<PAGE>
<PAGE>
PROSPECTUS
October 1, 2000
T. Rowe Price Funds
Prime Reserve New Income Equity Income International Stock
A selection of stock, bond, and money market funds to help investors meet their
financial objectives.
(T. ROWE PRICE RAM LOGO)
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
T. Rowe Price
Prime Reserve Fund, Inc.
New Income Fund, Inc.
Equity Income Fund
International Funds, Inc.
Prospectus
October 1, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ABOUT THE FUNDS
1
Objective, Strategy, Risks and Expense
s
and
Other Information About the Funds
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Prime Reserve Fund
1, 3
New Income Fund
6, 10
Equity Income
Fund 14, 17
International Stock Fund 19, 23
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Some Basics of Investing
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Prime Reserve Fund 5
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New Income Fund 12
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ABOUT YOUR ACCOUNT
2
Pricing Shares and Receiving 25
Sale Proceeds
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Useful Information on
Distributions 26
and Taxes
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Transaction Procedures and 29
Special Requirements
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MORE ABOUT THE FUNDS
3
Organization and Management 32
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Understanding Performance Information 35
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Investment Policies and Practices 37
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Financial Highlights 55
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INVESTING WITH T. ROWE PRICE
4
Account Requirements 60
and Transaction Information
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Opening a New Account 60
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Purchasing Additional Shares 62
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Exchanging and Redeeming 62
Shares
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Rights Reserved by the Funds 64
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Information About Your 65
Services
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T. Rowe Price 67
Brokerage
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Investment Information 68
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</TABLE>
The Prime Reserve, New Income, and Equity Income Funds are managed by T. Rowe
Price Associates, Inc., which was founded in 1937 and managed $179 billion as
of June 30, 2000. The International Stock Fund is managed by Rowe Price-Fleming
International, Inc., a joint venture established in 1979 between T. Rowe Price
and Robert Fleming Holdings, Ltd. which managed over $42.6 billion as of
December 31, 1999.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
<PAGE>
ABOUT THE FUNDS
Prime Reserve Fund
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
To help you decide whether this fund is appropriate for you, this section
reviews its major characteristics.
What is the fund's objective?
The fund's goals are preservation of capital, liquidity, and, consistent with
these, the highest possible current income.
What is the fund's principal investment strategy?
The fund, which is managed to provide a stable share price of $1.00, invests
in high-quality, U.S. dollar-denominated money market securities. The fund's
average weighted maturity will not exceed 90 days, and its yield will
fluctuate with changes in short-term interest rates. In selecting securities,
fund managers may examine the relationships among yields on various types and
maturities of money market securities in the context of their outlook for
interest rates. For example, commercial paper often offers a yield advantage
over Treasury bills. If rates are expected to fall, longer maturities, which
typically have higher yields than shorter maturities, may be purchased to try
to preserve the fund's income level. Conversely, shorter maturities may be
favored if rates are expected to rise.
The fund may sell holdings for a variety of reasons, such as to adjust the
portfolio's average maturity or quality, or to shift assets into
higher-yielding securities.
. For further details on the fund's investment program, please see "What is
the fund's investment program?" later in this section, and see the
Investment Policies and Practices section.
What are the main risks of investing in the fund?
Since the fund seeks to maintain a $1.00 share price, it should have little
risk of principal loss. However, there is no assurance the fund will avoid
principal losses in the rare event that holdings default or interest rates
rise sharply in an unusually short period.
The fund's yield will vary; it is not fixed for a specific period like the
yield on a bank certificate of deposit. This is a disadvantage when interest
rates are falling. An investment in the fund is not insured or guaranteed by
the FDIC or any other government agency. Although the fund seeks to preserve
the value of your investment at $1.00 per share, it is possible to lose money
by investing in the fund.
<PAGE>
T. ROWE PRICE
As with any mutual fund, there can be no guarantee the fund will achieve its
objective.
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. Over time, money market securities have provided
greater stability but lower returns than bonds or stocks. If you have some
money for which safety and accessibility are more important than total return
or capital growth over time, the fund should be an appropriate investment.
The fund can be used for both regular and tax-deferred accounts, such as IRAs
and Keoghs.
How has the fund performed in the past?
The bar chart showing calendar year returns and the average annual total
return table indicate risk by illustrating how much returns can differ from
one year to the next and over time. Fund past performance is no guarantee of
future returns.
The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns during the years depicted in the
chart.
LOGO
<TABLE>
<CAPTION>
Calendar Year Total Returns
"90" "91" "92" "93" "94" "95" "96" "97" "98" "99"
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7.73 5.67 3.34 2.60 3.74 5.48 4.90 5.10 5.13 4.71
----------------------------------------------------------------------
</TABLE>
Quarter ended Total return
Best quarter 6/30/90 1.91%
Worst quarter 6/30/93 0.62%
The fund's total return for the six months ended 6/30/00 was 2.84%.
<PAGE>
ABOUT THE FUNDS
<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1999
1 year 5 years 10 years
-----------------------------------------------------------------------
<S> <C> <C> <C>
Prime Reserve Fund 4.71% 5.06% 4.83%
Lipper Money Market Funds Average 4.49 4.95 4.80
-----------------------------------------------------------------------
</TABLE>
These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.
What fees or expenses will I pay?
The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees. Redemption proceeds of less than $5,000 sent by wire are
subject to a $5 fee paid to the fund.
<TABLE>
Table 2 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
-------------------------------------------------------------------------------------
<S> <C>
Management fee 0.37%/ // /
Other expenses 0.25%
Total annual fund operating 0.62%/ // /
expenses
-------------------------------------------------------------------------------------
</TABLE>
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other mutual funds. Although your actual costs may be
higher or lower, the table shows how much you would pay if operating expenses
remain the same, you invest $10,000, earn a 5% annual return, and hold the
investment for the following periods and then redeem:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
----------------------------------------------------
<S> <C> <C> <C>
$63 $199 $346 $774
----------------------------------------------------
</TABLE>
OTHER INFORMATION ABOUT THE FUND
What are the fund's potential rewards?
The fund offers a relatively secure, liquid investment for money you may need
for occasional or unexpected expenses and for money awaiting investment in
longer-term bond or stock funds. In addition to preserving capital, the fund
seeks to provide the highest possible income available from low-risk,
short-term securities.
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T. ROWE PRICE
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager uses various
tools to try to reduce risk and increase total return, including:
. Diversification of assets to reduce the impact of a single holding or sector
on the fund's net asset value.
. Thorough credit research by our own analysts.
. Maturity adjustments to reflect the fund manager's interest rate outlook.
What is a money market fund?
A money market fund is a pool of assets invested in U.S. dollar-denominated,
short-term debt obligations with fixed or floating rates of interest, and
maturities generally less than 13 months. Money funds can be taxable or
tax-exempt, depending on their investment program. Issuers can include the
U.S. government and its agencies, domestic and foreign banks and other
corporations, and states and municipalities. Because of the high degree of
safety they provide, money market funds typically offer the lowest return
potential of any type of mutual fund.
What is the fund's investment program?
