment Company Act of 1940. These include any security with a remaining
maturity of 397 days or less that is rated (or that has been issued by an
issuer that is rated with respect to a class of short-term debt obligations,
or any security within that class that is comparable in priority and security
with the security) by any two nationally recognized statistical rating
organizations (NRSROs) (or if only one NRSRO has issued a rating, that NRSRO)
in the highest rating category for short-term debt obligations (within which
there may be sub-categories). First Tier Securities also include unrated
PAGE 5
securities comparable in quality to rated securities, as determined by T. Rowe
Price under the supervision of the Fund's Board of Directors.
Investments in Debt Securities
Prime Reserve and Short-Term Bond Funds
The money market securities that the Fund may invest in are limited to
those described below. At least 95% of the Prime Reserve Fund's total assets
will at all times be maintained in prime money market instruments as defined
above.
U.S. Government Obligations. Bills, notes, bonds, and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; and 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 will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation,
and (iii) in the case of foreign banks, the security is, in the opinion of the
Fund's investment manager, T. Rowe Price Associates, Inc. ("T. Rowe Price"),
of an investment quality comparable with other debt securities which may be
purchased by the Fund. These limitations do not prohibit investments in
securities issued by foreign branches of U.S. banks, provided such U.S. banks
meet the foregoing requirements.
Short-term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates. The Short-Term Bond Fund will only invest in short-term
corporate obligations which are rated A or better by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"), or, if not
rated, are of equivalent quality as determined by T. Rowe Price.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. The Short-Term Bond Fund will
only invest in commercial paper within the top three ratings of either Moody's
PAGE 6
or S&P or which, in the opinion of T. Rowe Price, is of equivalent investment
quality. Certain notes may have floating or variable rates.
Canadian Government Securities. Issued or guaranteed by the Government
of Canada, a Province of Canada, or an instrumentality or political
subdivision thereof. However, the Fund will only purchase these securities if
they are marketable and payable in U.S. dollars. The Fund will not purchase
any such security if, as a result, more than 10% of the value of its total
assets would be invested in such securities.
Savings and Loan Obligations. Negotiable certificates of deposit and
other short-term debt obligations of savings and loan associations. The Fund
will not invest in any security issued by a savings and loan association
unless: (i) the savings and loan association has total assets of at least $1
billion, or, in the case of savings and loan associations which do not have
total assets of at least $1 billion, the aggregate investment made in any one
savings and loan association is limited to $100,000 and the principal amount
of such investment is insured in full by the Federal Deposit Insurance
Corporation; and (ii) the savings and loan association issuing the security is
a member of the Federal Home Loan Bank System.
The Fund will not purchase any security of a small bank or savings and
loan association which is not readily marketable if, as a result, more than
10% of the value of its net assets would be invested in such securities, other
illiquid securities, or securities without readily available market
quotations, such as restricted securities and repurchase agreements maturing
in more than seven days. (See Investment Restriction (5) on page 35 for the
Prime Reserve Fund and (2) on page 39 for the Short-Term Bond Fund.)
Short-Term Bond Fund
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although
certain classes of CMOs have priority over others with respect to the receipt
of prepayments on the mortgages. Therefore, depending on the type of CMOs in
which a Fund invests, the investment may be subject to a greater or lesser
risk of prepayment than other types of mortgage-related securities.
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interest in a pool of mortgages. Principal and interest payments
made on the mortgages in the underlying mortgage pool are passed through to
the Fund. Unscheduled prepayments of principal shorten the securities'
weighted average life and may lower their total return. (When a mortgage in
the underlying mortgage pool is prepaid, an unscheduled principal prepayment
is passed through to the Fund. This principal is returned to the Fund at par.
As a result, if a mortgage security were trading at a premium, its total
return would be lowered by prepayments, and if a mortgage security were
trading at a discount, its total return would be increased by prepayments.)
The value of these securities also may change because of changes in the
market's perception of the creditworthiness of the federal agency that issued
them. In addition, the mortgage securities market in general may be adversely
affected by changes in governmental regulation or tax policies.
PAGE 7
Stripped Mortgage Securities. The Fund may invest up to 10% of its
total assets in stripped mortgage securities. With such securities, the
principal and interest payments on a pool of mortgages in a CMO are separated
or "stripped" to create two classes of securities. In general, the interest-
only, or "IO" class of stripped securities, receives all interest and no
principal payments, while the principal-only, or "PO" class, is entitled to
receive all principal and no interest payments. Stripped mortgage securities
can be extremely volatile and are expected to be acutely sensitive to
fluctuations in interest rates and prepayment rates on the mortgages
underlying stripped securities. The Fund will invest in IO securities
principally for the purpose of reducing, or hedging against, the decline in
principal value of the Fund's securities which may occur as a result of
increasing interest rates. IOs may also be purchased in anticipation of
declining prepayment rates. An unanticipated increase in the rate of
prepayments will adversely affect the return on IOs. The Fund may invest in
POs for the purpose of offsetting the potential adverse impact on the value of
premium mortgage securities held by the Fund as a result of decreasing
interest rates (which will increase prepayment rates). The Fund may also
purchase POs for the purpose of taking advantage of an anticipated decline in
interest rates. An increase in interest rates or a slowing of prepayment
rates can adversely affect the return on POs. There is, of course, no
guarantee the Fund's use of these investments will be successful and the
Fund's total return could be adversely affected as a result.
The Fund may also invest in the securities of certain supranational
entities, such as the International Development Bank.
Adjustable Rate Securities. Certain 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. 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. A variable rate instrument which is subject to a demand feature
entitles the purchaser to receive the principal amount of the underlying
security or securities, either (i) upon notice of no more than 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.
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. 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. Floating rate instruments with demand
PAGE 8
features are deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
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.
Asset-Backed Securities
Prime Reserve and Short-Term Bond Funds
The Fund may invest a portion of its assets in debt obligations known as
asset-backed securities. The credit quality of most asset-backed securities
depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator or any other affiliated entities and the amount
and quality of any credit support provided to the securities. The rate of
principal payment on asset-backed securities generally depends on the rate of
principal payments received on the underlying assets which in turn may be
affected by a variety of economic and other factors. As a result, the yield
on any asset-backed security is difficult to predict with precision and actual
yield to maturity may be more or less than the anticipated yield to maturity.
Asset-backed securities may be classified either as pass-through certificates
or collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support".
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the related
asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed securities
are issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
PAGE 9
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support".
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of
each other and from those of the underlying assets. Examples include so-
called "strips" (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-asset-
backed securities, such as floating interest rates (i.e., interest rates which
adjust as a specified benchmark changes) or scheduled amortization of
principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Fund may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that scheduled payments on the underlying pool are
made in a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising out of the
structure of the transaction include "senior-subordinated securities"
(multiple class asset-backed securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have "reserve funds"
(where cash or investments, sometimes funded from a portion of the initial
payments on the underlying assets, are held in reserve against future losses)
or that have been "overcollateralized" (where the scheduled payments on, or
the principal amount of, the underlying assets substantially exceeds that
required to make payment of the asset-backed securities and pay any servicing
or other fees). The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that
anticipated could adversely affect the return on an investment in an asset-
backed security.
Automobile Receivable Securities. The Fund may invest in Asset-Backed
Securities which are backed by receivables from motor vehicle installment
sales contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities"). Since installment sales contracts for motor vehicles
or installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
PAGE 10
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not
amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the Automobile Receivable Securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle owner the
right to assert against the holder of the owner's Automobile Contract certain
defenses such owner would have against the seller of the motor vehicle. The
assertion of such defenses could reduce payments on the Automobile Receivable
Securities.
Credit Card Receivable Securities. The Fund may invest in Asset Backed
Securities backed by receivables from revolving credit card agreements
("Credit Card Receivable Securities"). Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such securities
provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder and principal
payments received on such Accounts are used to fund the transfer to the pool
of assets supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events which signal
a potential deterioration in the quality of the assets backing the security,
such as the imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying accounts during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other Asset
Backed Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. T. Rowe Price anticipates that Asset Backed Securities
backed by assets other than those described above will be issued in the
PAGE 11
future. The Fund may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing.
Short-Term Bond Fund
Adjustable Rate Mortgages
The adjustable rate mortgage (ARM) securities, which the Fund will
purchase will be collateralized by adjustable rate, rather than fixed rate,
mortgages.
ARMs, like fixed rate mortgages, have a specified maturity date, and the
principal amount of the mortgage is repaid over the life of the mortgage.
Unlike fixed rate mortgages, the interest rate on ARMs is adjusted at regular
intervals based on a specified, published interest rate "index" such as a
Treasury rate index. The new rate is determined by adding a specific interest
amount, the "margin," to the interest rate of the index. Investment in ARM
securities allows the Fund to participate in changing interest rate levels
through regular adjustments in the coupons of the underlying mortgages,
resulting in more variable current income and lower price volatility than
longer term fixed rate mortgage securities. The ARM securities in which the
Fund expects to invest will generally adjust their interest rates at regular
intervals of one year or less. ARM securities are a less effective means of
locking in long-term rates than fixed rate mortgages since the income from
adjustable rate mortgages will increase during periods of rising interest
rates and decline during periods of falling rates.
Characteristics of Adjustable Rate Mortgage Securities. The interest
rates paid on the mortgages underlying ARM securities are reset at regular
intervals by adding an interest rate margin to a specified interest rate
index. There are three main categories of indices: those based on U.S.
Treasury securities such as the constant maturity treasury rate (CMT); those
derived from a calculated measure such as a cost of funds index (COFI) or a
moving average of mortgage rates; and those based on certain actively traded
or prominent short-term rates such as the LIBOR. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror changes in interest
rate levels. Others, such as COFI tend to lag behind changes in market rate
levels but reset monthly thus tending to be somewhat less volatile. Such a
delay in adjusting to changes in interest rates may cause securities owned by
the Fund to increase or decrease in value, particularly during periods between
interest adjustment dates.
ARMs will frequently have caps and floors which limit the maximum amount
by which the interest rate to the residential borrower may move up or down,
respectively, each adjustment period and over the life of the loan. Interest
rate caps on ARM securities may cause them to decrease in value in an
increasing interest rate environment. Such caps may also prevent their income
from increasing to levels commensurate with prevailing interest rates.
Conversely, interest rate floors on ARM securities may cause their income to
remain higher than prevailing interest rate levels and result in an increase
in the value of such securities. However, this increase may be tempered by
the acceleration of prepayments.
Mortgage securities generally have a maximum maturity of up to 30 years.
However, due to the adjustable rate feature of ARM securities, their prices
are considered to have volatility characteristics which approximate the
average period of time until the next adjustment of the interest rate. As a
PAGE 12
result, the principal volatility of ARM securities may be more comparable to
short- and intermediate-term securities than to longer term fixed rate
mortgage securities. Prepayments however, will increase their principal
volatility. See also the discussion of Mortgage-Backed Securities on page 5.
After purchase by the Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, T.
Rowe Price will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the prospectus.
Industry Concentration
When the market for corporate debt securities is dominated by issues in
the gas utility, gas transmission utility, electric utility, telephone
utility, or petroleum industry, the Fund will as a matter of fundamental
policy concentrate 25% or more, but not more than 50% of its assets, in any
one such industry, if the Fund has cash for such investment (i.e., the Fund
will not sell portfolio securities to raise cash) and, if in T. Rowe Price's
judgment, the return available and the marketability, quality, and
availability of the debt securities of such industry justifies such
concentration in light of the Fund's investment objectives. Domination would
exist with respect to any one such industry, when, in the preceding 30-day
period, more than 25% of all new-issue corporate debt offerings (within the
four highest grades of Moody's or Standard & Poor's and with maturities of 10
years or less) of $25,000,000 or more consisted of issues in such industry.
Although the Fund will normally purchase corporate debt securities in the
secondary market as opposed to new offerings, T. Rowe Price believes that the
new issue-based dominance standard, as defined above, is appropriate because
it is easily determined and represents an accurate correlation to the
secondary market. Investors should understand that concentration in any
industry may result in increased risk. Investments in any of these industries
may be affected by environmental conditions, energy conservation programs,
fuel shortages, difficulty in obtaining adequate return on capital in
financing operations and large construction programs, and the ability of the
capital markets to absorb debt issues. In addition, it is possible that the
public service commissions which have jurisdiction over these industries may
not grant future increases in rates sufficient to offset increases in
operating expenses. These industries also face numerous legislative and
regulatory uncertainties at both federal and state government levels.
Management believes that any risk to the Fund which might result from
concentration in any industry will be minimized by the Fund's practice of
diversifying its investments in other respects. The Fund's policy with
respect to industry concentration is a fundamental policy. (For investment
restriction on industry concentration, see Investment Restriction (5) on page
38.)
When-Issued Securities
The Fund may from time to time purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally,
the settlement date occurs within 90 days of the purchase. During the period
PAGE 13
between purchase and settlement, no payment is made by a Fund to the issuer
and no interest accrues to the Fund. Forward commitments involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
a Fund's other assets. Such when-issued securities may be sold prior to the
settlement date. At the time a Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect
the value of the security in determining its net asset value. The Fund does
not believe that its net asset value or income will be adversely affected by
its purchase of securities on a when-issued basis. The Fund will maintain
cash and marketable securities equal in value to commitments for when-issued
securities. Such segregated securities either will mature or, if necessary,
be sold on or before the settlement date.
Equity Income Fund
Warrants
The Fund may invest in 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.
Other Investments
Although substantially all of the Fund's assets are invested in common
stocks, the Fund may invest in convertible securities, corporate debt
securities and preferred stocks which hold the prospect of contributing to the
achievement of the Fund's objectives. Yields on short, intermediate, and
long-term securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the credit quality and rating of
the issue. Debt securities with longer maturities tend to have higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market prices of debt securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the value of
portfolio investments, and a decline in interest rates will generally increase
the value of portfolio investments. The ability of the Fund to achieve its
investment objective is also dependent on the continuing ability of the
issuers of the debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due. The Fund's
investment program permits it to purchase below investment grade securities.
Since investors generally perceive that there are greater risks associated
with investment in lower quality securities, the yields from such securities
normally exceed those obtainable from higher quality securities. However, the
principal value of lower-rated securities generally will fluctuate more widely
than higher quality securities. Lower quality investments entail a higher
risk of default--that is, the nonpayment of interest and principal by the
issuer than higher quality investments. Such securities are also subject to
special risks, discussed below. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate all
PAGE 14
risk. There can, of course, be no assurance that the Fund will achieve its
investment objective.
After purchase by the Fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, T.
Rowe Price will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the prospectus.
Special Risks of High Yield Investing
The Fund may invest in low quality bonds commonly referred to as "junk
bonds." Junk bonds are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
Because investment in low and lower-medium quality bonds involves greater
investment risk, to the extent the Fund invests in such bonds, achievement of
its investment objective will be more dependent on T. Rowe Price's credit
analysis than would be the case if the Fund was investing in higher quality
bonds. High yield bonds may be more susceptible to real or perceived adverse
economic conditions than investment grade bonds. A projection of an economic
downturn, or higher interest rates, for example, could cause a decline in high
yield bond prices because the advent of such events could lessen the ability
of highly leverage issuers to make principal and interest payments on their
debt securities. In addition, the secondary trading market for high yield
bonds may be less liquid than the market for higher grade bonds, which can
adversely affect the ability of a Fund to dispose of its portfolio securities.
Bonds for which there is only a "thin" market can be more difficult to value
inasmuch as objective pricing data may be less available and judgment may play
a greater role in the valuation process.
International Stock Fund
It is the present intention of Price-Fleming to invest in companies
based in (or governments of or within) the Far East (for example, Japan, Hong
Kong, Singapore, and Malaysia), Western Europe (for example, United Kingdom,
Germany, Hungary, Poland, Netherlands, France, Spain, and Switzerland), South
Africa, Australia, Canada, Latin America, and such other areas and countries
as Price-Fleming may determine from time to time.
In determining the appropriate distribution of investments among various
countries and geographic regions, Price-Fleming ordinarily considers the
following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Price-Fleming ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
PAGE 15
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which
the Fund invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future
years as earnings increase.
It is expected that the Fund's investments will ordinarily be traded on
exchanges located at least in the respective countries in which the various
issuers of such securities are principally based.
Prime Reserve, Short-Term Bond, Equity Income and International Stock Funds
Foreign Securities
Prime Reserve and Short-Term Bond Funds
Subject to the Prime Reserve and Short-Term Bond Funds' quality and
maturity standards, each Fund may invest without limitation in the securities
(payable in U.S. dollars) of foreign issuers in developed countries and in the
securities of foreign branches of U.S. banks such as negotiable certificates
of deposit (Eurodollars). The Short-Term Bond Fund may also invest up to 10%
of its net assets in non-U.S. dollar-denominated fixed income securities
principally traded in financial markets outside the United States. Because
these Funds may invest in foreign securities, investment in the Funds involves
risks that are different in some respects from an investment in a fund which
invests only in debt obligations or securities of U.S. domestic issuers.
Foreign investments may be affected favorably or unfavorably by changes in
currency rates and with respect to the Short-Term Bond Fund, exchange control
regulation. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to those applicable to U.S. companies. There may be less
governmental supervision of securities markets, brokers and issuers of
securities. Securities of some foreign companies are less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the United States. Settlement
practices may include delays and may differ from those customary in U.S.
markets. Investments in foreign securities may also be subject to other risks
different from those affecting U.S. investments, including local political or
economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States) with respect
to the Short-Term Bond Fund, and difficulty in enforcing legal rights outside
the United States.
The Equity Income 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 international mutual fund while others relate more to the
countries in which the Funds will invest. Many of the risks are more
pronounced for investments in developing or emerging countries, such as many
of the countries of Southeast Asia, Latin America, Eastern Europe and the
Middle East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
PAGE 16
initial stages of its industrialization cycle with a per capita gross national
product of less than $8,000.
General (International Stock Fund). Investors should understand that
all investments have a risk factor. There can be no guarantee against loss
resulting from an investment in the Fund, and there can be no assurance that
the Fund's investment policies will be successful, or that its investment
objective will be attained. The Fund is designed for individual and
institutional investors seeking to diversify beyond the United States in
actively researched and managed portfolios, and is intended for long-term
investors who can accept the risks entailed in investment in foreign
securities.
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy
in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as
stable as in the United States. For example, in 1991, the existing government
in Thailand was overthrown in a military coup. In 1992, there were two
military coup attempts in Venezuela and in 1992 the President of Brazil was
impeached. In addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim sovereignty of one
another and there is a demilitarized border between North and South Korea.
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 Funds will invest in securities denominated
in various currencies. Accordingly, a change in the value of any such
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of the Funds' assets denominated in that currency. Such
changes will also affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of the Fund's
securities denominated in that currency will rise. When a given currency
depreciates against the dollar (the dollar strengthens) the value of the
Funds' securities denominated in that currency would be expected to decline.
Investment and Repatriation of Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude
investment in certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
PAGE 17
Market Characteristics. It is contemplated that most foreign
securities, other than Latin American 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. Currently, it
is anticipated that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and the Funds' portfolio securities may be less liquid and
subject to more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on United States exchanges,
although the Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government supervision
and regulation of foreign stock exchanges, brokers and listed companies than
in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences may include delays beyond periods customary in the United States
and practices, such as delivery of securities prior to receipt of payment,
which increase the likelihood of a "failed settlement." Failed settlements
can result in losses to a Fund.
Investment Funds. The Funds may invest in investment funds which have
been authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. If the Funds invest in such
investment funds, the Funds' shareholders will bear not only their
proportionate share of the expenses of the Funds (including operating expenses
and the fees of the investment manager), but also will bear indirectly similar
expenses of the underlying investment funds. In addition, the securities of
these investment funds may trade at a premium over their net asset value.
Information and Supervision. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. It also may be more difficult to keep currently informed of
corporate actions which affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the Funds'
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Funds'
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction for U.S. federal income tax purposes for his or her proportionate
share of such foreign taxes paid by the Funds. (See "Tax Status," page 71.)
Other. With respect to certain foreign countries, especially developing
and emerging ones, there is the possibility of adverse changes in investment
or exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect investments
by U.S. persons in those countries.
PAGE 18
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 a Fund's assets
invested in such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive relief from
such Act may be required. All of these considerations are among the factors
which could cause significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company located in, or a
government of, Eastern Europe and Russia, if it believes the potential return
justifies the risk. To the extent any securities issued by companies in
Eastern Europe and Russia are considered illiquid, each Fund will be required
to include such securities within its 15% restriction on investing in illiquid
securities.
Short-Term Bond, Equity Income, and International Stock Funds
Illiquid or Restricted Securities
The Short-Term Bond Fund may invest in illiquid securities including
repurchase agreements which do not provide for payment within seven days, but
will not acquire such securities, if as a result, they would comprise more
than 10% of the value of the Fund's net assets.
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, a 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, a 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 Short-Term Bond and International Stock Funds' Boards of
Directors and in good faith by the Equity Income Fund's Board of Trustees. If
through the appreciation of illiquid securities or the depreciation of liquid
securities, a Fund should be in a position where more than 10% (15% for Equity
Income and International Stock Funds) of the value of its net assets are
invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Funds 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,
PAGE 19
such as the Funds, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price or Price-
Fleming, under the supervision of the Funds' Boards of Directors/Trustees,
will consider whether securities purchased under Rule 144A are illiquid and
thus subject to each Fund's restriction of investing no more than 10% (15% for
Equity Income and International Stock Funds) of its assets in illiquid
securities. Securities purchased under Rule 144A are considered restricted
and thus subject to the Fund's prohibition of investing no more than 10% (15%
for Equity Income and International Stock Funds) of its total assets in
restricted securities. However, not all Rule 144A securities are illiquid,
and T. Rowe Price, under the supervision of the Fund's Board of Trustees, on a
case by case basis, will make this determination. A determination of whether
a Rule 144A security is liquid or not is a question of fact. In making this
determination, T. Rowe Price or Price-Fleming 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 or Price-Fleming 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, a 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 10% (15% for Equity Income and International Stock
Funds) of its assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of a Fund's assets
invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
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 Funds 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 a 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, a Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency
during the period between the date the security is purchased or sold and the
date on which payment is made or received.
PAGE 20
Second, when T. Rowe Price or Price-Fleming believe that the currency of
a particular foreign country 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 a Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, each
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. T. Rowe Price
does not intend to enter into such forward contracts under this second
circumstance on a regular or continuous basis, and will not do so if, as a
result, the Equity Income Fund will have more than 15% of the value its total
assets committed to the consummation of such contracts. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, T. Rowe Price and Price-Fleming
believe that it is important to have the flexibility to enter into such
forward contracts when either determines that the best interests of the Fund
will be served.
Third, the Short-Term Bond Fund may use forward contracts when the Fund
wishes to hedge out of the dollar into a foreign currency in order to create a
synthetic bond or money market instrument -- the security would be issued by a
U.S. issuer but the dollar component would be transformed into a foreign
currency through a forward contract.
A Fund may enter into forward contracts for any other purpose consistent
with the Fund's investment objective and program. However, a Fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the Fund's holdings of liquid, high-grade debt securities and currency
available for cover of the forward contract(s). In determining the amount to
be delivered under a contract, a Fund may net offsetting positions.
At the maturity of a forward contract, a Fund may either 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 a 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 a 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 a Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
PAGE 21
the currency it has agreed to purchase. Should forward prices increase, a
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.
A Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Funds
reserve the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, a 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 or Price-Fleming. 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 each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Hybrid Commodity and Security Instruments - Short-Term Bond, Equity Income and
International Stock Funds
Hybrid instruments have recently been developed and combine the elements
of futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid
Instruments are indexed to the price of a commodity, a particular currency or
a domestic or foreign debt or equity securities index. 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 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.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, options, futures, and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures on page 27, forward contracts on page 18, and options on
page 22, for a discussion of these risks. Further, the prices of the Hybrid
Instrument and the related commodity or currency 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. In
addition, because the purchase and sale of Hybrid Instruments could take place
in an over-the-counter market or in a private transaction between each Fund
and the seller of the Hybrid Instrument, the creditworthiness of the contra
party to the transaction would be a risk factor which the Fund would have to
consider. 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 (with respect to the
International Stock Fund) the SEC, which regulates the offer and sale of
securities, or any other governmental regulatory authority.
PAGE 22
All Funds
Lending of Portfolio Securities
For the purpose of realizing additional income, each Fund may make
secured loans of portfolio securities amounting to not more than 30% (33 1/3%
with respect to Equity Income and International Stock Funds) of its total
assets. This policy is a fundamental policy. Securities loans are made to
broker-dealers or institutional investors and, with respect to the Short-Term
Bond, Equity Income and International Stock Funds, 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,
each 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. Each Fund has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Funds will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed by T. Rowe Price or
Price-Fleming to be of good standing and will not be made unless, in the
judgment of T. Rowe Price or Price-Fleming, the consideration to be earned
from such loans would justify the risk.
Other Lending/Borrowing - Short-Term Bond, Equity Income and International
Stock Funds
Subject to approval by the Securities and Exchange Commission, each Fund
may make loans to, or borrow funds from, other mutual funds sponsored or
advised by T. Rowe Price or Price-Fleming (collectively, "Price Funds"). The
Funds have no current intention of engaging in these practices at this time.
Repurchase Agreements
Each Fund may enter into a repurchase agreement through which an
investor (such as the Fund) purchases a security (known as the "underlying
security") from a well-established securities dealer or a bank that is a
member of the Federal Reserve System. Any such dealer or bank will be on T.
Rowe Price's approved list and have a credit rating with respect to its short-
term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody's
Investors Service, Inc., or the equivalent rating by T. Rowe Price. At that
time, the bank or securities dealer agrees to repurchase the underlying
security at the same price, plus specified interest. Repurchase agreements
are generally for a short period of time, often less than a week. Each Fund
will not enter into a repurchase agreement which does not provide for payment
within seven days if, as a result, more than 10% of the value of its net
assets would then be invested in such repurchase agreements. Each Fund will
only enter into repurchase agreements where (i) Prime Reserve Fund -- the
underlying securities are either U.S. government securities or securities
that, at the time the repurchase agreement is entered into, are rated in the
PAGE 23
highest rating category by the requisite number of NRSROs (as required by Rule
2a-7 under the 1940 Act) and otherwise are of the type (excluding maturity
limitations) which the Fund's investment guidelines would allow it to purchase
directly (however, the underlying securities will either be U.S. government
securities or securities which, at the time the repurchase agreement is
entered into, are rated in the highest rating category by pubic rating
agencies), Short-Term Bond, Equity Income, and International Stock Funds --
the underlying securities are of the type (excluding maturity limitations)
which each Fund's investment guidelines would allow it to purchase directly,
(ii) the market value of the underlying security, including interest accrued,
will be at all times equal to or exceed the value of the repurchase agreement,
and (iii) payment for the underlying security is made only upon physical
delivery or evidence of book-entry transfer to the account of the custodian or
a bank acting as agent. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, a Fund could experience both delays in
liquidating the underlying security and losses, including: (a) possible
decline in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
Short-Term Bond, Equity Income and International Stock Funds
Writing Covered Call Options
Each Fund may write (sell) "covered" call options and purchase options
to close out options previously written by a Fund. In writing covered call
options, a 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 or Price-Fleming's opinion, are not expected to have any major
price increases or moves in the near future but which, over the long term, are
deemed to be attractive investments for a 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 Funds will write only covered call options. This means that a Fund
will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid high-
grade debt obligations having a value equal to the fluctuating market value of
the optioned securities or currencies.
PAGE 24
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with each 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 Funds
will not do), but capable of enhancing a 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, a 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 a 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 Funds do not consider a security or
currency covered by a call to be "pledged" as that term is used in the Funds'
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium a
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 or Price-Fleming, 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 a 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 a 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 a Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If a Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that a Fund will be able to
effect such closing transactions at favorable prices. If a Fund cannot enter
into such a transaction, it may be required to hold a security or currency
that it might otherwise have sold. When a 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. Each
Fund will pay transaction costs in connection with the writing of options to
PAGE 24
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 a 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, a 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.
A 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.
In order to comply with the requirements of several states, each Fund
will not write a covered call option if, as a result, the aggregate market
value of all portfolio securities or currencies covering call or put options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should each Fund obtain a waiver of their application, each
Fund reserves the right to increase this percentage. In calculating the 25%
limit, each 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 Funds may write American or European style covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at the expiration
of the option (European style). So long as the obligation of the writer
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to make payment of the exercise price
against delivery of the underlying security or currency. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
Each Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or each 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.) A Fund would generally write covered put options in
circumstances where T. Rowe Price or Price-Fleming 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 a 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
a Fund would also receive interest on debt securities or currencies maintained
PAGE 25
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, a Fund, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. In order to comply with the requirements of several states, the
Funds 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 each Fund's net assets. Should
these state laws change or should each Fund obtain a waiver of their
application, each Fund reserves the right to increase this percentage. In
calculating the 25% limit, each 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
Each Fund may purchase American or European style put options. As the
holder of a put option, each 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).
Each Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. Each Fund may purchase put
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use
of put options is provided below.
A 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 a 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 or
Price-Fleming 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.
Each Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. Although the Equity Income Fund has
no current intention, in the foreseeable future, of purchasing put options at
a time when the Fund does not own the underlying security, it reserves the
right to do so. By purchasing put options on a security or currency it does
not own, a 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, a 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
PAGE 26
exercise price to cover the premium and transaction costs, unless the put
option is sold in a closing sale transaction.
To the extent required by the laws of certain states, each Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
put and call options. Should these state laws change or should each Fund
obtain a waiver of their application, each Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The premium paid by
a 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 each 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 Funds may purchase American or European style call options. As the
holder of a call option, each 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).
Each Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. Each Fund may purchase call
options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. Each 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 a Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables a Fund to acquire the securities
or currencies at the exercise price of the call option plus the premium paid.
At times the net cost of acquiring securities or currencies in this manner may
be less than the cost of acquiring the securities or currencies directly.
This technique may also be useful to a 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, a 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.
To the extent required by the laws of certain states, each Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should each Fund
obtain a waiver of their application, each Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. Each 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 Options
PAGE 27
The Short-Term Bond, Equity Income, and International Stock Funds may
engage in transactions involving dealer options. Certain risks are specific
to dealer options. While a 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 a 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, a 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 a 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 each 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 a
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, a Fund may be unable to
liquidate a dealer option. With respect to options written by a Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund. For example, since a 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 Funds may treat the cover used for written OTC options as
liquid if the dealer agrees that the Fund may repurchase the OTC option it has
written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Accordingly, each Fund will treat dealer options as subject to the
Fund's limitation on unmarketable securities. If the SEC changes its position
on the liquidity of dealer options, each Fund will change its treatment of
such instrument accordingly.
Futures Contracts
Transactions in Futures
The Short-Term Bond Fund may enter into financial futures contracts,
including interest rate and currency futures ("futures or futures contracts").
The Equity Income and International Stock Funds may enter into futures
contracts, including stock index, interest rate and currency futures.
Stock index futures contracts may be used to provide a hedge for a
portion of the Equity Income and International Stock Funds' portfolios, as a
cash management tool, or as an efficient way for Price-Fleming to implement
PAGE 28
either an increase or decrease in portfolio market exposure in response to
changing market conditions. Stock index futures contracts are currently
traded with respect to the S&P 500 Index and other broad stock market indices,
such as the New York Stock Exchange Composite Stock Index and the Value Line
Composite Stock Index. The Fund may, however, purchase or sell futures
contracts with respect to any stock index whose movements will, in its
judgment, have a significant correlation with movements in the prices of all
or portions of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by a Fund. In this regard, a
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. Futures can also be used as an
efficient means of regulating the Fund's exposure to the market.
The Funds will enter into futures contracts which are traded on national
or foreign futures exchange 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 Commodity Futures
Trading Commission ("CFTC"). Futures are traded in London at the London
International Financial Futures Exchange, in Paris at the MATIF and in Tokyo
at the Tokyo Stock Exchange. Although techniques other than the sale and
purchase of futures contracts could be used for the above-referenced purposes,
futures contracts offer an effective and relatively low cost means of
implementing each Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, yield enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the
CFTC, and not for speculation.
The Funds may not purchase or sell futures contracts or related options
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits and
premiums paid on these 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 accordance with the rules of the State of California, the Fund may
have to apply the above 5% test without excluding the value of initial margin
and premiums paid for bona fide hedging positions.
The Fund's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by each Fund,
an amount of cash, U.S. government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts and options
PAGE 29
thereon (less any related margin deposits), will be identified in an account
with the Fund's custodian to cover the position, or alternative cover (such as
owning an offsetting position) will be employed. Assets used as cover or held
in an identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of a Fund's assets to
cover or identified accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Fund would comply with such
new restrictions.
Trading in Futures
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 with respect to the Equity Income and
International Stock Funds, and a debt security with respect to the Short-Term
Bond Fund) 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 a Fund purchases or sells a security, no price would be paid
or received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the Fund's open positions in
futures contracts, the Fund would be required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of cash, U.S.
government securities, suitable money market instruments, or liquid, high-
grade debt securities, known as "initial margin." The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." Each 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 purchase or sale, respectively, for the
same aggregate amount of the identical securities and the same delivery date.