The fund invests at least 95% of its total assets in prime money market
instruments, that is, securities receiving a credit rating within the highest
category assigned by at least two established rating agencies, or by one
rating agency if the security is rated by only one, or, if unrated, the
equivalent rating as established by T. Rowe Price. The fund's weighted
average maturity will not exceed 90 days. It will not purchase any security
with a maturity of more than 13 months. Its yield will fluctuate in response
to changes in interest rates, but the share price is managed to remain stable
at $1.00. Unlike most bank accounts or certificates of deposit, the fund is
not insured or guaranteed by the U.S. government.
What are the main risks of investing in money market funds?
Since they are managed to maintain a $1.00 share price, money market funds
should have little risk of principal loss. However, the potential for a loss
of principal could derive from:
. Credit risk This is the chance that any of the fund's holdings will have
its credit rating downgraded or will default (fail to make scheduled interest
or principal payments), potentially reducing the fund's income level and
share price. Regulations require that securities of money market funds be
rated in the highest two credit categories.
. Interest rate risk This risk refers to the decline in the prices of fixed
income securities and funds that may accompany a rise in the overall level of
interest rates. A sharp and unexpected rise in interest rates could cause a
money fund's price to
<PAGE>
ABOUT THE FUNDS
drop below a dollar. However, the extremely short maturity of securities held
in money market portfolios -a means of achieving an overall fund objective of
principal safety-reduces their potential for price fluctuation.
What are the main types of money market securities the fund can invest in?
. Commercial paper Unsecured promissory notes that corporations typically
issue to finance current operations and other expenditures.
. Treasury bills, notes, and bonds Debt obligations sold at discount or at
face value and repaid at face value by the U.S. Treasury. Bills mature in one
year or less; notes and bonds may have longer maturities at issue but will
only be purchased by the fund if they mature within 13 months of the purchase
date. All are backed by the full faith and credit of the U.S. government.
. Certificates of deposit Receipts for funds deposited at banks that
guarantee a fixed interest rate over a specified time period.
. Repurchase agreements Contracts, usually involving U.S. government
securities, that require one party to repurchase securities at a fixed price
on a designated date.
. Banker's acceptances Bank-issued commitments to pay for merchandise sold in
the import/export market.
. Agency notes Debt obligations of agencies sponsored by the U.S. government
that are not backed by the full faith and credit of the United States.
. Medium-term notes Unsecured corporate debt obligations that are
continuously offered in a broad range of maturities and structures.
. Bank notes Unsecured obligations of a bank that rank on an equal basis with
other kinds of deposits but do not carry FDIC insurance.
. Asset-backed securities Certificates, trusts, or similarly structured
investment vehicles whose principal and interest is backed by an underlying
pool of assets. The value of the asset pool often exceeds the value of the
security and may include a swap obligation or third-party guarantee.
. Funding agreements Short-term, privately placed, nontransferrable
obligations of insurance companies that often include an adjustable coupon
tied to market rates and the right to sell the agreement back to the issuer
prior to maturity.
The fund may also purchase other types of money market securities that meet
the fund's maturity and credit requirements.
<PAGE>
T. ROWE PRICE
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of management
practices the fund may use.
SOME BASICS OF INVESTING
Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
(Although money fund prices are stable, income is variable.)
Is yield the same as total return?
Yes, for money funds. The total return reported for the fund is the result of
reinvested distributions (income and capital gains) and the change in share
price for a given time period. Since money funds are managed to maintain a
stable share price, their yield and total return should be the same. Of
course, there is no guarantee a money fund will maintain a $1.00 share price.
What is credit quality and how does it affect yield?
Credit quality refers to a borrower's expected ability to make all required
interest and principal payments in a timely manner. Because highly rated
issuers represent less risk, they can borrow at lower interest rates than
less creditworthy issuers.
What is meant by a money market fund's maturity?
Every money market instrument has a stated maturity date when the issuer must
repay the entire principal to the investor. The fund has no maturity in the
strict sense of the word, but does have a dollar-weighted average maturity,
expressed in days. This number is an average of the maturities of the
underlying instruments, with each maturity "weighted" by the percentage of
fund assets it represents.
Do money market securities react to changes in interest rates?
Yes. As interest rates change, the prices of money market securities
fluctuate, but changes are usually small because of their very short
maturities. Investments are typically held until maturity in a money fund to
help the fund maintain a $1.00 share price.
. An investment in the fund should help you meet your individual investment
goals for principal stability, liquidity, and income, but it should not
represent your complete investment program.
<PAGE>
ABOUT THE FUNDS
New Income Fund
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
To help you decide whether this fund is appropriate for you, this section
reviews its major characteristics.
What is the fund's objective?
The fund seeks the highest level of income consistent with the preservation
of capital over time by investing primarily in marketable debt securities.
What is the fund's principal investment strategy?
We will invest at least 80% of the fund's total assets in income-producing
securities, which may include U.S. government and agency obligations,
mortgage- and asset-backed securities, corporate bonds, foreign securities,
collateralized mortgage obligations (CMOs), and others, including, on
occasion, equities.
All securities purchased by the fund must be rated investment grade (AAA, AA,
A, or BBB) by at least one major credit rating agency or, if unrated, must
have a T. Rowe Price equivalent rating. Up to 15% of total assets may be
invested in "split-rated securities," or those rated investment grade by at
least one rating agency, but below investment grade by others. However, none
of the fund's remaining assets can be invested in bonds rated below
investment grade by Standard & Poor's, Moody's, or Fitch IBCA, Inc.
We have considerable flexibility in seeking high yield for the fund. There
are no maturity restrictions, so we can purchase longer-term bonds which tend
to have higher yields than shorter-term issues. However, the portfolio's
weighted average maturity is expected to be between four and 15 years. In
addition, when there is a large yield difference between the various quality
levels, we may move down the credit scale and purchase lower-rated bonds with
higher yields. When the difference is small, we may concentrate investments
in the higher-rated issues.
We may also invest in other securities, including futures and options, in
keeping with the fund's objective.
The fund may sell holdings for a variety of reasons, such as to adjust the
portfolio's average maturity, or to shift assets into higher-yielding
securities.
. For details about the fund's investment program, please see the Investment
Policies and Practices section.
What are the main risks of investing in the fund?
. Interest rate risk Investors should be concerned primarily with this risk.
An increase in interest rates could cause the fund's share price to fall,
resulting in a
<PAGE>
T. ROWE PRICE
loss of principal (see Table 5). That's because the bonds and notes in the
fund's portfolio become less attractive to other investors when securities
with higher yields become available. Even GNMAs and other securities whose
principal and interest payments are guaranteed by the U.S. government can
decline in price if rates rise. The longer a bond's maturity, the greater its
potential for price declines if rates rise, and for price gains if rates
fall. Because the fund may invest in bonds of any maturity, it carries more
interest rate risk than short-term bond funds.
. Credit risk This is the chance that any of a fund's holdings will have its
credit rating downgraded or will default (fail to make scheduled interest or
principal payments), potentially reducing the fund's income level and share
price. While the fund's overall credit quality is high, BBB securities are
more susceptible to adverse economic conditions and some may have speculative
characteristics.
. The fund may continue to hold a security that has been downgraded or loses
its investment-grade rating after purchase.
. Foreign investing risk To the extent the fund holds foreign bonds, it will
be subject to special risks whether the bonds are denominated in U.S. dollars
or foreign currencies. These risks include potentially adverse political and
economic developments overseas, greater volatility, lower liquidity, and the
possibility that foreign currencies will decline against the dollar, lowering
the value of securities denominated in those currencies and possibly the
fund's share price. Currency risk can affect the fund to the extent that it
holds nondollar foreign bonds.