PAGE 30
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For the Short-Term Bond Fund, 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.
With respect to the Equity Income Fund, for example, the Standard &
Poor's 500 Stock Index is composed of 500 selected common stocks, most of
which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those common stocks. In the
case of the S&P 500 Index, contracts are to buy or sell 500 units. Thus, if
the value of the S&P 500 Index were $150, one contract would be worth $75,000
(500 units x $150). The stock index futures contract specifies that no
delivery of the actual stock making up the index will take place. Instead,
settlement in cash occurs. Over the life of the contract, the gain or loss
realized by the Fund will equal the difference between the purchase (or sale)
price of the contract and the price at which the contract is terminated. For
example, if the Fund enters into a futures contract to buy 500 units of the
S&P 500 Index at a specified future date at a contract price of $150 and the
S&P 500 Index is at $154 on that future date, the Fund will gain $2,000 (500
units x gain of $4). If the Fund enters into a futures contract to sell 500
units of the stock index at a specified future date at a contract price of
$150 and the S&P 500 Index is at $152 on that future date, the Fund will lose
$1,000 (500 units x loss of $2).
With respect to the International Stock Fund, for example, one contract
in the Financial Times Stock Exchange 100 Index future is a contract to buy 25
pounds sterling multiplied by the level of the UK Financial Times 100 Share
Index on a given future date. Settlement of a stock index futures contract
may or may not be in the underlying security. If not in the underlying
security, then settlement will be made in cash, equivalent over time to the
difference between the contract price and the actual price of the underlying
asset at the time the stock index futures contract expires.
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 policies and economic events.
PAGE 31
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, a Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be
certain that a 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. Each Fund may elect to close some or all of its futures
positions at any time prior to their expiration. A Fund would do so to reduce
exposure represented by long futures positions or increase exposure
represented by short futures positions. Each 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 Funds intend 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, a 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, a 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 the 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.
PAGE 32
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 and Price-Fleming will, however, attempt
to reduce this risk by entering into futures contracts whose movements, in its
judgment, will have a significant correlation with movements in the prices of
the Fund's underlying instruments sought to be hedged.
Successful use of futures contracts by the Funds for hedging purposes is
also subject to T. Rowe Price's and Price-Fleming's ability to correctly
predict movements in the direction of the market. It is possible that, when a
Fund has sold futures to hedge its portfolio against a decline in the market,
the index, indices, or underlying instruments on which the futures are written
might advance and the value of the underlying instruments held in the Fund's
portfolio might decline. If this were to occur, the Fund would lose money on
the futures and also would experience a decline in value in its underlying
instruments. However, while this might occur to a certain degree, T. Rowe
Price and Price-Fleming believe that over time the value of a Fund's portfolio
will tend to move in the same direction as the market indices which are
intended to correlate to the price movements of the underlying instruments
sought to be hedged. It is also possible that if a 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 a 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). A Fund might have to sell underlying instruments at a time when it
would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements
of futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of the imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price or Price-Fleming
might not result in a successful hedging transaction over a very short time
period.
Options on Futures Contracts
PAGE 33
The Funds may purchase and sell options on the same types of futures in
which they may invest.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on stock
indices with respect to the Equity Income and International Stock Funds, or
financial indices with respect to the Short-Term Bond Funds. Such options
would be used in a manner similar to the use of options on futures contracts.
From time to time, a single order to purchase or sell futures contracts (or
options thereon) may be made on behalf of the Funds and other T. Rowe Price
Funds. Such aggregated orders would be allocated among the Funds and the
other T. Rowe Price Funds in a fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. In addition, where the Funds seek to close out an option position by
writing or buying an offsetting option covering the same index, underlying
instruments, or contract and having the same exercise price and expiration
date. The 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.
PAGE 34
Additional Futures and Options Contracts-Short-Term Bond and International
Stock Funds
Although each Fund has no current intention of engaging in financial
futures or options transactions other than those described above, it reserves
the right to do so. Such futures and options trading might involve risks
which differ from those involved in the futures and options described above.
Foreign Futures and Options-Short-Term Bond, Equity Income and International
Stock Funds
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, customers who trade foreign
futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from customers 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 your order is placed and the time it is liquidated, offset or
exercised.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The discussion herein may refer to transactions in which the Equity
Income Fund does not engage. The Fund's prospectus sets forth the types of
transactions permissible for the Fund.
The Funds may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of a Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. A 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
PAGE 35
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
In order for each Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
or securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of a Fund's annual gross income. In
order to avoid realizing excessive gains on securities or currencies held less
than three months, a Fund may be required to defer the closing out of option,
futures or foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains
on Section 1256 option, futures and foreign forward exchange contracts, which
have been open for less than three months as of the end of a Fund's fiscal
year and which are recognized for tax purposes, will not be considered gains
on securities or currencies held less than three months for purposes of the
30% test.
INVESTMENT RESTRICTIONS
Fundamental policies may not be changed without the approval of the
lesser of (1) 67% of a Fund's shares present at a meeting of shareholders if
the holders of more than 50% of the outstanding shares are present in person
or by proxy or (2) more than 50% of a Fund's outstanding shares. Other
restrictions, in the form of operating policies, are subject to change by each
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, a Fund.
Prime Reserve Fund
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
PAGE 36
(1) Borrowing. Borrow money, except the Fund may borrow from banks as
a temporary measure for extraordinary or emergency purposes, and
then only from banks in amounts not exceeding the lesser of 10% of
its total assets valued at cost or 5% of its total assets valued at
market. The Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which
might otherwise require untimely disposition of portfolio
securities. Interest paid on any such borrowings will reduce net
investment income;
(2) Commodities. Purchase or sell commodities or commodity contracts;
(3) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(4) Equity Securities. Purchase any common stocks or other equity
securities, or securities convertible into equity securities;
(5) Illiquid Securities. Purchase securities which are not readily
marketable, or invest more than 10% of the value of its net assets
in repurchase agreements which do not provide for payment within
seven days and in the obligations of small banks and savings and
loan associations which are not readily marketable;
(6) Industry Concentration. Purchase the securities of any issuer if,
as a result, 25% or more 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 (other than
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities); this limitation does not apply to
certificates of deposit, or bankers' acceptances;
(7) Investment Companies. Purchase securities of other investment
companies, except in connection with a merger, consolidation,
acquisition, or reorganization. Duplicate fees may result from
such purchases;
(8) Loans. Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements, and (ii) lend
portfolio securities provided that no such loan may be made if, as
a result, the aggregate of such loans would exceed 30% of the value
of the Fund's total assets;
(9) Mortgaging. Mortgage, pledge, hypothecate or, in any other manner,
transfer as security for indebtedness any security owned by the
Fund, except as may be necessary in connection with permissible
borrowings, in which event such mortgaging, pledging, or
hypothecating may not exceed 15% of the Fund's assets, valued at
cost; provided, however, that as a matter of operating policy,
which may be changed without shareholder approval, the Fund will
limit any such mortgaging, pledging, or hypothecating to 10% of its
net assets, valued at market, in order to comply with certain state
investment restrictions;
(10) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to oil, gas, other
mineral exploration or development programs;
PAGE 37
(11) Options, Etc. Invest in puts, calls, straddles, spreads, or any
combination thereof;
(12) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and directors of
the Fund, and of its investment manager, who each owns beneficially
more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities;
(13) Percent Limit on Assets Invested in Any One Issuer. Purchase the
securities of any issuer if, as a result more than 5% of the value
of the Fund's total assets would be invested in the securities of a
single issuer (including repurchase agreements with any one issuer)
(other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities);
(14) Percent Limit on Share Ownership of Any One Issuer. Purchase the
securities of any issuer if, as a result, 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);
(15) Purchases on Margin. Purchase securities on margin, except for use
of short-term credit necessary for clearance of purchases of
portfolio securities;
(16) Real Estate. Purchase or sell real estate (although it may
purchase money market securities secured by real estate or
interests therein, or issued by companies which invest in real
estate or interests therein);
(17) Senior Securities. Issue any class of securities senior to any
other class of securities;
(18) 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 of government securities directly from
the issuer in accordance with the Fund's investment objectives,
program, and restrictions; and
(19) Unseasoned Issuers. Purchase the securities of any issuer if, as a
result, more than 5% of the value of the Fund's total assets would
be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years, including
predecessors and unconditional guarantors (other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).
Short-Term Bond Fund
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
PAGE 38
(1) Borrowing. Borrow money, except the Fund may borrow from banks or
other Price Funds, as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 30% of
its total assets valued at market. The Fund will not borrow in
order to increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely
disposition of portfolio securities. Interest paid on any such
borrowings will reduce net investment income. The Fund may enter
into interest rate futures contracts as set forth in (4) below;
(2) Commodities. Purchase or sell commodities or commodity contracts;
except that it may (i) enter into futures contracts and options on
futures contracts; (ii) invest in or commit its assets to forward
foreign currency exchange contracts (although the Fund does not
consider such contracts to be commodities); and (iii) purchase or
sell instruments which have the characteristics of both futures
contracts and securities;
(3) Equity Securities. Purchase any common stocks or other equity
securities, or securities convertible into equity securities;
(4) Futures Contracts. Enter into a futures contract or options
thereon, although the Fund may enter into financial and currency
futures contracts or options on financial and currency futures
contracts;
(5) Industry Concentration. Purchase the securities of any issuer
(other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, 25%
or more of the value of the Fund's total assets would be invested
in the securities of issuers having their principal business
activities in the same industry; provided, however, that the Fund
will normally concentrate 25% or more of its assets in the
securities of the banking industry when the Fund's position in
issues maturing in one year or less equals 35% or more of the
Fund's total assets; provided, further, that the Fund will invest
25% or more of its assets, but not more than 50%, in any one of the
gas utility, gas transmission utility, electric utility, telephone
utility, and petroleum industries under certain circumstances (see
page 11);
(6) Loans. Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements; (ii) acquire
publicly-distributed bonds, debentures, notes and other debt
securities and purchase debt securities at private placement; (iii)
lend portfolio securities; and (iv) 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 30% of the value of the Fund's total assets;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for
indebtedness except as may be necessary in connection with
permissible borrowings and then such mortgaging, pledging or
hypothecating may not exceed 30% of the Fund's total assets valued
at market at the time of the borrowing;
PAGE 39
(8) Percent Limit on Assets Invested in Any One Issuer. Purchase a
security if, as a result, with respect to 75% of the value of the
Fund's total assets, more than 5% of the value of its total assets
would be invested in the securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities);
(9) Percent Limit on Share Ownership of Any One Issuer. Purchase a
security if, as a result, with respect to 75% of the value of the
Fund's total assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) provided that, as an operating
policy, the Fund will not purchase a security if, as a result, more
than 10% of the outstanding voting securities of any issuer would
be held by the Fund;
(10) Purchases on Margin. Purchase securities on margin, except for use
of short-term credit necessary for clearance of purchases of
portfolio securities; except that the Fund may make margin deposits
in connection with interest rate futures contracts, subject to (4)
above;
(11) Real Estate. Purchase or sell real estate (although it may
purchase money market securities secured by real estate or
interests therein, or issued by companies which invest in real
estate or interests therein);
(12) Senior Securities. Issue any class of securities senior to any
other class of securities;
(13) Underwriting. Underwrite securities issued by other persons,
except: (i) 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 of government securities directly from
the issuer in accordance with the Fund's investment objective,
program, and restrictions; and (ii) the later disposition of
restricted securities acquired within the limits imposed on the
acquisition of restricted securities.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result, more
than 10% of the Fund's net assets would be invested in illiquid
securities, including repurchase agreements which do not provide
for payment within seven days;
(3) Investment Companies. Purchase securities of open-end or closed-
end investment companies except in compliance with the Investment
Company Act of 1940 and any applicable state law. Duplicate fees
may result from such purchases;
PAGE 40
(4) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to oil, gas, other
mineral exploration or development programs;
(5) Options, Etc. Purchase and sell call and put options except as set
forth in its prospectus and Statement of Additional Information;
(6) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and directors of
the Fund, and of its investment manager, who each owns beneficially
more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities;
(7) Unseasoned Issuers. Purchase a security other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if, as a result, more than 5% of the value of
the Fund's total assets would be invested in the securities of
issuers which at the time of purchase had been in operation for
less than three (3) years (for this purpose, the period of
operation of any issuer shall include the period of operation of
any predecessor or unconditional guarantor of such issuer); or
(8) Warrants. Purchase any securities which would cause more than 2%
of its total assets at the time of such purchase to be invested in
warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange, or more than 5% of its total assets to be
invested in warrants whether or not so listed, such warrants in
each case to be valued at the lesser of cost or market, but
assigning no value to warrants acquired by the Fund in units with
or attached to debt securities.
<PAGE>
PAGE 41
Equity Income and International Stock Funds
Fundamental Policies
As a matter of fundamental policy, each Fund may not:
(1) Borrowing. Borrow money except that each 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 a Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the
value of a 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. Each Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law;
(2) Commodities. Purchase or sell physical commodities; except
that it may enter into futures contracts and options
thereon;
(3) Industry Concentration. Purchase the securities of any
issuer if, as a result, more than 25% of the value of each
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 each 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 a Fund's total assets;
(ii) purchase money market securities and enter into
repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and
purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer.
Purchase a security if, as a result, with respect to 75% of
the value of its total assets, more than 5% of the value of
each Fund's total assets would be invested in the securities
of a single issuer, except securities issued or guaranteed
by the U.S. Government or any of its agencies or
instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer.
Purchase a security if, as a result, with respect to 75% of
the value of each Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by
a Fund (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities);
PAGE 42
(7) Real Estate. Purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments
(but this shall not prevent each 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; or
(9) Underwriting. Underwrite securities issued by other
persons, except to the extent that each 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), each Fund will
not borrow from or lend to any other Price Fund unless each Fund
applies for and receives an exemptive order from the SEC or the SEC
issues rules permitting such transactions. Each Fund has no
current intention of engaging in any such activity and there is no
assurance the SEC would grant any order requested by a Fund or
promulgate any rules allowing the transactions.
With respect to investment restriction (2), each 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 each Fund's semi-
annual and annual reports.
For purposes of investment restriction (4), each Fund will consider
the acquisition of a debt security to include the execution of a
note or other evidence of an extension of credit with a term of
more than nine months.
Operating Policies
As a matter of operating policy, each Fund may not:
(1) Borrowing. Each Fund will not purchase additional
securities when money borrowed exceeds 5% of its total
assets;
(2) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
PAGE 43
(3) Futures Contracts. Purchase a futures contract or an option
thereon if, with respect to positions in futures or options
on futures which do not represent bona fide hedging, the
aggregate initial margin and premiums on such options would
exceed 5% of each Fund's net asset value;
(4) Illiquid Securities. Purchase illiquid securities and
securities of unseasoned issuers if, as a result, more than
15% of its net assets would be invested in such securities,
provided that each Fund will not invest more than 5% of its
total assets in restricted securities and not more than 5%
in securities of unseasoned issuers. Securities eligible
for resale under Rule 144A of the Securities Act of 1933 are
not included in the 5% limitation but are subject to the 15%
limitation;
(5) Investment Companies. Purchase securities of open-end or
closed-end investment companies except in compliance with
the Investment Company Act of 1940 and applicable state law.
Duplicate fees may result from such purchases;
(6) Margin. Purchase securities on margin, except (i) for use
of short-term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits in
connection with futures contracts or other permissible
investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any
manner, transfer any security owned by each 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 a Fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs. Purchase participations or other
direct interests in or enter into leases with respect to,
oil, gas, or other mineral exploration or development
programs;
(9) Options, Etc. Invest in puts, calls, straddles, spreads, or
any combination thereof, except to the extent permitted by
the prospectus and Statement of Additional Information;
(10) Ownership of Portfolio Securities by Officers and
Directors/Trustees. Purchase or retain the securities of
any issuer if, to the knowledge of each Fund's management,
those officers and directors/trustees of a Fund, and of its
investment manager, who each owns beneficially more than .5%
of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities;
(11) Short Sales. Effect short sales of securities;
PAGE 44
(12) Unseasoned Issuers. Purchase a security (other than
obligations issued or guaranteed by the U.S., any foreign,
state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of the
value of each Fund's total assets would be invested in the
securities of issuers which at the time of purchase had been
in operation for less than three years (for this purpose,
the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional
guarantor of such issuer). This restriction does not apply
to securities of pooled investment vehicles or mortgage or
asset-backed securities; or
(13) Warrants. Invest in warrants if, as a result thereof, more
than 2% of the value of the total assets of each Fund would
be invested in warrants which are not listed on the New York
Stock Exchange, the American Stock Exchange, or a recognized
foreign exchange, or more than 5% of the value of the total
assets of a Fund would be invested in warrants whether or
not so listed. For purposes of these percentage
limitations, the warrants will be valued at the lower of
cost or market and warrants acquired by each Fund in units
or attached to securities may be deemed to be without value.
International Stock Fund
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as Passive Foreign
Investment Companies. The Fund is subject to certain percentage limitations
under the 1940 Act and certain states relating to the purchase of securities
of investment companies, and may be subject to the limitation that no more
than 10% of the value of the Fund's total assets may be invested in such
securities.
RISK FACTORS
Prime Reserve Fund
There can be no assurance that the Fund will achieve its investment
objectives or be able to maintain its net asset value per share at $1.00. The
price of the Fund is not guaranteed or insured, and its yield is not fixed.
While the Fund invests in high-grade money market instruments, investment in
the Fund is not without risk even if all portfolio instruments are paid in
full at maturity. An increase in interest rates could reduce the value of the
Fund's portfolio investments, and a decline in interest rates could increase
the value. See the sections on "Repurchase Agreements" and "Foreign
Securities" on pages 21 and 14, which discusses the risks associated with such
investments and the section on "Lending of Portfolio Securities" on page 20,
which discusses the risks associated with such investments.
Short-Term Bond Fund
Because of its investment policy, the Fund may or may not be
suitable or appropriate for all investors. The Fund is not a money market
fund and is not an appropriate investment for those whose primary objective is
principal stability. There is risk in all investment. The Fund is designed
PAGE 45
for the investor who seeks to participate in a diversified portfolio of short-
term investment grade bonds and other debt securities which provide greater
stability in the rate of income than a money market fund (average weighted
maturity of less than 90 days) and less risk of capital fluctuation than a
portfolio of long-term debt securities. The value of the portfolio securities
of the Fund will fluctuate based upon market conditions. Although the Fund
seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. There can, of course, be no
assurance that the Fund will achieve these results. Reference is also made to
the sections entitled "Repurchase Agreements," "Private Placements," "Futures
Contracts," "Covered Call and Put Options," "Foreign Securities," "Foreign
Currency Transactions," "Industry Concentration," "When-Issued Securities,"
and "Lending of Portfolio Securities," for discussions of the risks associated
with these investments or investment practices.
Debt Obligations. Yields on short and intermediate-term securities
are dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt 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 debt
securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio investments, and a
decline in interest rates will generally increase the value of portfolio
investments. The ability of the Fund to achieve its investment objective is
also dependent on the continuing ability of the issuers of the debt securities
in which the Fund invests to meet their obligations for the payment of
interest and principal when due.
All Funds
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of a Fund, brokerage fees could be incurred
by the shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for securities or
assets other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that:
(a) meet the investment objectives and policies of the Funds; (b) are acquired
for investment and not for resale except in accordance with applicable law;
(c) have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
MANAGEMENT OF FUNDS
The officers and directors/trustees of each 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 or
the Funds as defined under Section 2(a)(19) of the Investment Company Act of
1940 are noted with an asterisk (*). The directors/trustees are referred to
PAGE 46
as inside directors/trustees by virtue of their officership, directorship
and/or employment with T. Rowe Price.
Prime Reserve Fund
ROBERT P. BLACK, Director--Retired; formerly President, Federal Reserve Bank
of Richmond;
Address: 10 Dahlgren Road, Richmond, Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State College; Director,
Maryland Chamber of Commerce and Provident Bank of Maryland; President,
Baltimore Area Council Boy Scouts of America; Vice President, Board
of Directors, The Walters Art Gallery; Address: 2000 North Warwick
Avenue, Baltimore, Maryland 21216
*GEORGE J. COLLINS, Vice President and Director--President, Managing Director,
and Chief
Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming
International, Inc., T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc., Chartered Investment Counselor
ANTHONY W. DEERING, Director--Director, 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
*CARTER O. HOFFMAN, Chairman of the Board--Managing Director, T. Rowe Price;
Chartered
Investment Counselor
F. PIERCE LINAWEAVER, Director--President, F. Pierce Linaweaver & Associates,
Inc.; formerly
(1987-1991) Executive Vice President, EA Engineering, Science, and
Technology, Inc., (1987-1990) President, EA Engineering, Inc., Baltimore,
Maryland; Address: The Legg Mason Tower, 111 South Calvert Street, Suite
2700, Baltimore, Maryland 21202
JOHN G. SCHREIBER, Director--President, Schreiber Investments, a real estate
investment
company; Director and formerly (1/80-12/90) Executive Vice President, JMB
Realty Corporation, a national real estate investment manager and
developer; Address: 1115 East Illinois Road, Lake Forest, Illinois 60045
EDWARD A. WIESE, President--Vice President, T. Rowe Price, Rowe Price-Fleming
International,
Inc. and T. Rowe Price Trust Company
ROBERT P. CAMPBELL, Executive Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International Inc.; formerly (4/80-5/90) Vice
President and Director, Private Finance, New York Life Insurance
Company, New York, New York
JAMES M. MCDONALD, Executive Vice President--Vice President, T. Rowe Price
PATRICE L. BERCHTENBREITER, Vice President--Vice President, T. Rowe Price
PAUL W. BOLTZ, Vice President--Vice President and Financial Economist of T.
Rowe Price
MICHAEL J. CONELIUS, Vice President--Assistant Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and
Director, T. Rowe Price Investment Services, Inc., T. Rowe Price Services,
Inc., and T. Rowe Price Trust Company; Vice President, Rowe Price-Fleming
International, Inc. and T. Rowe Price Retirement Plan Services, Inc.;
Director, ICI Mutual Insurance Company
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
JAMES S. RIEPE, Vice President--Managing Director, T. Rowe Price; Chairman of
the Board, T.
PAGE 47
Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc.,
and T. Rowe Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
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
ROGER L. FIERY, III, Assistant Vice President--Vice President, T. Rowe Price
and Rowe Price-
Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.;
Assistant Vice President, T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
<PAGE>
PAGE 48
Short-Term Bond Fund
ROBERT P. BLACK, Director--Retired; formerly President, Federal Reserve Bank
of Richmond;
Address: 10 Dahlgren Road, Richmond, Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State College; Director,
Maryland Chamber of Commerce and Provident Bank of Maryland; President,
Baltimore Area Council Boy Scouts of America; Vice President, Board
of Directors, The Walters Art Gallery; Address: 2000 North Warwick
Avenue, Baltimore, Maryland 21216
*GEORGE J. COLLINS, Chairman of the Board--President, Managing Director, and
Chief Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming
International, Inc., T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc., Chartered Investment Counselor
ANTHONY W. DEERING, Director--Director, 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.; formerly
(1987-1991) Executive Vice President, EA Engineering, Science, and
Technology, Inc., and (1987-1990) President, EA Engineering, Inc.,
Baltimore, Maryland; Address: The Legg Mason Tower, 111 South Calvert
Street, Suite 2700, Baltimore, Maryland 21202
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of
the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement Plan
Services, Inc., and T. Rowe Price Trust Company; President and Director, T.
Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
JOHN G. SCHREIBER, Director--President, Schreiber Investments, a real estate
investment company; Director and formerly (1/80-12/90) Executive Vice
President, JMB Realty Corporation, a national real estate
investment manager and developer; Address: 1115 East Illinois
Road, Lake Forest, Illinois 60045
VEENA A. KUTLER, President--Vice President, T. Rowe Price and Rowe Price-
Fleming International, Inc.
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price and Rowe
Price-Fleming
International, Inc.; formerly (4/80-5/90) Vice President and Director,
Private Finance, New York Life Insurance Company, New York, New York
CHRISTY M. DIPIETRO, Vice President--Vice President, T. Rowe Price and T. Rowe
Price Trust Company
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and
Director, T. Rowe Price Investment Services, Inc., T. Rowe Price Services,
Inc., and T. Rowe Price Trust Company; Vice President, Rowe Price-Fleming
International, Inc. and T. Rowe Price Retirement Plan Services, Inc.;
Director, ICI Mutual Insurance Company
JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
CHARLES P. SMITH, Vice President--Managing Director, T. Rowe Price; Vice
President, Rowe
Price-Fleming International, Inc.
EDWARD A. WIESE, Vice President--Vice President, T. Rowe Price, Rowe Price-
Fleming International, Inc. and T. Rowe Price Trust Company
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PAGE 49
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
ROGER L. FIERY, III, Assistant Vice President--Vice President, T. Rowe Price
and Rowe Price-
Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.;
Assistant Vice President, T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
Equity Income Fund
*THOMAS H. BROADUS, JR., Vice President and Trustee--Managing Director, T. Rowe
Price; Chartered Financial Analyst and Chartered Investment Counselor
LEO C. BAILEY, Trustee--Retired; Address: 3396 South Placita Fabula, Green
Valley, Arizona 85614
DONALD W. DICK, JR., Trustee--Principal, Overseas Partners, Inc., a financial
investment firm;
Director, Waverly Press, Inc., Baltimore, Maryland; Address: 375 Park
Avenue, Suite 2201, New York, New York 10152
DAVID K. FAGIN, Trustee--Chairman, Chief Executive Officer and Director,
Golden Star Resources, Ltd.; formerly (1986-7/91) President, Chief
Operating Officer and Director, Homestake Mining Company; Address: One
Norwest Center, 1700 Lincoln Street, Suite 1950, Denver, Colorado 80203
ADDISON LANIER, Trustee--Financial management; President and Director, Thomas
Emery's Sons, Inc., and Emery Group, Inc.; Director, Scinet Development
and Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio
45202-2913
JOHN K. MAJOR, Trustee--Chairman of the Board and President, KCMA
Incorporated, Tulsa,
Oklahoma; Address: 126 E. 26 Place, Tulsa, Oklahoma 74114-2422
HANNE M. MERRIMAN, Trustee--Retail business consultant; formerly, President
and Chief Operating
Officer, Nan Duskin, Inc., a women's specialty store, Director and
Chairman, Federal Reserve Bank of Richmond, and President and Chief
Executive Officer, Honeybee, Inc., a division of Spiegel, Inc; Director,
Ann Taylor Stores Corporation, Central Illinois Public Service Company,
CIPSCO Incorporated, The Rouse Company, State Farm Mutual Automobile
Insurance Company and USAir Group, Inc., Member, National Women's Forum;
Trustee, American-Scandinavian Foundation; Address: One James Center, 901
East Cary Street, Richmond, Virginia 23219-4030
*JAMES S. RIEPE, Vice President and Trustee--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President
and Director, T. Rowe Price Investment Services, Inc; Director, Rhone-
Poulenc Rorer, Inc.
*M. DAVID TESTA, Trustee--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President, T. Rowe
Price Trust Company; Chartered Financial Analyst
HUBERT D. VOS, Trustee--President, Stonington Capital Corporation, a private
investment company; Address: 1231 State Street, Suite 210, Santa Barbara,
California 93190-0409
PAGE 50
PAUL M. WYTHES, Trustee--Founding General Partner, Sutter Hill Ventures, a
venture capital limited
partnership providing equity capital to young high technology companies
throughout the United States; Director, Teltone Corporation,
Interventional Technologies, Inc., and Stuart Medical, Inc.; Address: 755
Page Mill Road, Suite A200, Palo Alto, California 94304
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Investment Services, Inc., T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company; Vice President of
Rowe Price-Fleming International, Inc. and T. Rowe Price Retirement Plan
Services, Inc.
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
DENISE S. JEVNE, Vice President-Vice President, T. Rowe Price
ROBERT W. SMITH, Vice President-Vice President, T. Rowe Price; formerly (1987-
1992) Investment Analyst, Massachusetts Financial Services, Inc., Boston,
Massachusetts
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe Price
MARK J. VASELKIV, Vice President-Vice President, T. Rowe Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
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
ROGER L. FIERY, III, Assistant Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.; Assistant Vice President, T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
International Stock Fund
*M. DAVID TESTA, Chairman of the Board--Chairman of the Board, Price-Fleming;
Managing
Director, T. Rowe Price; Vice President and Director, T. Rowe Price Trust
Company; Chartered Financial Analyst
*MARTIN G. WADE, President and Director--President, Price-Fleming; Director,
Robert Fleming
Holdings Limited; Address: 25 Copthall Avenue, London, EC2R 7DR, England
LEO C. BAILEY, Director--Retired; Address: 3396 South Placita Fabula, Green
Valley, Arizona
85614
ANTHONY W. DEERING, Director--Director, 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
DONALD W. DICK, JR., Director--Principal, Overseas Partners, Inc., a financial
investment firm;
Director, Waverly Press, Inc., Baltimore, Maryland; Address: 375 Park
Avenue, Suite 2201, New York, New York 10152
ADDISON LANIER, Director--Financial management; President and Director, Thomas
Emery's
Sons, Inc. and Emery Group, Inc.; Director, Scinet Development and
Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio 45202-
2913
CHRISTOPHER D. ALDERSON, Vice President--Vice President, Price-Fleming
PAGE 51
PETER B. ASKEW, Vice President--Executive Vice President, Price-Fleming
RICHARD J. BRUCE, Vice President--Vice President, Price-Fleming; formerly
(1985-1990)
Investment Manager, Jardine Fleming Advisers, Tokyo
ROBERT P. CAMPBELL, Vice President--Vice President, Price-Fleming and T. Rowe
Price;
formerly (4/80-5/90) Vice President and Director, Private Finance, New
York Life Insurance Company, New York, New York
MARK J.T. EDWARDS, Vice President--Vice President, Price-Fleming
JOHN R. FORD, Vice President--Executive Vice President, Price-Fleming
HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming and T. Rowe
Price
Retirement Plan Services, Inc.; 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
ROBERT C. HOWE, Vice President--Vice President, Price-Fleming and T. Rowe
Price
STEPHEN ILOTT, Vice President--Employee, Price-Fleming; formerly (1988-1991)
portfolio
management, Fixed Income Portfolios Group, Robert Fleming Holdings
Limited, London
GEORGE A. MURNAGHAN, Vice President--Vice President, Price-Fleming, T. Rowe
Price, T.
Rowe Price Trust Company, and T. Rowe Price Investment Service
JAMES S. RIEPE, Vice President--Managing Director, T. Rowe Price; Chairman of
the Board, T.
Rowe Price Services, Inc., T. Rowe Price Retirement Plan Services, Inc.,
and T. Rowe Price Trust Company; President and Director, T. Rowe Price
Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
CHRISTOPHER ROTHERY, Vice President--Vice President, Price-Fleming; formerly
(1987-1989)
employee of Robert Fleming Holdings Limited, London
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
CHARLES P. SMITH, Vice President--Vice President, Price-Fleming; Managing
Director, T. Rowe
Price
BENEDICT R. F. THOMAS, Vice President--Vice President, Price-Fleming
PETER VAN DYKE, Vice President--Vice President, Price-Fleming; Managing
Director, T. Rowe
Price
DAVID J. L. WARREN, Vice President--Executive Vice President, Price-Fleming
WILLIAM F. WENDLER, II, Vice President--Vice President, Price-Fleming and T.
Rowe Price,
and T. Rowe Price Investment Services, Inc.
EDWARD A. WIESE, Vice President--Vice President, Price-Fleming, T. Rowe Price
and T. Rowe
Price Trust Company
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
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
ANN B. CRANMER, Assistant Vice President--Vice President, Price-Fleming
ROGER L. FIERY, III, Assistant Vice President--Vice President, Price-Fleming
and T. Rowe Price
PAGE 52
LEAH P. HOLMES, Assistant Vice President--Vice President, Price-Fleming and
Assistant Vice
President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.;
Assistant Vice President, T. Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
Each Fund's Executive Committee has been authorized by its Board of
Directors/Trustees to exercise all powers of the Board to manage the Fund in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated. The members of each Fund's Executive Committee
are as follows:
Prime Reserve Fund--Messrs. Collins and Hoffman
Short-Term Bond Fund--Messrs. Collins and Riepe
Equity Income Fund- Messrs. Broadus, Riepe, and Testa
International Stock Fund--Messrs. Testa and Wade
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors/trustees of
each Fund, as a group, owned less than 1% of the outstanding shares of the
Fund.
As of March 31, 1993, the following shareholders beneficially owned more
than 5% of the outstanding shares of the Short-Term Bond Fund: Yachtcrew &
Co., Attn.: Mark White, Spectrum Income Account, State Street Bank and Trust
Co., 1776 Heritage Drive - 4W, North Quincy, Massachusetts 02171-2101.