. Prepayment risk and extension risk A mortgage-backed bond, unlike most other
bonds, can be hurt when interest rates fall, because homeowners tend to
refinance and prepay principal. The loss of high-yielding, underlying
mortgages and the reinvestment of proceeds at lower interest rates can reduce
the bond's potential price gain in response to falling interest rates, reduce
the bond's yield, or even cause the bond's price to fall below what an
investor paid for it, resulting in a capital loss. Any of these developments
could cause a decrease in the fund's income, share price, or total return.
Extension risk refers to a rise in interest rates that causes a fund's
average maturity to lengthen unexpectedly due to a drop in mortgage
prepayments. This would increase the fund's sensitivity to rising rates and
its potential for price declines.
. Derivatives risk Shareholders are also exposed to derivatives risk, the
potential that our investments in these complex and volatile instruments
could affect the fund's share price. In addition to CMOs and better-known
instruments such as futures, other derivatives that may be used in limited
fashion by the fund include interest-only (IO) and principal-only (PO)
securities known as "strips." The value of these instruments is derived from
an underlying pool of mortgage-backed securities or a CMO. All these
instruments can be highly volatile, and
<PAGE>
ABOUT THE FUNDS
their value can fall dramatically in response to rapid or unexpected changes
in the mortgage or interest rate environment.
As with any mutual fund, there can be no guarantee the fund will achieve its
objective.
. The fund's share price may decline, so when you sell your shares, you may
lose money.
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. The fund may be appropriate for you if you seek an
attractive level of income and are willing to accept the risk of a declining
share price when interest rates rise. Steadily reinvesting the fund's income
is a conservative strategy for building capital over time. If you are
investing primarily for safety and liquidity, you should consider a money
market fund.
The fund can be used in both regular and tax-deferred accounts, such as IRAs.
. The fund should not represent your complete investment program or be used
for short-term trading purposes.
How has the fund performed in the past?
The bar chart showing calendar year returns and the average annual total
return table indicate risk by illustrating how much returns can differ from
one year to the next and over time. Fund past performance is no guarantee of
future returns.
The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns during the years depicted in the
chart.
<PAGE>
T. ROWE PRICE
LOGO
<TABLE>
<CAPTION>
Calendar Year Total Returns
"90" "91" "92" "93" "94" "95" "96" "97" "98" "99"
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.77 15.51 4.96 9.58 -2.22 18.36 2.38 9.32 5.04 -1.58
--------------------------------------------------------------------------
</TABLE>
Quarter ended Total return
Best quarter 6/30/89 6.63%
Worst quarter 3/31/96 -2.53%
The fund's total return for the six months ended 6/30/00 was 3.43%.
<PAGE>
ABOUT THE FUNDS
<TABLE>
Table 3 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1999
1 year 5 years 10 years
----------------------------------------------------------------------
<S> <C> <C> <C>
New Income Fund -1.58% 6.49% 6.83%
Lehman Aggregate Bond Index -0.82 7.73 7.70
Lipper Corp. Debt Funds A-Rated -2.61 6.90 7.30
Average
----------------------------------------------------------------------
</TABLE>
These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any. Lehman indices do not reflect the deduction
of any fees or expenses.
What fees or expenses will I pay?
The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees. Redemption proceeds of less than $5,000 sent by wire are
subject to a $5 fee paid to the fund.
<TABLE>
Table 4 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
-------------------------------------------------------------------------------------
<S> <C>
Management fee 0.47%
Other expenses 0.26%
Total annual fund operating 0.73%
expenses
-------------------------------------------------------------------------------------
</TABLE>
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other mutual funds. Although your actual costs may be
higher or lower, the table shows how much you would pay if operating expenses
remain the same, you invest $10,000, earn a 5% annual return, and hold the
investment for the following periods and then redeem:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------------------------------------------------------
<S> <C> <C> <C>
$75 $233 $406 $906
-------------------------------------------------------
</TABLE>
OTHER INFORMATION ABOUT THE FUND
What are the fund's potential rewards?
The fund can provide an attractive level of income to investors who want only
a modest level of credit risk. It should offer higher yields than money
market and short-term bond funds and generally less volatility than
longer-term bond funds.
<PAGE>
T. ROWE PRICE
In addition, the portfolio is widely diversified among various fixed income
securities, thus reducing the effect of a single bond's price fluctuations on
the fund's share price or total return.
How does the portfolio manager try to reduce risk?
Consistent with the fund's objective, the portfolio manager uses various
tools to try to reduce risk and increase total return, including:
. Diversification of assets to reduce the impact of a single holding or sector
on the fund's net asset value.
. Thorough credit research by our own analysts.
. Adjustment of fund duration to try to reduce the drop in price when interest
rates rise or to benefit from the rise in price when rates fall. Duration is
a measure of a fund's sensitivity to interest rate changes.
Is the fund a substitute for a money market fund?
No. Money market funds, which have an average maturity under one year,
ordinarily generate lower income in return for stability of net asset value.
The fund's total return is expected to fluctuate more than a money market
fund's and, as such, it should be viewed as a longer-term and riskier
investment.
Do mortgage-backed securities differ from other high-quality bonds?
Yes, in one major respect. Most bonds repay principal (face value of the
bond) when their maturity date is reached, but most mortgage-backed
securities repay principal continually as homeowners make mortgage payments.
Homeowners have the option of paying either part or all of the loan balance
before maturity, perhaps to refinance or buy a new home. As a result, the
effective maturity of a mortgage-backed security is virtually always shorter
than its stated maturity.
For example, a new GNMA certificate backed by 30-year, fixed rate mortgages
will generally have a far shorter life than 30 years - probably 12 or less.
Therefore, it will usually be about as volatile as a 10-year Treasury note.
It is possible to estimate the average life of an entire mortgage pool
backing a particular security with some accuracy, but not with certainty.
Why are yields on mortgage-backed securities higher than yields on Treasuries
of similar maturity?
The structure of mortgage-backed securities is much more complex, and their
effective maturities are uncertain because of unscheduled prepayments. Higher
yields compensate investors for these potentially negative features. See the
previous discussion of prepayment risk and extension risk.
<PAGE>
ABOUT THE FUNDS
What are derivatives and can the fund invest in them?
The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of risks and potential rewards fall under the
"derivatives" umbrella - from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured notes. While the term "derivative" became
widely known among the investing public relatively recently, derivatives have
in fact been employed by investment managers for many years.
We invest in derivatives only if the expected risks and rewards are
consistent with the fund's objective, policies, and overall risk profile
described in this prospectus. We use derivatives in situations where they may
enable the fund to increase yield, hedge against a decline in principal,
invest in other asset classes more efficiently and at a lower cost, or adjust
duration.
We will not invest in any high-risk, highly leveraged derivative that we
believe would cause the portfolio to be more volatile than a long-term,
investment-grade bond.
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of management
practices the fund may use.
SOME BASICS OF INVESTING
Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
(Although money fund prices are stable, income is variable.)
Is yield the same as total return?
Not for bond funds. A fund's total return is the result of reinvested
distributions from income and capital gains and the change in share price for
a given period. Income is always a positive contributor to total return and
can either enhance a rise in share price or help offset a price decline.