As of December 31, 1993, the following shareholder beneficially owned
more than 5% of the outstanding shares of the International Stock Fund:
Charles Schwab & Co., Inc., Reinvestment Account, Attn: Mutual Fund Dept., 101
West Montgomery Street, San Francisco, California 94104-4122.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price or Price-Fleming provides
each Fund with discretionary investment services. Specifically, T. Rowe Price
or Price-Fleming is responsible for supervising and directing the investments
of each Fund in accordance with the Fund's investment objective, program, and
restrictions as provided in its prospectus and this Statement of Additional
Information. T. Rowe Price or Price-Fleming is also responsible for effecting
all security transactions on behalf of each Fund, including the negotiation of
commissions and the allocation of principal business and portfolio brokerage.
In addition to these services, T. Rowe Price or Price-Fleming provides each
Fund with certain administrative services, including: maintaining each Fund's
existence, records, and registering and qualifying a Fund's shares under
federal and state laws; monitoring the financial, accounting, and
administrative functions of each Fund; maintaining liaison with the agents
employed by each Fund such as the Fund's custodian and transfer agent;
assisting each Fund in the coordination of such agents' activities; and
permitting T. Rowe Price's or Price-Fleming's employees to serve as officers,
PAGE 53
directors/trustees, and committee members of each Fund without cost to the
Fund.
The Management Agreement also provides that T. Rowe Price or Price-
Fleming, its directors, officers, employees, and certain other persons
performing specific functions for each Fund will only be liable to a Fund for
losses resulting from willful misfeasance, bad faith, gross negligence, or
reckless disregard of duty.
Management Fee
Each Fund pays T. Rowe Price or Price-Fleming a fee ("Fee") which
consists of two components: a Group Management Fee ("Group Fee") and an
Individual Fund Fee ("Fund Fee"). The Fee is paid monthly to the T. Rowe
Price or Price-Fleming on the first business day of the next succeeding
calendar month and is calculated as described below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily
Group Fee accruals ("Daily Group Fee Accruals") for each month. The Daily
Group Fee Accrual for any particular day is computed by multiplying the Price
Funds' group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily Price Funds'
Group Fee Accrual for any particular day is calculated by multiplying the
fraction of one (1) over the number of calendar days in the year by the
annualized Daily Price Funds' Group Fee Accrual for that day as determined in
accordance with the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the Price Funds include
all the mutual funds distributed by T. Rowe Price Investment Services, Inc.
(excluding T. Rowe Price Spectrum Fund, Inc. and any institutional or private
label mutual funds). For the purpose of calculating the Daily Price Funds'
Group Fee Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund
Fee accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate for the Prime Reserve, Short-Term Bond, Equity Income and International
Stock Funds of .05%, .10%, .25% and .35%, respectively, 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.
Listed below are the total amounts paid to T. Rowe Price by the Prime
Reserve, Short-Term Bond, and Equity Income Funds and amounts paid to Price-
Fleming by the International Stock Fund under an investment management
PAGE 54
agreement, in effect at that time, for each of the last three fiscal years or
year ends.
Prime Short-Term Equity International
Reserve Fund Bond Fund Income Fund Stock Fund
Fiscal Fiscal
Year Amount Year Amount Year Amount Year Amount
1993 $15,620,000 1993 $2,136,000 1993$15,154,800 1993$14,955,000
1992 18,486,000 1992 1,398,000 1992 10,430,000 1992 12,522,000
1991 19,710,000 1991 1,089,000 1991 6,829,000 1991 9,233,000
Limitation on Fund Expenses
The Management Agreement between each Fund and T. Rowe Price or Price-
Fleming provides that each Fund will bear all expenses of its operations not
specifically assumed by T. Rowe Price or Price-Fleming. However, in
compliance with certain state regulations, T. Rowe Price or Price-Fleming will
reimburse a Fund for certain expenses which in any year exceed the limits
prescribed by any state in which the Fund's shares are qualified for sale.
Presently, the most restrictive expense ratio limitation imposed by any state
is 2.5% of the first $30 million of a Fund's average daily net assets, 2% of
the next $70 million of such assets, and 1.5% of net assets in excess of $100
million. For the purpose of determining whether a Fund is entitled to
reimbursement, the expenses of the Fund are calculated on a monthly basis. If
a Fund is entitled to reimbursement, that month's management fee will be
reduced or postponed, with any adjustment made after the end of the year.
T. Rowe Price Spectrum Fund, Inc.
The Funds are party to a Special Servicing Agreement ("Agreement")
between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum Fund"), T. Rowe
Price, T. Rowe Price Services, Inc. and various other T. Rowe Price funds
which, along with the Funds, are funds in which Spectrum Fund invests
(collectively all such funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors/Trustees of any
Underlying Price Fund determines that such Underlying Fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly
in the Underlying Price Funds and the resulting reduction in shareholder
servicing costs. Although such cost savings are not certain, the estimated
savings to the Underlying Price Funds generated by the operation of Spectrum
Fund are expected to be sufficient to offset most, if not all, of the expenses
incurred by Spectrum Fund.
International Stock Fund
Under the Management Agreement, Price-Fleming is permitted to utilize
the services or facilities of others to provide it or the Fund with
statistical and other factual information, advice regarding economic factors
and trends, advice as to occasional transactions in specific securities, and
such other information, advice or assistance as Price-Fleming may deem
necessary, appropriate, or convenient for the discharge of its obligations
under the Management Agreement or otherwise helpful to the Fund.
PAGE 55
Certain administrative support is provided by T. Rowe Price which
receives from Price-Fleming a fee of .15% of the market value of all assets in
equity accounts, .15% of the market value of all assets in active fixed income
accounts and .035% of the market value of all assets in passive fixed income
accounts under Price-Fleming's management.
Price-Fleming has entered into separate letters of agreement with
Fleming Investment Management Limited ("FIM") and Jardine Fleming Investment
Holdings Limited ("JFIH"), wherein FIM and JFIH have agreed to render
investment research and administrative support to Price-Fleming. FIM is a
wholly-owned subsidiary of Robert Fleming Asset Management Limited which is a
wholly-owned subsidiary of Robert Fleming Holdings Limited ("Robert Fleming").
JFIH is an indirect wholly-owned subsidiary of Jardine Fleming Group Limited.
Under the letters of agreement, these companies will provide Price-Fleming
with research material containing statistical and other factual information,
advice regarding economic factors and trends, advice on the allocation of
investments among countries and as between debt and equity classes of
securities, and research and occasional advice with respect to specific
companies. For these services, FIM and JFIH each receives a fee of .075% of
the market value of all assets in equity accounts under Price-Fleming's
management. JFIH each receives a fee of .075% of the market value of all
assets in active fixed income accounts and .0175% of such market value in
passive fixed income accounts under Price-Fleming's management.
Robert Fleming personnel have extensive research resources throughout
the world. A strong emphasis is placed on direct contact with companies in
the research universe. Robert Fleming personnel, who frequently speak the
local language, have access to the full range of research products available
in the market place and are encouraged to produce independent work dedicated
solely to portfolio investment management, which adds value to that generally
available.
DISTRIBUTOR FOR FUNDS
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Funds' 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 each
Fund's shares is continuous.
Investment Services is located at the same address as the Funds and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to each Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that each
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
The Underwriting Agreement provides that Investment Services will pay
all fees and expenses in connection with: printing and distributing
prospectuses and reports for use in offering and selling Fund shares;
preparing, setting in type, printing, and mailing all sales literature and
advertising; Investment Services' federal and state registrations as a
broker-dealer; and offering and selling Fund shares, except for those fees and
expenses specifically assumed by each Fund. Investment Services' expenses are
paid by T. Rowe Price.
PAGE 56
Investment Services acts as the agent of each Fund in connection with
the sale of its shares in all states in which the shares are qualified and in
which Investment Services is qualified as a broker-dealer. Under the
Underwriting Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the Funds.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the custodian for
each Fund's securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Short-Term Bond, Equity Income, and International
Stock Funds have entered into a Custodian Agreement with The Chase Manhattan
Bank, N.A., London, pursuant to which portfolio securities which are purchased
outside the United States are maintained in the custody of various foreign
branches of The Chase Manhattan Bank and such other custodians, including
foreign banks and foreign securities depositories as are approved by each
Fund's Board of Directors in accordance with regulations under the Investment
Company Act of 1940. The Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110. The address for The Chase Manhattan Bank, N.A.,
London is Woolgate House, Coleman Street, London, EC2P 2HD, England.
PORTFOLIO TRANSACTIONS
Prime Reserve and Short-Term Bond Funds
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Funds 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.
Each Fund's purchases and sales of portfolio securities are normally done on a
principal basis and do not involve the payment of a commission although they
may involve the designation of selling concessions. That part of the
discussion below relating solely to brokerage commissions would not normally
apply to a Fund. However, it is included because T. Rowe Price does manage a
significant number of common stock portfolios which do engage in agency
transactions and pay commissions and because some research and services
resulting from the payment of such commissions may benefit the Funds.
How Brokers and Dealers are Selected
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a
primary market-maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by the client, although the price
usually includes an undisclosed compensation. Transactions placed through
dealers serving as primary market-makers reflect the spread between the bid
and asked prices. Securities may also be purchased from underwriters at
prices which include underwriting fees.
T. Rowe Price may effect principal transactions on behalf of a 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
PAGE 57
with the acquisition of securities in underwritings. Each Fund may receive
brokerage and research services in connection with such designations in fixed
priced underwritings.
In purchasing and selling a Fund's portfolio securities, it is T. Rowe
Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions (in a the Fund does not generally engage), at competitive
commission rates. However, under certain conditions, a Fund may pay higher
brokerage commissions in return for brokerage and research services. In
selecting broker-dealers to execute a Fund's portfolio transactions,
consideration is given to such factors as the price of the security, the rate
of the commission, the size and difficulty of the order, the reliability,
integrity, financial condition, general execution and operational capabilities
of competing brokers and dealers, and brokerage and research services provided
by them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
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 Funds. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Description of Research Services Received from Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers
and dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to
T. Rowe Price's own research effort and, when utilized, are subject to
internal analysis before being incorporated by T. Rowe Price into its
investment process. As a practical matter, it would not be possible for T.
Rowe Price 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
PAGE 58
from brokerage firms has not reduced T. Rowe Price's normal research
activities, the expenses of T. Rowe Price could be materially increased if it
attempted to generate such additional information through its own staff. To
the extent that research services of value are provided by brokers or dealers,
T. Rowe Price may be relieved of expenses which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in
return for products or services other than brokerage or research services. In
accordance with the provisions of Section 28(e) of the Securities Exchange Act
of 1934, T. Rowe Price may from time to time receive services and products
which serve both research and non-research functions. In such event, T. Rowe
Price makes a good faith determination of the anticipated research and non-
research use of the product or service and allocates brokerage only with
respect to the research component.
<PAGE>
PAGE 59
Commissions to Brokers who Furnish Research Services
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 charged by
broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular broker.
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 or selling concessions 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 and dealers, and attempts to allocate a
portion of its brokerage and selling concession 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 and dealers and make judgments as to the
level of business which would recognize such services. In addition, brokers
and dealers sometimes suggest a level of business they would like to receive
in return for the various brokerage and research services they provide.
Actual business 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
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 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.
Each 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.
PAGE 60
Some of T. Rowe Price's other clients have investment objectives and
programs similar to those of the Funds. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Funds. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution which
generally results in lower commission rates being attained. In certain cases,
where the aggregate order is executed in a series of transactions at various
prices on a given day, each participating client's proportionate share of such
order reflects the average price paid or received with respect to the total
order. T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers - Short-Term Bond Fund
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include of certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming International Holdings Limited, a subsidiary of JFG. JFG is
50% owned by Robert Fleming Holdings and 50% owned by Jardine Matheson
Holdings Limited. Orders for the Fund's portfolio transactions placed with
affiliates of Robert Fleming Holdings and JFG will result in commissions being
received by such affiliates.
The Board of Directors of the Fund has authorized T. Rowe Price to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of the Fund's portfolio transactions. These
affiliates include, but are not limited to, Jardine Fleming (Securities)
Limited ("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co.
Limited ("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert
Fleming, Inc. (a New York brokerage firm). Other affiliates of Robert Fleming
PAGE 61
Holdings and JFG also may be used. Although it does not believe that the
Fund's use of these brokers would be subject to Section 17(e) of the
Investment Company Act of 1940, the Board of Directors of the Fund has agreed
that the procedures set forth in Rule 17(e)(1) under that Act will be followed
when using such brokers.
Other
Prime Reserve Fund
For the fiscal years February 28, 1993, February 29, 1992, and February
28, 1991, the Fund engaged in portfolio transactions involving broker-dealers
totaling $36,478,989,278, $29,975,769,142, and $45,350,218,407, respectively.
The entire amount for each of these years represented principal transactions
as to which the Fund has no knowledge of the profits or losses realized by the
respective broker-dealers. Of all such portfolio transactions, approximately
81%, 76%, and 15%, respectively, were placed with firms which provided
research, statistical, or other services to T. Rowe Price in connection with
the management of the Fund or, in some cases, to the Fund.
Short-Term Bond Fund
For the fiscal periods February 28, 1993, February 29, 1992, and
February 28, 1991, the Fund engaged in portfolio transactions involving
broker-dealers totaling $5,805,957,978, $5,534,535,154, and $6,867,288,297,
respectively. For the fiscal year ended February 29, 1992, $5,034,535,154
consisted of principal transactions as to which the Fund has no knowledge of
the profits or losses realized by the respective broker-dealers; and
$5,000,000 involved trades with brokers acting as agents or underwriters, in
which such brokers received total commissions, including discounts received in
connection with underwritings, of $15,000. For the fiscal years ended
February 28, 1993 and February 28, 1991, all of the amounts represented
principal transactions as to which the Fund has no knowledge of the profits or
losses realized by the respective broker-dealers. Of all such portfolio
transactions, approximately 84%, 79%, and 80%, respectively, were placed with
firms which provided research, statistical, or other services to T. Rowe Price
in connection with the management of the Fund or, in some cases, to the Fund.
The portfolio turnover rate of the Fund for the fiscal years ended
February 28, 1993, February 29, 1992, and February 28, 1991, was 1993--68.4%,
1992--380.7%, and 1991--980.4%, respectively.
Equity Income Fund
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.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is T. Rowe
Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
PAGE 62
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided by
them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a
primary market-maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by the client, although the price
usually includes an undisclosed compensation. Transactions placed through
dealers serving as primary market-makers reflect the spread between the bid
and asked prices. Securities may also be purchased from underwriters at
prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe Price may
effect principal transactions on behalf of the Fund with a broker or dealer
who furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in fixed price offerings.
How Evaluations are Made of the Overall Reasonableness of Brokerage
Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Description of Research Services Received from Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers
and dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
PAGE 63
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 who provide quality brokerage and execution services
also furnish research services to T. Rowe Price. With regard to the payment
of brokerage commissions, T. Rowe Price has adopted a brokerage allocation
policy embodying the concepts of Section 28(e) of the Securities Exchange Act
of 1934, which permits an investment adviser to cause an account to pay
commission rates in excess of those another broker or dealer would have
charged for effecting the same transaction, if the adviser determines in good
faith that the commission paid is reasonable in relation to the value of the
brokerage and research services provided. The determination may be viewed in
terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular broker. T. Rowe
Price may receive research, as defined in Section 28(e), in connection with
selling concessions and designations in fixed price offerings in which the
Fund participates.
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 which are able to
meet the needs of the transaction.
PAGE 64
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 brokerage business is
allocated on the basis of all the considerations described above. In no case
is a broker 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 elimination of
all or a portion of the selling-group concession or underwriting discount when
PAGE 65
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by
Robert Fleming Holdings and 50% owned by Jardine Matheson Holdings Limited.
Orders for the Fund's portfolio transactions placed with affiliates of Robert
Fleming Holdings and JFG will result in commissions being received by such
affiliates.
The Board of Trustees of the Fund has authorized T. Rowe Price to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of the Fund's portfolio transactions. These
affiliates include, but are not limited to, Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert Fleming,
Inc. (a New York brokerage firm). Other affiliates of Robert-Fleming Holdings
and JFG also may be used. Although it does not believe that the Fund's use of
these brokers would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Trustees of the Fund has agreed that the procedures set
forth in Rule 17(e)(1) under that Act will be followed when using such
brokers.
For the years 1993, 1992, and 1991, the total brokerage commissions paid
by the Fund, including the discounts received by securities dealers in
connection with underwritings, were $4,660,406, $3,419,000, and $3,087,000,
respectively. Of these commissions, approximately 42%, 37%, and 36%,
respectively, were paid to firms which provided research, statistical, or
other services to T. Rowe Price in connection with the management of the Fund,
or, in some cases, to the Fund.
On December 31, 1993, the Fund held 250,000 shares of the common stock
of J.P. Morgan with a value of $17,344,000. In 1993, J.P. Morgan was among
the Fund's regular brokers or dealers as defined in Rule 10b-1 under the
Investment Company Act of 1940.
The portfolio turnover rate of the Fund for each of the last three years
has been as follows: 1993--31.2%, 1992--30.0%, and 1991--33.5%.
International Stock Fund
Investment or Brokerage Discretion
PAGE 66
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund is made by Price-Fleming. Price-Fleming is also
responsible for implementing these decisions, including the allocation of
portfolio brokerage and principal business and the negotiation of commissions.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is Price-
Fleming's policy to obtain quality execution at the most favorable prices
through responsible broker-dealers and, in the case of agency transactions, at
competitive commission rates where such rates are negotiable. However, under
certain conditions, the Fund may pay higher brokerage commissions in return
for brokerage and research services. In selecting broker-dealers to execute
the Fund's portfolio transactions, consideration is given to such factors as
the price of the security, the rate of the commission, the size and difficulty
of the order, the reliability, integrity, financial condition, general
execution and operational capabilities of competing brokers and dealers, their
expertise in particular markets and the brokerage and research services they
provide to Price-Fleming or the Fund. It is not the policy of Price-Fleming
to seek the lowest available commission rate where it is believed that a
broker or dealer charging a higher commission rate would offer greater
reliability or provide better price or execution.
Transactions on stock exchanges involve the payment of brokerage
commissions. In transactions on stock exchanges in the United States, these
commissions are negotiated. Traditionally, commission rates have generally
not been negotiated on stock markets outside the United States. In recent
years, however, an increasing number of overseas stock markets have adopted a
system of negotiated rates, although a number of markets continue to be
subject to an established schedule of minimum commission rates. It is
expected that equity securities will ordinarily be purchased in the primary
markets, whether over-the-counter or listed, and that listed securities may be
purchased in the over-the-counter market if such market is deemed the primary
market. In the case of securities traded on the over-the-counter markets,
there is generally no stated commission, but the price usually includes an
undisclosed commission or markup. In underwritten offerings, the price
includes a disclosed, fixed commission or discount.
Fixed Income Securities
For fixed income securities, it is expected that purchases and sales
will ordinarily be transacted with the issuer, or issuer's underwriter, or
with a primary market maker acting as principal on a net basis, with no
brokerage commission being paid by the Fund. However, the price of the
securities generally includes compensation which is not disclosed separately.
Transactions placed though dealers who are serving as primary market makers
reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, Price-Fleming 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. The prices the Fund pays to
underwriters of newly-issued securities usually include a concession paid by
the issuer to the underwriter. Price-Fleming may receive research services in
connection with brokerage transactions, including designations in fixed price
offerings.
PAGE 67
Price-Fleming may cause the Fund to pay a broker-dealer who furnishes
brokerage and/or research services a commission for executing a transaction
that is in excess of the commission another broker-dealer would have received
for executing the transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or research services
which have been provided. In some cases, research services are generated by
third parties but are provided to Price-Fleming by or through broker-dealers.
Descriptions of Research Services Received from Brokers and Dealers
Price-Fleming receives a wide range of research services from brokers
and dealers covering investment opportunities throughout the world, including
information on the economies, industries, groups of securities, individual
companies, statistics, political developments, technical market action,
pricing and appraisal services, and performance analyses of all the countries
in which the Fund's portfolio is likely to be invested. Price-Fleming cannot
readily determine the extent to which commissions charged by brokers reflect
the value of their research services, but brokers occasionally suggest a level
of business they would like to receive in return for the brokerage and
research services they provide. To the extent that research services of value
are provided by brokers, Price-Fleming may be relieved of expenses which it
might otherwise bear. In some cases, research services are generated by third
parties but are provided to Price-Fleming by or through brokers.
Commissions to Brokers who Furnish Research Services
Certain broker-dealers which provide quality execution services also
furnish research services to Price-Fleming. Price-Fleming 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
its clients to pay a broker which furnishes brokerage or research services a
higher commission than that which might be charged by another broker which
does not furnish brokerage or research services, or which furnishes brokerage
or research services deemed to be of lesser value, if such commission is
deemed reasonable in relation to the brokerage and research services provided
by the broker, viewed in terms of either that particular transaction or the
overall responsibilities of the adviser with respect to the accounts as to
which it exercises investment discretion. Accordingly, Price-Fleming may
assess the reasonableness of commissions in light of the total brokerage and
research services provided by each particular broker.
Miscellaneous
Research services furnished by brokers through which Price-Fleming
effects securities transactions may be used in servicing all accounts managed
by Price-Fleming, Conversely, research services received from brokers which
execute transactions for the Fund will not necessarily be used by Price-
Fleming exclusively in connection with the management of the Fund.
Some of Price-Fleming's other clients have investment objectives and
programs similar to those of the Fund. Price-Fleming 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 Price-Fleming's policy not to favor one client over another
in making recommendations or in placing orders. Price-Fleming 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. Price-Fleming has established a general investment policy that it will
PAGE 68
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.
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.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
Price-Fleming, Price-Fleming is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that Price-Fleming will often place orders for the Fund's portfolio
transactions with broker-dealers through the trading desks of certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming"), an affiliate
of Price-Fleming. Robert Fleming, through Copthall Overseas Limited, a
wholly-owned subsidiary, owns 25% of the common stock of Price-Fleming. Fifty
percent of the common stock of Price-Fleming is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of Jardine Fleming Group
Limited ("JFG"). JFG is 50% owned by Robert Fleming and 50% owned by Jardine
Matheson Holdings Limited. The affiliates through whose trading desks such
orders may be placed include Fleming Investment Management Limited ("FIM") and
Robert Fleming & Co. Limited ("RF&Co."). FIM and RF&Co. are wholly-owned
subsidiaries of Robert Fleming. These trading desks will operate under strict
instructions from the Fund's portfolio manager with respect to the terms of
such transactions. Neither Robert Fleming, JFG, nor their affiliates will
receive any commission, fee, or other remuneration for the use of their
trading desks, although orders for the Fund's portfolio transactions may be
placed with affiliates of Robert Fleming and JFG who may receive a commission.
The Board of Directors of the Fund has authorized Price-Fleming to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of each Fund's portfolio transactions,
provided that Price-Fleming believes that doing so will result in an economic
advantage (in the form of lower execution costs or otherwise) being obtained
for each Fund. These affiliates include Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, RF&Co., Jardine Fleming Australia
Securities Limited, and Robert Fleming, Inc. (a New York brokerage firm).
The above-referenced authorization was made in accordance with
Section 17(e) of the Investment Company Act of 1940 (the "1940 Act") and
Rule 17e-1 thereunder which require the Fund's independent directors to
approve the procedures under which brokerage allocation to affiliates is to be
made and to monitor such allocations on a continuing basis. Except with
respect to tender offers, it is not expected that any portion of the
commissions, fees, brokerage, or similar payments received by the affiliates
of Robert Fleming in such transactions will be recaptured by the Fund. The
directors have reviewed and from time to time may continue to review whether
other recapture opportunities are legally permissible and available and, if
they appear to be, determine whether it would be advisable for the Fund to
seek to take advantage of them.
During the year 1993, the Fund paid JFS and RF&Co. $1,198,000 and
$100,000, respectively, in total brokerage commissions in connection with
PAGE 69
their portfolio transactions. The brokerage commissions paid to JFS and
RF&Co. represented 22% and 2%, respectively, of the Fund's aggregate brokerage
commissions paid during 1993. The aggregate dollar amount of transactions
effected through JFS and RF&Co., involving the payment of commissions,
represented 18% and 2%, respectively, of the aggregate dollar amount of all
transactions involving the payment of commissions during 1993. In accordance
with the written procedures adopted pursuant to Rule 17e-1, the independent
directors of the Fund reviewed the 1993 transactions with affiliated brokers
and determined that such transactions resulted in an economic advantage to the
Fund either in the form of lower execution costs or otherwise.
Other
For the years 1993, 1992, and 1991, the total brokerage commissions paid
by the Fund, including the discounts received by securities dealers in
connection with underwritings, were $5,419,000, $4,052,000, and $3,119,000,
respectively. Of these commissions, approximately 76%, 85%, and 90%,
respectively, were paid to firms which provided research, statistical, or
other services to Price-Fleming in connection with the management of the Fund
or, in some cases, to the Fund.
The portfolio turnover rate of the Fund for each of the last three years
has been as follows: 1993--29.8%, 1992--37.8%, and 1991--45.0%.
PRICING OF SECURITIES
Prime Reserve Fund
Securities with more than 60 days remaining to maturity are stated at
fair value which is determined by using a matrix system that establishes a
value for each security based on money market yields. Securities originally
purchased with remaining maturities of 60 days or less are valued at amortized
cost. In addition, securities purchased with maturities in excess of 60 days,
but which currently have maturities of 60 days or less, are valued at their
amortized cost for the 60 days prior to maturity--such amortization being
based on the fair value of the securities on the 61st day prior to maturity.
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 officers of
the Funds, as authorized by the Board of Directors.
Maintenance of Net Asset Value Per Share
It is the policy of the Fund to attempt to maintain a net asset value of
$1.00 per share by rounding to the nearest one cent. This method of valuation
is commonly referred to as "penny rounding" and is permitted by Rule 2a-7
under the Investment Company Act of 1940. Under Rule 2a-7:
(a)the Board of Directors of the Fund must undertake to assure, to the
extent reasonably practical taking into account current market
conditions affecting the Fund's investment objectives, that the Fund's
net asset value will not deviate from $1.00 per share;
(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 (or in the case of U.S. government securities
greater than 762 days), and (iii) maintain a dollar-weighted average
portfolio maturity of 90 days or less;
PAGE 70
(c)the Fund must limit its purchase of portfolio instruments, including
repurchase agreements, to those U.S. dollar-denominated instruments
which the Fund's Board of Directors determines present minimal credit
risks, and which are eligible securities as defined by Rule 2a-7; and
(d)the Board of Directors must determine that (i) it is in the best
interest of the Fund and its shareholders to maintain a stable price per
share under the penny rounding method; and (ii) the Fund will continue
to use the penny rounding method only so long as the Board of Directors
believes that it fairly reflects the market based net asset value per
share.
Although the Fund believes that it will be able to maintain its net
asset value at $1.00 per share under most conditions, there can be no absolute
assurance that it will be able to do so on a continuous basis. If the Fund's
net asset value per share declined, or was expected to decline, below $1.00
(rounded to the nearest one cent), the Board of Directors of the Fund might
temporarily reduce or suspend dividend payments in an effort to maintain the
net asset value at $1.00 per share. As a result of such reduction or
suspension of dividends, an investor would receive less income during a given
period than if such a reduction or suspension had not taken place. Such
action could result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption, a price per
share lower than that which he paid. On the other hand, if the Fund's net
asset value per share were to increase, or were anticipated to increase above
$1.00 (rounded to the nearest one cent), the Board of Directors of the Fund
might supplement dividends in an effort to maintain the net asset value at
$1.00 per share.
Short-Term Bond Fund
Fixed income securities are generally traded in the over-the-counter
market. Investments in domestic securities with remaining maturities of one
year or more and foreign securities are stated at fair value using 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. Domestic securities with
remaining maturities less than one year are stated at fair value which is
determined by using a matrix system that establishes a value for each security
based on bid-side money market yields.
There are a number of pricing services available, and the Board of
Directors, on the basis of an ongoing evaluation of these services, may use or
may discontinue the use of any pricing service in whole or in part.
For the purposes of determining the Fund's net asset value per share,
all assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by any 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 officers of
the Fund as authorized by its Board of Directors.
Equity Income and International Stock Funds
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
PAGE 71
primary market for such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors/Trustees or by persons delegated by the Board, best to reflect fair
value.
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost in local currency which,
when combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at 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.
International Stock Fund
Trading in the portfolio securities of the International Stock Fund may
take place in various foreign markets on certain days (such as Saturday) when
the Fund is not open for business and does not calculate its net asset value.
In addition, trading in the Fund's portfolio securities may not occur on days
when the Fund is open. The calculation of the Fund's net asset value normally
will not take place contemporaneously with the determination of the value of
the Fund's portfolio securities. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
time the Fund's net asset value is calculated will not be reflected in the
Fund's net asset value unless Price-Fleming, under the supervision of the
Fund's Board of Directors, determines that the particular event should be
taken into account in computing the Fund's net asset value.
NET ASSET VALUE PER SHARE
The purchase and redemption price of each Fund's shares is equal to the
Fund's net asset value per share or share price. Each Fund determines its net
asset value per share by subtracting the Fund's liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Prime Reserve Fund is
calculated twice daily, and for the Short-Term Bond, Equity Income, and
International Stock Funds, is 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, Washington's Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of the net asset value (and the offering, sale redemption
and repurchase of shares) for a Fund may be suspended at times (a) during
which the NYSE is closed, other than customary weekend and holiday closings,
(b) during which trading on the NYSE is restricted (c) during which an
emergency exists as a result of which disposal by a Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for a
Fund fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over a Fund may by order permit such a
PAGE 72
suspension for the protection of a 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
Unless you elect otherwise, the Funds' dividends and, with respect to
the Equity Income and International Stock Funds, capital gain distributions,
if any, and the Equity Income Fund's final quarterly dividend, will be
invested on the reinvestment date using the NAV per share of that date. The
reinvestment date normally precedes the payment date by about 10 days although
the exact timing is subject to change.
TAX STATUS
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
Dividends and distributions paid by the Prime Reserve and Short-Term
Bond Funds are not eligible for the dividends-received deduction for corporate
shareholders. A portion of the dividends paid by the Equity Income Fund may
be eligible for the dividends-received deduction for corporate shareholders.
Dividends and distributions paid by the International Stock Fund are not
eligible for the dividends-received deduction for corporate shareholders, if
as expected, none of the Fund's income consists of dividends paid by United
States corporations. Capital gain distributions paid from the Fund are never
eligible for this deduction.
For tax purposes, it does not make any difference whether dividends and
capital gain distributions are paid in cash or in additional shares. Each
Fund must declare dividends equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to avoid a federal
excise tax and distribute 100% of ordinary income and capital gains as of its
tax year-end to avoid federal income tax.
Foreign currency gains and losses, including the portion of gain or loss
on the sale of debt securities attributable to foreign exchange rate
fluctuations are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the International Stock Fund will
be increased; if the result is a loss, the income dividend paid by the Fund
will be decreased. Adjustments, to reflect these gains and losses will be
made at the end of the Fund's taxable year.
At the time of your purchase, each Fund's net asset value may reflect
undistributed income, with respect to the Equity Income and International
Stock Funds, 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
either as dividends or capital gain distributions. For federal income tax
purposes, each Fund is permitted to carry forward its net realized capital
losses, if any, for eight years and realize net capital gains up to the amount
of such losses without being required to pay taxes on, or distribute such
gains. On May 31, 1993, the books of the Prime Reserve Fund indicated that
the Fund's aggregate net assets included realized capital losses of $4,216,462
and unrealized appreciation of $27,710. On May 31, 1993, the books of the
Short-Term Bond Fund indicated that the Fund's aggregate net assets included
realized capital losses of $9,381,939 and unrealized appreciation of
$11,367,942. On March 31, 1994, the books of the Equity Income Fund indicated
that the Fund's aggregate net assets included undistributed net income of
$132,075, net realized capital gains of $36,563,108, and unrealized
appreciation of $153,387,691. On March 31, 1994, the books of the
PAGE 73
International Stock Fund indicated that the Fund's aggregate net assets
included undistributed net income of $22,022,000, net realized capital losses
of $131,726,000 and unrealized appreciation of $598,128,000.
If, in any taxable year, a 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 without deduction
for dividends or other distributions to shareholders; (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), and with respect to the International Stock Fund, may qualify for
the 70% deduction for dividends received by corporation; and (iii) foreign tax
credits would not "pass through" to International Stock Fund shareholders.
Foreign Currency Gains and Losses-Short-Term Bond and Equity Income Funds
Foreign currency gains and losses, including the portion of gain or loss
on the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by a Fund will be increased; if the
result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments to reflect these gains and losses will be made at the end of each
Fund's taxable year.