<PAGE>
T. ROWE PRICE
What is credit quality and how does it affect yield?
Credit quality refers to a bond issuer's expected ability to make all
required interest and principal payments on time. Because highly rated
issuers represent less risk, they can borrow at lower interest rates than
less creditworthy issuers. Therefore, a fund investing in high-quality
securities should have a lower yield than an otherwise comparable fund
investing in lower-quality securities.
What is meant by a bond fund's maturity?
Every bond has a stated maturity date when the issuer must repay the bond's
entire principal value to the investor. However, many bonds are "callable,"
meaning their principal can be repaid earlier, on or after specified call
dates. Bonds are most likely to be called when interest rates are falling
because the issuer can refinance at a lower rate, just as a homeowner
refinances a mortgage. In that environment, a bond's "effective maturity" is
usually its nearest call date. For example, the rate at which homeowners pay
down their mortgage principal determines the effective maturity of
mortgage-backed bonds.
A bond mutual fund has no real maturity, but it does have a weighted average
maturity and a weighted average effective maturity. This number is an average
of the stated or effective maturities of the underlying bonds, with each
bond's maturity "weighted" by the percentage of fund assets it represents.
Some funds target effective maturities rather than stated maturities when
computing the average. This provides additional flexibility in portfolio
management.
What is meant by a bond fund's duration?
Duration is a calculation that seeks to measure the price sensitivity of a
bond or a bond fund to changes in interest rates. It is expressed in years,
like maturity, but it is a better indicator of price sensitivity than
maturity because it takes into account the time value of cash flows generated
over the bond's life. Future interest and principal payments are discounted
to reflect their present value and then are multiplied by the number of years
they will be received to produce a value expressed in years - the duration.
"Effective" duration takes into account call features and sinking fund
payments that may shorten a bond's life.
Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on share price by multiplying fund duration by an
expected change in interest rates. For example, the price of a bond fund with
a duration of five years would be expected to fall approximately 5% if rates
rose by one percentage point. (T. Rowe Price shareholder reports show
duration.)
How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa. In
general, the longer a bond's maturity, the greater the price increase or
decrease in response to a given change in rates, as shown in Table 5.
<PAGE>
ABOUT THE FUNDS
<TABLE>
Table 5 How Interest Rates May Affect Bond Prices
<CAPTION>
Price per $1,000 of bond face value if interest rates:
-----
Bond maturity Coupon Increase Decrease
1 point 2 points 1 point 2 points
<S> <C> <C> <C> <C> <C> <S>
1 year 6.06% $991 $981 $1,010 $1,019
5 years 959 919 1,044 1,089
10 years 929 864 1,078 1,163
30 years 5.90 874 772 1,156 1,352
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Coupons reflect yields on Treasury securities as of June 30, 2000. The table
may not be as representative of price changes for mortgage-backed securities
because of prepayments. This is an illustration and does not represent expected
yields or share price changes of any T. Rowe Price fund.
Equity Income Fund
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
To help you decide whether this fund is appropriate for you, this section
reviews its major characteristics.
What is the fund's objective?
The fund seeks to provide substantial dividend income as well as long-term
growth of capital through investments in the common stocks of established
companies.
What is the fund's principal investment strategy?
We will normally invest at least 65% of the fund's total assets in the common
stocks of well-established companies paying above-average dividends.
We typically employ a "value" approach in selecting investments. Our in-house
research team seeks companies that appear to be undervalued by various
measures and may be temporarily out of favor, but have good prospects for
capital appreciation and dividend growth.
In selecting investments, we generally look for companies with the following:
. an established operating history;
. above-average dividend yield relative to the S&P 500;
. low price/earnings ratio relative to the S&P 500;
. a sound balance sheet and other positive financial characteristics; and
. low stock price relative to a company's underlying value as measured by
assets, cash flow, or business franchises.
<PAGE>
T. ROWE PRICE
While most assets will be invested in U.S. common stocks, other securities
may also be purchased, including foreign stocks, futures, and options, in
keeping with fund objectives.
The fund may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
. For details about the fund's investment program, please see the Investment
Policies and Practices section.
What are the main risks of investing in the fund?
As with all equity funds, this fund's share price can fall because of
weakness in the broad market, a particular industry, or specific holdings.
The market as a whole can decline for many reasons, including adverse
political or economic developments here or abroad, changes in investor
psychology, or heavy institutional selling. The prospects for an industry or
company may deteriorate because of a variety of factors, including
disappointing earnings or changes in the competitive environment. In
addition, our assessment of companies held in the fund may prove incorrect,
resulting in losses or poor performance even in a rising market. Finally, the
fund's investment approach could fall out of favor with the investing public,
resulting in lagging performance versus other types of stock funds.
The value approach carries the risk that the market will not recognize a
security's intrinsic value for a long time, or that a stock judged to be
undervalued may actually be appropriately priced.
The fund's emphasis on stocks of established companies paying high dividends
and its potential investments in fixed income securities may limit its
potential for appreciation in a broad market advance. Such securities may be
hurt when interest rates rise sharply. Also, a company may reduce or
eliminate its dividend.
Foreign stock holdings are subject to the risk that some holdings may lose
value because of declining foreign currencies or adverse political or
economic events overseas. Investments in futures and options, if any, are
subject to additional volatility and potential losses.
As with any mutual fund, there can be no guarantee the fund will achieve its
objective.
. The fund's share price may decline, so when you sell your shares, you may
lose money.
<PAGE>
ABOUT THE FUNDS
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for the inherent risk of common stock investments. If you seek
a relatively conservative equity investment that provides substantial
dividend income along with the potential for capital growth, the fund could
be an appropriate part of your overall investment strategy. This fund should
not represent your complete investment program or be used for short-term
trading purposes.
The fund can be used in both regular and tax-deferred accounts, such as IRAs.
. Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How has the fund performed in the past?
The bar chart showing calendar year returns and the average annual total
return table indicate risk by illustrating how much returns can differ from
one year to the next and over time. Fund past performance is no guarantee of
future returns.
The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns during the years depicted in the
chart.
LOGO
<TABLE>
<CAPTION>
Calendar Year Total Returns
"90" "91" "92" "93" "94" "95" "96" "97" "98" "99"
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-6.79 25.28 14.13 14.84 4.53 33.35 20.40 28.82 9.23 3.82
----------------------------------------------------------------------
</TABLE>
Quarter ended Total return
Best quarter 3/31/91 14.76%
Worst quarter 9/30/90 -13.46%
<PAGE>
T. ROWE PRICE
<TABLE>
Table 6 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1999
1 year 5 years 10 years
------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income Fund 3.82% 18.59% 14.14%
S&P 500 Stock Index 21.04 28.56 18.21
Lipper Equity Income Funds Average 4.55 17.83 12.55
------------------------------------------------------------------------
</TABLE>
These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.
What fees or expenses will I pay?
The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees.
<TABLE>
Table 7 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
-------------------------------------------------------------------------------------
<S> <C>
Management fee 0.57%
Other expenses 0.20%
Total annual fund operating 0.77%
expenses
-------------------------------------------------------------------------------------
</TABLE>
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you compare the cost of investing in
this fund with that of other funds. Although your actual costs may be higher
or lower, the table shows how much you would pay if operating expenses remain
the same, you invest $10,000, earn a 5% annual return, and hold the
investment for the following periods:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------------------------------------------------------
<S> <C> <C> <C>
$79 $246 $428 $954
-------------------------------------------------------
</TABLE>
OTHER INFORMATION ABOUT THE FUND
What are the fund's major characteristics?