Passive Foreign Investment Companies-Equity Income Fund
The Fund may purchase the securities of certain foreign investment funds
or trusts called passive foreign investment companies. Capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the Fund holds its investment. In addition to bearing their
proportionate share of the fund's expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses of such
funds. In addition, the Fund may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to
shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such
gains will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
Taxation of Foreign Shareholders-Equity Income and International Stock Funds
The Code provides that dividends from net income (which are deemed to
include for this purpose each shareholder's pro rata share of foreign taxes
paid by the International Stock Fund--see discussion of "pass through" of the
foreign tax credit to U.S. shareholders) will be subject to U.S. tax. For
shareholders who are not engaged in a business in the U.S., this tax would be
imposed at the rate of 30% upon the gross amount of the dividends in the
absence of a Tax Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized each Fund are
not subject to tax unless the foreign shareholder is a nonresident alien
individual who was physically present in the U.S. during the tax year for more
than 182 days.
<PAGE>
PAGE 74
International Stock Fund
Income received by the Fund from sources within various foreign
countries will be subject to foreign income taxes withheld at the source.
Under the Code, if more than 50% of the value of the Fund's total assets at
the close of its taxable year comprise securities issued by foreign
corporations, the Fund may file an election with the Internal Revenue Service
to "pass through" to the Fund's shareholders the amount of foreign income
taxes paid by the Fund. Pursuant to this election, shareholders will be
required to: (i) include in gross income, even though not actually received,
their respective pro rata share of foreign taxes paid by the Fund; (ii) treat
their pro rata share of foreign taxes as paid by them; and (iii) either deduct
their pro rata share of foreign taxes in computing their taxable income, or
use it as a foreign tax credit against U.S. income taxes (but not both). No
deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions.
The Fund intends to meet the requirements of the Code to "pass through"
to its shareholders foreign income taxes paid, but there can be no assurance
that the Fund will be able to do so. Each shareholder will be notified within
60 days after the close of each taxable year of the Fund, if the Fund will
"pass through" foreign taxes paid for that year, and, if so, the amount of
each shareholder's pro rata share (by country) of (i) the foreign taxes paid,
and (ii) the Fund's gross income from foreign sources. Of course,
shareholders who are not liable for federal income taxes, such as retirement
plans qualified under Section 401 of the Code, will not be affected by any
such "pass through" of foreign tax credits.
YIELD INFORMATION
Prime Reserve Fund
The Prime Reserve Fund's current and historical yield for a period is
calculated by dividing the net change in value of an account (including all
dividends accrued and dividends reinvested in additional shares) by the
account value at the beginning of the period to obtain the base period return.
This base period return is divided by the number of days in the period then
multiplied by 365 to arrive at the annualized yield for that period. The
Fund's annualized compound yield for such period is compounded by dividing the
base period return by the number of days in the period, and compounding that
figure over 365 days.
The seven-day yield ending May 31, 1993 for the Fund was 2.48% and the
Fund's compound yield for the same period was 2.51%.
Short-Term Bond Fund
From time to time, the Short-Term Bond Fund may advertise a yield figure
calculated in the following manner:
An income factor is calculated for each security in the portfolio based
upon the security's market value at the beginning of the period and yield as
determined in conformity with regulation of the Securities and Exchange
Commission. The income factors are then totalled for all securities in the
portfolio. Next, expenses of the Fund for the period net of expected
reimbursement are deducted from the income to arrive at net income, which is
then converted to a per-share amount by dividing net income by the average
number of shares outstanding during the period. The net income per share is
divided by the net asset value on the last day of the period to produce a
monthly yield which is then annualized. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future performance
PAGE 75
or forecast the dividend per share of the Fund.
The yield of the Fund calculated under the above described method for
the month ended May 31, 1993 was 5.62%.
INVESTMENT PERFORMANCE
Total Return Performance-Short-Term Bond, Equity Income, and International
Stock Funds
Each Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the percentage change
between the beginning value of a static account in each Fund and the ending
value of that account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of a Fund. Each average annual compound
rate of return is derived from the cumulative performance of each Fund over
the time period specified. The annual compound rate of return for each Fund
over any other period of time will vary from the average.
Short-Term Bond Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years Inception
Ended Ended 3/2/84-
2/28/93+ 2/28/93 2/28/93++
________ _______ _________
T. Rowe Price Short-Term Bond Fund 7.63% 47.71% 113.41%
T. Rowe Price Prime Reserve Fund 3.06 36.45 83.27
Donoghue Average of all Taxable Money
Funds 3.14 36.46 81.35
Lehman Bros. 1-3 Year Govt./Corp.
Bond Index 8.12 52.61 132.60
Lipper Short Investment Grade Debt
Funds Average 8.12 49.04 117.94*
*From 2/29/84
<PAGE>
PAGE 76
Average Annual Compound Rates of Return
Since
1 Year 5 Years Inception
Ended Ended 3/2/84-
2/28/93+ 2/28/93 2/28/93++
________ _______ _________
T. Rowe Price Short-Term Bond Fund 7.63% 8.11% 8.79%
T. Rowe Price Prime Reserve Fund 3.06 6.41 6.96
Donoghue Average of all Taxable Money
Funds 3.14 6.41 6.84
Lehman Bros. 1-3 Year Govt./Corp. Bond
Index 8.12 8.82 9.83
Lipper Short Investment Grade Debt
Funds Average 8.12 8.30 9.04
+ If you invested $1,000 on 2/29/92, the total return on 2/28/93 would be
$76.30 ($1,000 X .0763).
++ Assumes purchase price of one share of the Short-Term Bond Fund at the
inception price of $5.00 on 3/2/84.
Equity Income Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 10/31/85 to
12/31/93 12/31/93 12/31/93 12/31/93
________ _________ ___________________
Equity Income Fund 14.84% 74.08% 220.77%
S&P 500 10.07% 97.34% 301.77%
Dow Jones Industrial Average 16.99% 105.25% 333.86%
Lipper Equity Income Fund Average 13.38% 78.00% 160.86%
CPI 2.75% 21.00% 43.93%
Average Annual Compound Rates of Return
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 10/31/85 to
12/31/93 12/31/93 12/31/93 12/31/93
________ ________ __________________
Equity Income Fund 14.84% 11.72% 15.34%
S&P 500 10.07% 14.56% 14.92%
Dow Jones Industrial Average 16.99% 15.47% 15.81%
Lipper Equity Income Fund Average 13.38% 12.14% 12.17%
CPI 2.75% 3.89% 3.71%
The Lipper Equity Income Fund Average is the average performance of 40
equity income funds reported by Lipper Analytical Service.
<PAGE>
PAGE 77
International Stock Fund
Cumulative Performance Percentage Change
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/93+ 12/31/93 12/31/93 12/31/93++
_________ ________ ________ __________
International Stock Fund 40.11% 76.63% 326.21% 678.83%
S&P 500 10.07 97.34 301.77 661.50
Dow Jones Industrial 16.99 105.25 333.86 732.91
Average
Lipper International 39.40 62.48 303.71
480.69+++
Funds Average
EAFE Index 32.94 12.19 417.77
592.40+++
CPI 2.75 21.00 43.93 80.00
Financial Times 22.60 35.85 N/A N/A
Actuaries World Index++++
Average Annual Compound Rates of Return
Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/93+ 12/31/93 12/31/93 12/31/93++
_________ ________ ________ __________
International Stock Fund 40.11% 12.05% 17.37% 16.23%
S&P 500 10.07 14.56 14.92 16.04
Dow Jones Industrial 16.99 15.47 15.81 16.80
Average
Lipper International 39.40 9.85 14.84 13.66+++
Funds Average
EAFE Index 32.94 2.33 17.87 15.40+++
CPI 2.75 3.89 3.71 4.40
Financial Times 22.60 6.32 N/A N/A
Actuaries World Index++++
+ If you invested $1,000 at the beginning of 1993, the total return on
December 31, 1993 would be $1,401.10 ($1,000 x 1.4011).
++ Assumes purchase of one share of International Stock Fund at the
public offering price of $5.00 on May 9, 1980. Over this time, stock
prices in general have risen.
+++ 06/30/80-12/31/91
++++ The inception date of this index is 12/31/85.
Price-Fleming believes that foreign economies have performed well, and
emerging economies are significantly better than the world average, as shown
in the chart below.
GDP Growth Rates
Average
1975-84 1985 1986 1987 1988 1989 1990 19911992
_______ ____ ____ ____ ____ ____ ____ ________
World 3.3 3.8 3.6 3.9 4.6 3.3 2.0 0.6 1.8
Industrialized 2.5 3.3 2.8 3.2 4.3 3.2 2.1 0.2 1.5
Developing (Asia) 6.3 7.2 7.1 8.1 9.1 5.5 5.7 5.8 7.9
PAGE 78
Source: International Monetary Fund 1990 Yearbook
Prime Reserve and Short-Term Bond Funds
From time to time, in reports and promotional literature, one or more
of the T. Rowe Price funds, including this Fund, may compare its performance
to Overnight Government Repurchase Agreements, Treasury bills, notes, and
bonds, certificates of deposit, and money market deposit accounts.
Performance may also be compared to (1) indices of broad groups of managed and
unmanaged securities considered to be representative of or similar to Fund
portfolio holdings; (2) other mutual funds; or (3) other measures of
performance set forth in publications such as:
Advertising News Service, Inc., "Bank Rate Monitor+ - The Weekly
Financial Rate Reporter" is a weekly publication which lists the yields
on various money market instruments offered to the public by 100
leading banks and thrift institutions in the U.S., including loan rates
offered by these banks. Bank certificates of deposit differ from
mutual funds in several ways: the interest rate established by the
sponsoring bank is fixed for the term of a CD; there are penalties for
early withdrawal from CDs; and the principal on a CD is insured.
Bloomberg Financial Markets (Prime Reserve Fund only), a comprehensive
financial data distribution network which tracks a broad range of
financial markets.
Donoghue Organization, Inc., "Donoghue's Money Fund Report" is a weekly
publication which tracks net assets, yield, maturity and portfolio
holdings on approximately 380 money market mutual funds offered in the
U.S. These funds are broken down into various categories such as U.S.
Treasury, Domestic Prime and Euros, Domestic Prime and Euros and
Yankees, and Aggressive.
Donoghue's "Money Fund Insights" (Prime Reserve Fund only) a monthly
publication which tracks net assets, monthly yields and 12-month yields
on approximately 735 money market mutual funds offered in the U.S.
These funds are broken down into various categories such as U.S.
Treasury, Domestic Prime and Euros, and Domestic Prime and Euros and
Yankees.
Knight Ridder Financial Services Market Data (Prime Reserve Fund only),
a financial data delivery network which tracks current and historical
data on the fixed-income markets.
First Boston High Yield Index (Short-Term Bond Fund only). It shows
statistics on the Composite Index and analytical data on new issues in
the marketplace and low-grade issuers.
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund Performance
Analysis" is a monthly publication which tracks net assets, total
return, principal return and yield on over 1900 fixed income mutual
funds offered in the United States.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond Indices" is
a monthly publication which lists principal, coupon and total return on
over 100 different taxable bond indices tracked by Merrill Lynch,
together with the par weighted characteristics of each Index. The
index used as a benchmark for the High Yield Fund is the High Yield
Index. The two indices used as benchmarks for the Short-Term Bond Fund
are the 91-Day Treasury Bill Index and the 1-2.99 Year Treasury Note
Index.
PAGE 79
Morningstar, Inc. - is a widely used independent research firm which
rates mutual funds by overall performance, investment objectives, and
assets.
Salomon Brothers Inc., "Analytical Record of Yields and Yield Spreads"
is a publication which tracks historical yields and yield spreads on
short-term market rates, public obligations of the U.S. Treasury and
agencies of the U.S. Government, public corporate debt obligations,
municipal debt obligations and preferred stocks.
Salomon Brothers Inc., "Bond Market Round-up" is a weekly publication
which tracks the yields and yield spreads on a large, but select, group
of money market instruments, public corporate debt obligations, and
public obligations of the U.S. Treasury and agencies of the U.S.
Government.
Salomon Brothers Inc., "Market Performance" - a monthly publication
which tracks principal return, total return and yield on the Salomon
Brothers Broad investment - Grade Bond Index and the components of the
Index as well as some money market instruments not included in the
index.
Shearson Lehman Brothers, Inc., "The Bond Market Report" - a monthly
publication which tracks principal, coupon and total return on the
Shearson Lehman Govt./Corp. Index and Shearson Lehman Aggregate Bond
Index, as well as all the components of these Indices.
Telerate Systems, Inc., a market data distribution network computer
system which tracks a broad range of financial markets including, the
daily rates on money market instruments, public corporate debt
obligations and public obligations of the U.S. Treasury and agencies of
the U.S. Government.
Wall Street Journal, is a national daily financial news publication
which lists the yields and current market values on money market
instruments, public corporate debt obligations, public obligations of
the U.S. Treasury and agencies of the U.S. Government as well as common
stocks, preferred stocks, convertible preferred stocks, options and
commodities; in addition to indices prepared by the research
departments of such financial organizations as Shearson Lehman/American
Express Inc., and Merrill Lynch, Pierce, Fenner and Smith, Inc.,
including information provided by the Federal Reserve Board.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY, FORBES, BUSINESS WEEK, BARRON'S, etc.
will also be used.
Benefits of Investing in High-Quality Bond Funds - Short-Term Bond Fund
Higher Income
Bonds have generally provided a higher income than money market
securities because yield usually increased with longer maturities. For
instance, the yield on the 30-year Treasury bond usually exceeds the
yield on the 1-year Treasury bill or 5-year Treasury note. However,
securities with longer maturities fluctuate more in price than those
with shorter maturities. Therefore, the investor must weigh the
advantages of higher yields against the possibility of greater
fluctuation in the principal value of your investment.
Income Compounding
PAGE 80
Investing in bond mutual funds allows investors to benefit from easy
and convenient compounding because you can automatically reinvest
monthly dividends in additional fund shares. Each month investors earn
interest on a larger number of shares. Also, reinvesting dividends
removes the temptation to spend the income.
Broad Diversification
Each share of a mutual fund represents an interest in a large pool of
securities, so even a small investment is broadly diversified by
maturity. Since most bonds trade efficiently only in very large
blocks, mutual funds provide a degree of diversification that may be
difficult for individual investors to achieve on their own.
Lower Portfolio Volatility
Investing a portion of one's assets in longer term, high-quality bonds
can help smooth out the fluctuations in your overall investment
results, because bond prices do not necessarily move with stock prices.
Also, bonds usually have higher income yields than stocks, thus
increasing the total income component of your portfolio. This strategy
should also add stability to overall results, as income is always a
positive component of total return.
Liquidity
A bond fund can supplement a money market fund or bank account as a
source of capital for unexpected contingencies. T. Rowe Price fixed-
income funds offer you easy access to money through free checkwriting
and convenient redemption and exchange features. Of course, the value
of a bond fund's shares redeemed through checkwriting may be worth more
or less than their value at the time of their original purchase.
Suitability
High-quality bond funds are most suitable for the following objectives:
obtaining a higher current income with minimal credit risk; compounding
of income over time; or diversifying overall investments to reduce
volatility.
Other Sources of Information
Equity Income and International Stock Funds
From time to time, in reports and promotional literature: (1) each
Fund's total return performance or P/E ratio may be compared to any one or
combination of the following: (i) the Standard & Poor's 500 Stock Index and
Dow Jones Industrial Average so that you may compare a Fund's results with
those of a group of unmanaged securities widely regarded by investors as
representative of the U.S. stock market in general; (ii) other groups of
mutual funds, including T. Rowe Price Funds, tracked by: (A) Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets; (B)
Morningstar, Inc., another widely used independent research firm which ranks
mutual funds; or (C) other financial or business publications, such as
Business Week, Money Magazine, Forbes and Barron's, which provide similar
information; (iii) indices of stocks comparable to those in which the Equity
Income Fund invests; with respect to the International Stock Fund (iv) The
Financial Times (a London based international financial newspaper)-Actuaries
World Indices, including Europe and sub indices comprising this Index (a wide
range of comprehensive measures of stock price performance for the major stock
PAGE 81
markets as well as for regional areas, broad economic sectors and industry
groups); (v) Morgan Stanley Capital International Indices, including the EAFE
Index, Pacific Basin Index, Japan Index and Pacific Ex Japan Index which is a
widely-recognized series of indices in international market performance; (vi)
Baring International Investment Management Limited (an international
securities trading, research, and investment management firm), as a source for
market capitalization, GDP and GNP; (vii) the International Finance
Corporation (an affiliate of the World Bank established to encourage economic
development in less developed countries), World Bank, OECD (Organization for
Economic Co-Operation and Development) and IMF (International Monetary Fund)
as a source of economic statistics; (viii) the Nikkei Average, a generally
accepted benchmark for performance of the Japanese stock market; (ix) indices
of stocks comparable to those in which the International Stock Fund invests
including the Topix Index, which reflects the performance of the First Section
of the Tokyo Stock Exchange; and (x) the performance of U.S. government and
corporate bonds, notes and bills. (The purpose of these comparisons would be
to illustrate historical trends in different market sectors so as to allow
potential investors to compare different investment strategies.); (2) the
Consumer Price Index (measure for inflation) may be used to assess the real
rate of return from an investment in each Fund; (3) other U.S. or foreign
government statistics such as GNP, and net import and export figures derived
from governmental publications, e.g. The Survey of Current Business, may be
used to illustrate investment attributes of a Fund or the general economic,
business, investment, or financial environment in which a Fund operates; (4)
the effect of tax-deferred compounding on each Fund's investment returns, or
on returns in general, may be illustrated by graphs, charts, etc. where such
graphs or charts would compare, at various points in time, the return from an
investment in each Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (5) the sectors or
industries in which each Fund invests may be compared to relevant indices or
surveys (e.g. S&P Industry Surveys) in order to evaluate each Fund's
historical performance or current or potential value with respect to the
particular industry or sector. In connection with (4) above, information
derived from the following chart may be used:
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and 28%
tax bracket.