T. Rowe Price believes that income can be a significant contributor to total
return over time and expects the fund's yield to be above that of the
Standard & Poor's 500 Stock Index. The fund will tend to take a "value"
approach and invest in stocks and other securities that appear to be
temporarily undervalued by various measures, such as price/earnings ratios.
<PAGE>
ABOUT THE FUNDS
What is meant by a "value" investment approach?
Value investors seek to invest in companies whose stock prices are low in
relation to their real worth or future prospects. By identifying companies
whose stocks are currently out of favor or misunderstood, value investors
hope to realize significant appreciation as other investors recognize the
stock's intrinsic value and the price rises accordingly.
Finding undervalued stocks requires considerable research to identify the
particular company, analyze its financial condition and prospects, and assess
the likelihood that the stock's underlying value will be recognized by the
market and reflected in its price.
. Value investors look for undervalued assets.
Some of the principal measures used to identify such stocks are:
. Price/earnings ratio Dividing a stock's price by its earnings per share
generates a price/earnings or P/E ratio. A stock with a P/E that is
significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.
. Price/book value ratio Dividing a stock's price by its book value per share
indicates how a stock is priced relative to the accounting (i.e., book) value
of the company's assets. A ratio below the market, that of its competitors,
or its own historic norm could indicate an undervalued situation.
. Dividend yield A stock's dividend yield is found by dividing its annual
dividend by its share price. A yield significantly above a stock's own
historic norm or that of its peers may suggest an investment opportunity.
. A stock selling at $10 with an annual dividend of $0.50 has a 5% yield.
. Price/cash flow Dividing a stock's price by the company's cash flow per
share, rather than by its earnings or book value, provides a more useful
measure of value in some cases. A ratio below that of the market or of its
peers suggests the market may be incorrectly valuing the company's cash flow
for reasons that may be temporary.
. Undervalued assets This analysis compares a company's stock price with its
underlying asset values, its projected value in the private (as opposed to
public) market, or its expected value if the company or parts of it were sold
or liquidated.
. Restructuring opportunities The market can react favorably to the
announcement of the successful implementation of a corporate restructuring,
financial reengineering, or asset redeployment. Such events can result in an
increase in a company's stock price. A value investor may try to anticipate
these actions and invest before the market places an appropriate value on any
actual or expected changes.
<PAGE>
T. ROWE PRICE
What are some examples of undervalued situations?
There are numerous situations in which a company's value may not be reflected
in its stock price. For example, a company may own a substantial amount of
real estate that is valued on its financial statements well below market
levels. If those properties were to be sold, or if their hidden value became
recognized in some other manner, the company's stock price could rise. In
another example, a company's management could spin off an unprofitable
division into a separate company, potentially increasing the value of the
parent. Or, in the reverse, a parent company could spin off a profitable
division that has not drawn the attention it deserves, potentially resulting
in higher valuations for both entities.
Sometimes new management can revitalize companies that have grown fat or lost
their focus, eventually leading to improved profitability. Management could
increase shareholder value by using excess cash flow to pay down debt, buying
back outstanding shares of common stock, or raising the dividend.
What are some of the fund's potential rewards?
Dividends are normally a more stable and predictable component of total
return than capital appreciation. While the price of a company's stock can go
up or down in response to earnings or to fluctuations in the general market,
dividends are usually more reliable. Stocks paying a high level of dividend
income tend to be less volatile than those with below-average dividends and
may hold up better in falling markets.
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of management
practices the fund may use.
International Stock Fund
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
To help you decide whether this fund is appropriate for you, this section
reviews its major characteristics.
What is the fund's objective?
The fund seeks long-term growth of capital through investments primarily in
the common stocks of established, non-U.S. companies.
<PAGE>
ABOUT THE FUNDS
What is the fund's principal investment strategy?
We expect to invest substantially all of the fund's assets outside the U.S.
and to diversify broadly among developed and emerging countries throughout
the world. Stock selection reflects a growth style. We may purchase the
stocks of companies of any size, but our focus will typically be on large
and, to a lesser extent, medium-sized companies.
Growth Investing
Selection of common stocks reflects a growth style. Price-Fleming employs
in-depth fundamental research in an effort to identify companies capable of
achieving and sustaining above-average, long-term earnings growth. We seek
to purchase such stocks at reasonable prices in relation to present or
anticipated earnings, cash flow, or book value, and valuation factors often
influence our allocations among large-, mid-, or small-cap shares.
While we invest with an awareness of the global economic backdrop and our
outlook for individual countries, bottom-up stock selection is the focus of
our decision-making. Country allocation is driven largely by stock
selection, though we may limit investments in markets that appear to have
poor overall prospects.
In selecting stocks, we generally favor companies with one or more of the
following characteristics:
. leading market position;
. attractive business niche;
. strong franchise or natural monopoly;
. technological leadership or proprietary advantages;
. seasoned management;
. earnings growth and cash flow sufficient to support growing dividends;
and
. healthy balance sheet with relatively low debt.
While the fund invests primarily in common stocks, to a lesser extent we may
also purchase other securities, including futures and options, in keeping
with the fund's objective.
The fund may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.
What are the main risks of investing in the fund?
As with all stock funds, this fund's share price can fall because of weakness
in one or more of its primary equity markets, a particular industry, or
specific holdings. Stock markets can decline for many reasons, including
adverse political or economic developments, changes in investor psychology,
or heavy institutional
<PAGE>
T. ROWE PRICE
selling. The prospects for an industry or company may deteriorate because of
a variety of factors, including disappointing earnings or changes in the
competitive environment. In addition, our assessment of companies held in the
fund may prove incorrect, resulting in losses or poor performance even in
rising markets.
Even investments in countries with highly developed economies are subject to
significant risks. For example, Japanese stocks were in a steep decline for
much of the 1990s.
Funds that invest overseas generally carry more risk than funds that invest
strictly in U.S. assets. Some particular risks affecting this fund include
the following:
. Currency risk This refers to a decline in the value of a foreign currency
versus the U.S. dollar, which reduces the dollar value of securities
denominated in that currency. The overall impact on a fund's holdings can be
significant and long-lasting depending on the currencies represented in the
portfolio, how each one appreciates or depreciates in relation to the U.S.
dollar, and whether currency positions are hedged. Under normal conditions,
the fund does not engage in extensive foreign currency hedging programs.
Further, exchange rate movements are unpredictable and it is not possible to
effectively hedge the currency risks of many developing countries.
. Geographic risk The economies and financial markets of certain regions-such
as Latin America and Asia-can be highly interdependent and may decline all at
the same time.
. Emerging market risk To the extent the fund invests in emerging markets, it
is subject to greater risk than a fund investing only in developed markets.
The economic and political structures of developing nations, in most cases,
do not compare favorably with the U.S. or other developed countries in terms
of wealth and stability, and their financial markets often lack liquidity.
Fund performance will likely be negatively affected by portfolio exposure to
nations in the midst of hyperinflation, currency devaluation, trade
disagreements, sudden political upheaval, or interventionist government
policies. Significant buying or selling actions by a few major investors may
also heighten the volatility of emerging markets. These factors make
investing in such countries significantly riskier than in other countries and
any one of them could cause the fund's share price to decline.
. Other risks of foreign investing Other risks result from the varying stages
of economic and political development, the differing regulatory environments,
trading days, and accounting standards, and higher transaction costs of
non-U.S. markets. Investments outside the United States could be subject to
actions such as capital or currency controls, nationalizing a company or
industry, expropriating assets, or imposing punitive taxes which would have
an adverse effect on the fund.
<PAGE>
ABOUT THE FUNDS
. 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.
. Futures/options risk To the extent the fund uses futures and options, it is
exposed to additional volatility and potential losses.
As with any mutual fund, there can be no guarantee the fund will achieve its
objective.
. The fund's share price may decline, so when you sell your shares, you may
lose money.
How can I tell if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for the inherent risk of common stock and international
investments. If you want to diversify your domestic stock portfolio by adding
foreign investments, seek the long-term capital appreciation potential of
growth stocks, and are comfortable with the risks that accompany foreign
investments, the fund could be an appropriate part of your overall investment
strategy.
The fund can be used in both regular and tax-deferred accounts, such as IRAs.
. The fund should not represent your complete investment program or be used
for short-term trading purposes.
How has the fund performed in the past?
The bar chart showing calendar year returns and the average annual total
return table indicate risk by illustrating how much returns can differ from
one year to the next and over time. Fund past performance is no guarantee of
future returns.
The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns during the years depicted in the
chart.
<PAGE>
T. ROWE PRICE
LOGO
<TABLE>
<CAPTION>
Calendar Year Total Returns
"89" "90" "91" "92" "93" "94" "95" "96" "97" "98"
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
23.72 -8.89 15.87 -3.47 40.11 -0.76 11.39 15.99 2.70 16.14
----------------------------------------------------------------------
</TABLE>
Quarter ended Total return
Best quarter 9/30/89 14.89%
Worst quarter 9/30/90 -18.70%
<TABLE>
Table 8 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1999
1 year 5 years 10 years
-------------------------------------
<S> <C> <C> <C>
International Stock Fund 34.60% 15.71% 11.38%
MSCI EAFE Index 27.30 13.15 7.33
Lipper International Funds Average 40.80 15.05 10.22
------------------------------------------------------------------------
</TABLE>
These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.
What fees or expenses will I pay?
The fund is 100% no load. There are no fees or charges to buy or sell fund
shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
are no 12b-1 fees. Like all mutual funds, the fund charges the following:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1999,
and an individual fund fee of 0.35%.
<PAGE>
ABOUT YOUR ACCOUNT
. "Other" administrative expenses Primarily the servicing of shareholder
accounts, such as providing statements and reports, disbursing dividends, and
providing custodial services.
<TABLE>
Table 9 Fees and Expenses of the Fund
<CAPTION>
Annual fund operating expenses
(expenses that are deducted from fund assets)
------------------------------------------------------------------------------------------
<S> <C> <S>
Management fee 0.67%
Other expenses 0.18%
Total annual fund operating 0.85%
expenses
------------------------------------------------------------------------------------------
</TABLE>
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other funds. Although your actual costs may be higher
or lower, the table shows how much you would pay if operating expenses remain
the same, you invest $10,000 you earn a 5% annual return, and you hold the
investment for the following periods:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
----------------------------------------------------
<S> <C> <C> <C>
$87 $271 $471 $1,049
----------------------------------------------------
</TABLE>
OTHER INFORMATION ABOUT THE FUND
What are some of the potential rewards of investing overseas through the fund?
Investing abroad increases the opportunities available to you. Many foreign
countries may have greater potential for economic growth than the U.S.
Foreign investments also provide effective diversification for an all-U.S.
portfolio, since historically their returns have not moved in sync with U.S.
stocks over long time periods. Investing a portion of your overall portfolio
in foreign stock funds can enhance your diversification while providing the
opportunity to boost long-term returns.
How does the portfolio manager try to reduce risk?
The principal tools we use to try to reduce risk are intensive research and
diversification. Currency hedging techniques may be used from time to time.
. Price-Fleming employs a team of experienced portfolio managers and analysts,
with offices in London, Tokyo, Singapore, Hong Kong, Buenos Aires, Paris, and
Baltimore. Portfolio managers keep close watch on individual investments as
well as on political and economic trends in each country and region. Holdings
are adjusted according to the manager's analysis and outlook.
<PAGE>
T. ROWE PRICE
Diversification significantly reduces, but does not eliminate, risk. The
impact on the fund's share price from a drop in the price of a particular
stock is reduced substantially by investing in a portfolio with dozens of
different companies. Likewise, the impact of unfavorable developments in a
particular country is reduced when investments are spread among many
countries. However, the economies and financial markets of countries in a
certain region may be influenced heavily by one another.
. Though the fund doesn't normally engage in extensive currency hedging, fund
managers can employ currency forwards and options to hedge the risk to the
portfolio when foreign exchange movements are expected to be unfavorable for
U.S. investors. In a general sense, these tools allow a manager to lock in a
specified exchange rate for a stated period of time. (For more details,
please see Foreign Currency Transactions under Investment Policies and
Practices.) If the manager's forecast proves to be wrong, such a hedge may
cause a loss. Also, it may be difficult or impractical to hedge currency risk
in many emerging countries.
Is there other information I can review before making a decision?
Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of management
practices the fund may use.
<PAGE>
ABOUT THE FUNDS
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the
funds is calculated at the close of the New York Stock Exchange, normally 4
p.m. ET, each day the New York Stock Exchange is open for business. To
calculate the NAV, the fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by the number of
shares outstanding. Amortized cost is used to value money fund securities.
Current market values are used to price other fund shares.
The International Stock Fund's portfolio securities usually are valued on the
basis of the most recent closing market prices at 4 p.m. ET when the fund
calculates its NAV. Most of the securities in which the fund invests,
however, are traded in markets that close before that time. For securities
primarily traded in the Far East, for example, the most recent closing prices
may be as much as 15 hours old at 4 p.m. Normally, developments that could
affect the values of portfolio securities that occur between the close of the
foreign market and 4 p.m. ET will not be reflected in the fund's NAV.
However, if the fund determines that such developments are so significant
that they will, in its judgment, clearly and materially affect the value of
the fund's securities, the fund may adjust the previous closing prices to
reflect what it believes to be the fair value of the securities as of 4 p.m.
ET. The fund may fair value securities in other situations, for example, when
a particular foreign market is closed but the fund is open.
. The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
may differ for institutional and employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
<PAGE>
T. ROWE PRICE
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
. When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by ACH
transfer should be credited the second business day after the sale. Proceeds
sent by bank wire should be credited to your account the first business day
after the sale.
. Exception: Under certain circumstances and when deemed to be in a fund's
best interest, your proceeds may not be sent for up to seven calendar days
after we receive your redemption request.
. If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
. All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the day of the
reinvestment and to reinvest all subsequent distributions in shares of the
fund. No interest will accrue on amounts represented by uncashed distribution
or redemption checks.
<PAGE>
ABOUT THE FUNDS
Income dividends
. The International Stock Fund declares and pays a dividend (if any) annually.
The dividends will not be eligible for the 70% deduction for dividends
received by corporations, if, as expected, none of the fund's income consists
of dividends paid by U.S. corporations.