Year Taxable Tax Deferred
____ _______ ____________
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs-All Funds
An IRA is a long-term investment whose objective is to accumulate
personal savings for retirement. Due to the long-term nature of the
investment, even slight differences in performance will result in
significantly different assets at retirement. Mutual funds, with their
diversity of choice, can be used for IRA investments. Generally, individuals
may need to adjust their underlying IRA investments as their time to
retirement and tolerance for risk changes.
Other Features and Benefits-All Funds
PAGE 82
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as 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. These currently
include: the Asset Mix Worksheet which is designed to show shareholders how to
reduce their investment risk by developing a diversified investment plan: the
College Planning Guide which discusses various aspects of financial planning
to meet college expenses and assists parents in projecting the costs of a
college education for their children; the Retirement Planning Kit (also
available in a PC version) which includes a detailed workbook to determine how
much money you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggest how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
presentation of historical returns of various investments using published
indices. An example of this is shown on the next page.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 Years 25 Years 10 Years 5 Years
Small-Company Stocks 15.3% 18.8% 10.0% 13.3%
Large-Company Stocks 12.3 12.8 14.9 14.5
Foreign Stocks N/A 14.4 17.9 2.3
Long-Term Corporate Bonds 5.6 10.2 14.0 13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4 11.3
Treasury Bills 4.6 7.5 6.4 5.6
U.S. Inflation 4.3 5.9 3.7 3.9
Source: Ibbotson Associates, Morgan Stanley. Foreign stocks reflect
performance of The Morgan Stanley Capital International EAFE Index, which
includes some 1,000 companies representing the stock markets of Europe,
Australia, New Zealand, and the Far East. This chart is for illustrative
purposes only and should not be considered as performance for, or the
annualized return of, any T. Rowe Price Fund. Past performance does not
guarantee future results.
Also included will be various portfolios demonstrating how these historical
indices would have performed in various combinations over a specified time
period in terms of return. An example of this is shown on the next page.
<PAGE>
PAGE 83
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value of
Returns 20 Years $10,000
Ending 12/31/93 Investment
After
Period
___________________ _____________________ ________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.3% 5.4% 24.9% - 9.3%$ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2% 29.1% -15.6%$ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0% 33.4% -21.9%$100,031
Source: T. Rowe Price Associates; data supplied by Lehman Brothers, Wilshire
Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of stocks (85%
Wilshire 5000 and 15% Europe, Australia, Far East [EAFE] Index), bonds
(Lehman Brothers Aggregate Bond Index from 1976-93 and Lehman Brothers
Government/Corporate Bond Index from 1974-75), and 30-day Treasury bills
from January 1974 through December 1993. Past performance does not
guarantee future results. Figures include changes in principal value
and reinvested dividends and assume the same asset mix is maintained
each year. This exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price fund.
** Based on inflation rate of 5.9% for the 20-year period ended 12/31/93.
Insights
From time to time, Insights, a T. Rowe Price publication of reports on
specific investment topics and strategies, may be included in the Fund's
fulfillment kit. Such reports may include information concerning:
calculating taxable gains and losses on mutual fund transactions, coping with
stock market volatility, benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds, growth stock
investing, conservative stock investing, value investing, investing in small
companies, tax-free investing, fixed income investing, investing in mortgage-
backed securities, as well as other topics and strategies.
<PAGE>
PAGE 84
Other Publications
From time to time, in newsletters and other publications issued by T.
Rowe Price Investment Services, Inc., reference may be made to economic,
financial and political developments in the U.S. and abroad and their effect
on securities prices. Such discussions may take the form of commentary on
these developments by T. Rowe Price mutual fund portfolio managers and their
views and analysis on how such developments could affect investments in mutual
funds.
Redemptions in Kind
In the unlikely event a shareholder of the Fund were to receive an in
kind redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for securities or assets
other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment objective and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
ORGANIZATION OF THE FUNDS
International, Prime Reserve and Short-Term Bond Funds
The T. Rowe Price International Funds, Inc. (the "Corporation") was
originally organized in 1979 as a Maryland corporation under the name T. Rowe
Price International Fund, Inc. ("the Old Corporation"). Pursuant to the
Annual Meeting of Shareholders held on April 22, 1986, an Agreement and Plan
of Reorganization and Liquidation was adopted in order to convert the Old
Corporation from a Maryland corporation to a Massachusetts Business Trust,
named the T. Rowe Price International Trust ("the Trust"). This conversion
became effective on May 1, 1986. Pursuant to the Annual Meeting of
Shareholders held on April 19, 1990, an Agreement and Plan of Reorganization
and Liquidation was adopted in order to convert the Trust from a Massachusetts
Business Trust to a Maryland corporation. This conversion become effective
May 1, 1990. The Corporation is registered with the Securities and Exchange
Commission under the 1940 Act as a diversified, open-end investment company,
commonly known as a "mutual fund."
Currently, the Corporation consists of nine series, each of which
represents a separate class of the Corporation's shares and has different
objectives and investment policies. The International Bond Fund was added as
a separate series of the Trust in 1986, and the designation of the existing
series of the Trust was, at that time, changed to the International Stock
Fund. In 1988 and 1990, respectively, the International Discovery and
European Stock Funds were added as separate series of the Trust. Effective
May 1, 1990, all series of the Trust became series of the Corporation. In the
same year, after the May 1, 1990 reorganization, the New Asia and Global
Government Bond Funds were added as separate series of the Corporation. The
Japan, Short-Term Global Income and Latin America Funds were added as separate
series of the Corporation in 1991, 1992, and 1993, respectively. The Charter
also provides that the Board of Directors may issue additional series of
shares.
PAGE 85
Each Fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes, each class 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,
and provided that the authorized shares of any class shall not be decreased
below the number then outstanding and the authorized shares of all classes
shall not exceed 15,000,000,000 for the Prime Reserve Fund and 1,000,000,000
for the Short-Term Bond Fund. The shares of any such additional classes might
therefore differ from the shares of the present class of capital stock and
from each other as to preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption, subject to applicable law, and might thus be
superior or inferior to the capital stock or to other classes in various
characteristics. Each Fund's Board of Directors may increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any
class or series authorized to be issued without shareholder approval.
Except to the extent that the Prime Reserve and Short-Term Bond Fund's
Board of Directors might provide by resolution that holders of shares of a
particular class are entitled to vote as a class on specified matters
presented for a vote of the holders of all shares entitled to vote on such
matters, there would be no right of class vote unless and to the extent that
such a right might be construed to exist under Maryland law. The Charter
contains no provision entitling the holders of the present class of capital
stock to a vote as a class on any matter. Accordingly, the preferences,
rights, and other characteristics attaching to any class of shares, including
the present class of capital stock, might be altered or eliminated, or the
class might be combined with another class or classes, by action approved by
the vote of the holders of a majority of all the shares of all classes
entitled to be voted on the proposal, without any additional right of vote as
a class by the holders of the capital stock or of another affected class or
classes.
Each share of each series of the International Fund has equal voting
rights with every other share of every other series, and all shares of all
series vote as a single group except where a separate vote of any class or
series is required by the 1940 Act, the laws of the State of Maryland, the
Corporation's Articles of Incorporation, the By-Laws of the Corporation, or as
the Board of Directors may determine in its sole discretion. Where a separate
vote is required with respect to one or more classes or series, then the
shares of all other classes or series vote as a single class or series,
provided that, as to any matter which does not affect the interest of a
particular class or series, only the holders of shares of the one or more
affected classes or series is entitled to vote. The preferences, rights, and
other characteristics attaching to any series of shares, including the present
series of capital stock, might be altered or eliminated, or the series might
be combined with another series, by action approved by the vote of the holders
of a majority of all the shares of all series entitled to be voted on the
proposal, without any additional right to vote as a series by the holders of
the capital stock or of another affected series.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
PAGE 86
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of each Fund, a special meeting of
shareholders of a Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of all the votes
of the Fund entitled to be cast at such meeting. Shareholders requesting such
a meeting must pay to the Fund the reasonably estimated costs of preparing and
mailing the notice of the meeting. Each Fund, however, will otherwise assist
the shareholders seeking to hold the special meeting in communicating to the
other shareholders of the Fund to the extent required by Section 16(c) of the
Investment Company Act of 1940.
Equity Income Fund
For tax and business reasons, the Fund was organized in 1985 as a
Massachusetts Business Trust and is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940 as diversified,
open-end investment companies, commonly known as a "mutual funds."
The Fund's Declaration of Trust permits its Board of Trustees to issue
an unlimited number of full and fractional shares of a single class. The
Declarations of Trust also provides that the Fund's Board of Trustees may
issue additional series or classes of shares. Each share represents an equal
proportionate beneficial interest in the Fund. In the event of the
liquidation of the Fund, each share is entitled to a pro rata share of the net
assets of the Fund.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of trustees (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of 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 a 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 Declarations of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of redemption
and the privilege of exchange are described in the prospectus. Shares are
fully paid and nonassessable, except as set forth below. The Trust may be
terminated (i) upon the sale of its assets to another diversified, open-end
management investment company, if approved by the vote of the holders of two-
thirds of the outstanding shares of the Trust, or (ii) upon liquidation and
distribution of the assets of the Trust, if approved by the vote of the
holders of a majority of the outstanding shares of the Trust. If not so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a Fund.
However, the Declarations of Trust disclaim shareholder liability for acts or
obligations of a Fund and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Fund
PAGE 87
or a Trustee. The Declarations of Trust provide 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 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 a Fund paying such
liability will be entitled to reimbursement from the general assets of the
Fund. The Trustees intend to conduct the operations of each Fund in such a
way so as to avoid, as far as possible, ultimate liability of the shareholders
for liabilities of such 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 directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the Corporation, a special meeting
of shareholders of the Corporation shall be called by the Secretary of the
Corporation on the written request of shareholders entitled to cast at least
10% of all the votes of the Corporation, entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of the meeting.
The Corporation, however, will otherwise assist the shareholders seeking to
hold the special meeting in communicating to the other shareholders of the
Corporation to the extent required by Section 16(c) of the 1940 Act.
FEDERAL AND STATE REGISTRATION OF SHARES
Each Fund or its shares are registered under the laws of all states
which require registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Funds.
<PAGE>
PAGE 88
INDEPENDENT ACCOUNTANTS
Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland
21202, are independent accountants to the Funds. The financial statements of
the Prime Reserve and Short-Term Bond Funds for the fiscal year ended February
28, 1993 and the report of independent accountants are included in the Fund's
Annual Report for the fiscal year ended February 28, 1993 on pages 4 through
11, with respect to the Prime Reserve Fund, and on pages 5 through 15, with
the respect to the Short-Term Bond Fund. The financial statements of the
Equity Income and International Stock Funds for the year ended December 31,
1993 and the report of independent accountants are included in each Fund's
Annual Report for the year ended December 31, 1993 on pages 5 through 15, with
respect to the Equity Income Fund, and on pages 9 through 21, with respect to
the International Stock Fund. A copy each Fund's Annual Report accompanies
this Statement of Additional Information. The following financial statements
and the report of independent accountants appearing in the Annual Reports for
the fiscal year ending February 28, 1993 and for the year ended December 31,
1993 are incorporated into this Statement of Additional Information by
reference:
Short-Term
Prime Reserve Fund Bond Fund
Annual Report Annual Report
Page Page
___________ ____________
Report of Independent Accountants 11 15
Statement of Net Assets, February 28, 1993 5-8 5-10
Statement of Operations, year ended
February 28, 1993 8 11
Statement of Changes in Net Assets, years
ended February 28, 1993 and February 29, 1992 9 12
Notes to Financial Statements, February 28, 1993 9-10 12-13
Financial Highlights 10 14
Equity International
Income Fund Stock Fund
Annual Report Annual Report
Page Page
____________ _____________
Report of Independent Accountants 15 17
Statement of Net Assets, December 31, 1993 5-9
Statement of Net Assets, October 31, 1993 9-14
Statement of Operations, year ended
December 31, 1993 10
Statement of Operations, ten months ended
October 31, 1993 15
Statement of Changes in Net Assets, years ended
December 31, 1993 and December 31, 1992 11
Statement of Changes in Net Assets, ten months
ended October 31, 1993, and the years ended
December 31, 1992 and December 31, 1991 16
Notes to Financial Statements, December 31, 1993 12-13
Notes to Financial Statements, October 31, 1993 9-14
Financial Highlights 14 20
<PAGE>
PAGE 89
RATINGS OF COMMERCIAL PAPER
Prime Reserve and Short-Term Bond Funds
Moody's Investors Service, Inc. The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: valuation of the management
of the issuer; economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of earnings
over a period of 10 years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the management
of obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. These factors
are all considered in determining whether the commercial paper is rated P1,
P2, or P3.
Standard & Poor's Corporation. Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors
determines whether the issuer's commercial paper is rated A1, A2, or A3.
Prime Reserve Fund
Fitch Investors Service, Inc.: Fitch 1 - Highest grade. Commercial paper
assigned this rating is regarded as having the strongest degree of assurance
for timely payment. Fitch 2 - Very good grade. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than the
strongest issues.
RATINGS OF CORPORATE DEBT SECURITIES
Prime Reserve Fund
Moody's Investors Service, Inc.: Aaa - Best quality. These securities carry
the smallest degree of investment risk. Interest payments are protected by a
large, or exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues. Aa - High quality by all standards. They are rated lower than
the best bond because margins of protection may not be as large as in Aaa
securities, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat greater.
Standard & Poor's Corporation: AAA - Highest grade. They possess the
ultimate degree of protection as to principal and interest. Marketwise, they
move with interest rates, and hence provide the maximum safety on all counts.
AA - High-grade. Generally, these bonds differ from AAA issues only in a
small degree. Here, too, prices move with the long-term money market.
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
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times interest requirements for such stability of applicable interest that
safety is beyond reasonable question whenever changes occur in conditions.
Other features may enter, such as a wide margin of protection through
collateral, security or direct lien on specific property. Sinking funds or
voluntary reduction of debt by call or purchase are often factors, while
guarantee or assumption by parties other than the original debtor may
influence their rating. AA - Of safety virtually beyond question and readily
salable. Their merits are not greatly unlike those of "AAA" class but a bond
so rated may be junior though of strong lien, or the margin of safety is less
strikingly broad. The issue may be the obligation of a small company,
strongly secured, but influenced as to rating by the lesser financial power of
the enterprise and more local type of market.
Short-Term Bond Fund
Moody's Investors Service, Inc. Aaa - Best quality. These bonds carry the
smallest degree of investment risk. Interest payments are protected by a
large, or exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues. Aa - High quality by all standards. Together with the Aaa
group, they comprise what are generally known as high-grade bonds. They are
rated lower than the best quality bonds because margins of protection may not
be as large, fluctuations of protective elements may be of greater amplitude,
or there may be other elements present which make the long-term risks appear
somewhat greater than in Aaa securities. A - Upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment sometime
in the future.
Standard & Poor's Corporation. AAA - Highest grade obligations. They possess
the ultimate degree of protection as to principal and interest. Marketwise,
they move with interest rates, and hence provide the maximum safety on all
counts. AA - High-grade obligations. In the majority of instances, they
differ from AAA issues only in a small degree. Here too prices move with the
long-term money market. A - Upper-medium grade. They have considerable
investment strength, but are not entirely free from adverse effects of changes
in economic and trade conditions. Interest and principal are regarded as
safe. They predominantly reflect money rates in their market behavior but, to
some extent, also economic conditions.
Equity Income Fund
Moody's Investors Service, Inc.
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds.
A - Bonds rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
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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
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments of or 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.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC - 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 in accordance with the terms of the obligation.
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.