. The Equity Income Fund declares and pays a dividend (if any) quarterly. A
portion of fund dividends may be eligible for the 70% deduction for dividends
received by corporations.
. The New Income Fund declares income dividends daily at 4 p.m. ET to
shareholders of record at that time provided payment has been received on the
previous business day.
. The Prime Reserve Fund declares income dividends daily to shareholders of
record as of 12 noon ET on that day. Wire purchase orders received before 12
noon ET receive the dividend for that day. Other purchase orders receive the
dividend for the next business day after payment has been received.
. Dividends for the New Income Fund and Prime Reserve Fund are ordinarily paid
on the first business day of each month.
. Fund shares will earn dividends through the date of redemption; also, shares
redeemed on a Friday or prior to a holiday will continue to earn dividends
until the next business day. Generally, if you redeem all of your shares at
any time during the month, you will also receive all dividends earned through
the date of redemption in the same check. When you redeem only a portion of
your shares, all dividends accrued on those shares will be reinvested, or
paid in cash, on the next dividend payment date.
Capital gains
. Since money funds are managed to maintain a constant share price, the Prime
Reserve Fund is not expected to make capital gain distributions.
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month. For the Equity Income Fund, if a
second distribution is necessary, it is usually declared and paid during the
first quarter of the following year.
Tax Information
. You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
<PAGE>
T. ROWE PRICE
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For most new accounts or those opened by
exchange in 1984 or later, we will provide the gain or loss on the shares you
sold during the year, based on the "average cost," single category method.
This information is not reported to the IRS, and you do not have to use it.
You may calculate the cost basis using other methods acceptable to the IRS,
such as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions are generally taxable to you for
the year in which they were paid. You will be sent any additional information
you need to determine your taxes on fund distributions, such as the portion
of your dividends, if any, that may be exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income and long-term gains on securities held more
than 12 months are taxed at a maximum rate of 20%. If you realized a loss on
the sale or exchange of fund shares that you held six months or less, your
short-term loss must be reclassified to a long-term loss to the extent of any
long-term capital gain distribution received during the period you held the
shares.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease an ordinary income dividend. Net foreign currency losses may
cause a dividend to be classified as a return of capital.
Foreign investments (not applicable to Prime Reserve Fund)
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 a fund pays nonrefundable taxes to foreign governments
during the year,
<PAGE>
ABOUT THE FUNDS
the taxes will reduce the fund's dividends, and with respect to the
International Stock Fund, will also 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.
. Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain distribution (excluding
Prime Reserve Fund)
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future taxable distributions.
. The preceding tax information summary does not apply to retirement
accounts, such as IRAs, which are not subject to current tax.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
. Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If you pay with a check or ACH transfer that does not clear or if your
payment is not timely received, your purchase will be canceled. You will be
responsible for any losses or expenses incurred by each fund or transfer
agent, and the fund can redeem shares you own in this or another identically
registered T. Rowe Price account as reimbursement. The fund and its agents
have the right to reject or cancel any purchase, exchange, or redemption due
to nonpayment.
U.S. dollars; type of check
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
Holds on immediate redemptions: 10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If, during the clearing period, we receive a check drawn
against your bond or money market account, it will be returned marked
"uncollected." (The 10-day
<PAGE>
MORE ABOUT THE FUNDS
hold does not apply to purchases paid for by bank wire or automatic purchases
through your paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the boxes that state you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures to verify the identity of the shareholder.
If these procedures are followed, the funds and their agents are not liable
for any losses that may occur from acting on unauthorized instructions. A
confirmation is sent promptly after a transaction. Please review it carefully
and contact T. Rowe Price immediately about any transaction you believe to be
unauthorized. All telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
. T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades in your account or accounts controlled by you can disrupt
management of the fund and raise its expenses. To deter such activity, the
fund has adopted an excessive trading policy. If you violate our excessive
trading policy, you may be barred indefinitely and without further notice
from further purchases of T. Rowe Price funds.
. Trades placed directly with T. Rowe Price If you trade directly with T.
Rowe Price, you can make one purchase and one sale involving the same fund
within any 120-day period. For example, if you are in fund A, you can move
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit, or
if your trade activity involves market timing, you are in violation of our
excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a nonmoney fund are
not exempt); and 2) systematic purchases or redemptions (see Information
About Your Services).
<PAGE>
ABOUT THE FUNDS
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party, you can make one purchase and one sale involving the same fund within
any 120-day period. If you exceed this limit or if you hold fund shares for
less than 60 calendar days, you are in violation of our excessive trading
policy. Systematic purchases and redemptions are exempt from this policy.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum. The valuation of accounts and the deduction
are expected to take place during the last five business days of September.
The fee is deducted from accounts with balances below $2,000, except for
UGMA/UTMA accounts, for which the minimum is $500. The fee is waived for any
investor whose T. Rowe Price mutual fund accounts total $25,000 or more.
Accounts employing automatic investing (e.g., payroll deduction, automatic
purchase from a bank account, etc.) are also exempt from the charge. The fee
does not apply to IRAs and other retirement plan accounts and accounts
maintained by intermediaries through the National Securities Clearing
Corporation Networking Platform, but a separate custodial fee may apply to
such accounts.
Signature Guarantees
. A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
<PAGE>
T. ROWE PRICE
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
ABOUT THE FUNDS
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How are the funds organized?
The Prime Reserve and New Income Funds are Maryland corporations organized in
1975 and 1973, 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 organized in 1979 as a Maryland
corporation. The Prime Reserve, New Income, and Equity Income Funds, as well
as 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."
. Shareholders benefit from T. Rowe Price's 63 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors or trustees, changes in fundamental policies, or approval of
changes in the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, do not do so except when certain matters, such as
a change in fundamental policies, must be decided. In addition, shareholders
representing at least 10% of all eligible votes may call a special meeting,
if they wish, for the purpose of voting on the removal of any fund director
or trustee. If a meeting is held and you cannot attend, you can vote by
proxy. Before the meeting, the fund will send you proxy materials that
explain the issues to be decided and include instructions on voting by mail
or telephone, or on the Internet.
. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price and Price-Fleming - specifically by the fund's portfolio
managers.
<PAGE>
T. ROWE PRICE
Who runs the funds?
General Oversight
The funds are governed by a Board of Directors or Trustees that meets
regularly to review fund investments, performance, expenses, and other
business affairs. The Board elects fund officers. The policy of each fund is
that a majority of Board members are independent of T. Rowe Price and
Price-Fleming.
Investment Manager
For the Prime Reserve, New Income, and Equity Income Funds, all decisions
regarding the purchase and sale of fund investments are made by T. Rowe
Price-specifically by the funds' portfolio managers. T. Rowe Price's office
is located at 100 East Pratt Street, Baltimore, Maryland 21202. For the
International Stock Fund, Price-Fleming is responsible for selection and
management of portfolio investments. Price-Fleming's U.S. office is located
at 100 East Pratt Street, Baltimore, Maryland 21202. Price-Fleming also has
offices in London, Tokyo, Singapore, Hong Kong, Buenos Aires, and Paris.
Price-Fleming was incorporated in Maryland in 1979 as a joint venture between
T. Rowe Price and Robert Fleming Holdings Limited (Flemings).
T. Rowe Price, Flemings, and Jardine Fleming Group Limited (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 a subsidiary of Jardine Fleming. Jardine Fleming is
owned by Flemings. 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.
. 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, Seoul, Taipei, Bombay,
Jakarta, Singapore, Bangkok, and Johannesburg.
Portfolio Management
The Prime Reserve Fund has an Investment Advisory Committee with the
following members: Edward A. Wiese, Chairman, Patrice L. Berchtenbreiter Ely,
Brian E. Burns, Robert P. Campbell, Alan D. Levenson, Joseph K. Lynagh, James
M. McDonald, and Joan R. Potee. 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. Wiese has been
chairman of the fund's committee since 1990. He joined T. Rowe Price in 1984
and has been managing investments since 1985.
The New Income Fund has an Investment Advisory Committee with the following
members: William T. Reynolds, Chairman, Connice A. Bavely, Patrick S.
Cassidy, Alan D. Levenson, Edmund M. Notzon, Robert M. Rubino, and
<PAGE>
ABOUT THE FUNDS
Daniel O. Shackelford. 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. Reynolds became chairman of the
fund's committee in 1998. He joined T. Rowe Price in 1981 and has been
managing investments since 1978.
The Equity Income Fund has an Investment Advisory Committee with the
following members: Brian C. Rogers, Chairman, Stephen W. Boesel, Arthur B.
Cecil III, Giri Devulapally, Richard P. Howard, John D. Linehan, 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 fund's
committee since 1993. He joined T. Rowe Price in 1982 and has been managing
investments since 1983.
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 members of the advisory group
are: John R. Ford, James B.M. Seddon, Mark C.J. Bickford-Smith, and David
J.L. Warren.
John Ford joined Price-Fleming in 1982 and has 20 years of experience with
the Fleming Group in research and portfolio management. James Seddon joined
Price-Fleming in 1987 and has 13 years of portfolio management experience.
Mark Bickford-Smith joined Price-Fleming in 1995 and has 15 years of
experience in equity research and portfolio management. David Warren joined
Price-Fleming in 1983 and has 19 years of experience in equity research,
fixed income research, and portfolio management.
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 a 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) to the
fund.
The Management Fee
This fee has two parts - an "individual fund fee," which reflects a fund's
particular characteristics, and a "group fee." The group fee, which is
designed to reflect the benefits of the shared resources of the T. Rowe Price
investment management complex, is calculated daily based on the combined net
assets of all T. Rowe Price funds (except the Spectrum Funds, and any
institutional, index, or private label mutual funds). The group fee schedule
(shown below) is graduated, declining as the asset total rises, so
shareholders benefit from the overall growth in mutual fund assets.
<PAGE>
T. ROWE PRICE
<TABLE>
Group Fee Schedule
<CAPTION>
<S><C> <S>
0.334%/a/ First $50 billion
0.305% Next $30 billion
0.300% Next $40 billion
0.295% Thereafter
--------------------------------------
</TABLE>
/a/ Represents a blended group fee rate containing various break points.
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price fund assets of $104 billion at
May 31, 2000, the group fee was 0.32%. The individual fund fees are as
follows: Prime Reserve Fund, 0.05%; New Income Fund, 0.15%; Equity Income
Fund, 0.25%; and International Stock Fund, 0.35%.
International Stock Fund
Research and Administration
Certain administrative support is provided by T. Rowe Price, which receives
from Price-Fleming a fee of 0.15% of the market value of all assets in equity
accounts, 0.15% of the market value of all assets in active fixed income
accounts, and 0.035% of the market value of all assets in passive fixed
income accounts under Price-Fleming's management. Price-Fleming has entered
into research agreements with Fleming Investment Management Limited (FIM) and
Jardine Fleming International Holdings Limited (JFIH). For services under the
research agreements, FIM and JFIH each receive a fee of 0.075% of the market
value of all assets in equity accounts under Price-Fleming's management. FIM
and JFIH each receive a fee of 0.075% of the market value of all assets in
active fixed income accounts and 0.0175% of such market value in passive
fixed income accounts under Price-Fleming's management. In addition to the
research provided under these agreements, Price-Fleming has access to the
publicly available research materials produced by FIM and JFIH. FIM is a
wholly owned subsidiary of Flemings. JFIH is a wholly owned subsidiary of
Jardine Fleming.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in T. Rowe Price
advertisements; and in the media.
<PAGE>
ABOUT THE FUNDS
Total Return
This tells you how much an investment has changed in value over a given time
period. It reflects any net increase or decrease in the share price and
assumes that all dividends and capital gains (if any) paid during the period
were reinvested in additional shares. Therefore, total return numbers include
the effect of compounding.
Advertisements may include cumulative or average annual total return figures,
which may be compared with various indices, other performance measures, or
other mutual funds.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, an investment could have a
10-year positive cumulative return despite experiencing some negative years
during that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
Yield
The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the price at
the end of the period. For example, a fund providing $5 of annual income per
share and a price of $50 has a current yield of 10%. Yields can be calculated
for any time period.
The advertised or SEC yield is found by determining the net income per share
(as defined by the Securities and Exchange Commission) earned by a fund
during a 30-day base period and dividing this amount by the per share price
on the last day of the base period. The SEC yield-also called the
standardized yield-may differ from the dividend yield.
Prime Reserve Fund The fund may advertise a "current" yield, reflecting the
latest seven-day income annualized, or an "effective" yield, which assumes
the income has been reinvested in the fund.
<PAGE>
T. ROWE PRICE
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of fund portfolio
securities and the various kinds of investment practices that may be used in
day-to-day portfolio management. Fund investments are subject to further
restrictions and risks described in the Statement of Additional Information.
Shareholder approval is required to substantively change fund objectives and
certain investment restrictions noted in the following section as
"fundamental policies." The managers follow certain "operating policies,"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. Fund investment
restrictions and policies are adhered to at the time of investment. A later
change in circumstances will not require the sale of an investment if it was
proper at the time it was made.
Fund holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, the funds (other than the Prime Reserve Fund) can invest up to 10%
of their total assets in hybrid instruments. While these restrictions provide
a useful level of detail about fund investments, investors should not view
them as an accurate gauge of the potential risk of such investments. For
example, in a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on a fund's share price than its weighting in
the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all other fund investments.
Changes in fund holdings, fund performance, and the contribution of various
investments are discussed in the shareholder reports sent to you.
. Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help achieve fund objectives.
Prime Reserve Fund
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of short-term security or instrument whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of fund portfolio securities and investment management
practices.
Operating policy Except as may be permitted by Rule 2a-7, 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, lim-
<PAGE>
ABOUT THE FUNDS
ited 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.
Money Market Securities
Money market securities are IOUs issued by companies or governmental units.
Money market securities may be interest-bearing or discounted to reflect the
rate of interest paid. In the case of interest-bearing securities, the issuer
has a contractual obligation to pay coupon interest at a stated rate on
specific dates and to repay the face value on a specified date. In the case
of a discount security, no coupon interest is paid, but the security's price
is discounted so that the interest is realized when the security matures at
face value. In either case, an issuer may have the right to redeem or "call"
the security before maturity, and the investor may have to reinvest the
proceeds at lower market rates.
Except for adjustable rate instruments, a money market security's interest
rate, as reflected in the coupon rate or discount, is usually fixed for the
life of the security. Its current yield (coupon or discount as a percent of
current price) will fluctuate to reflect changes in interest rate levels. A
money market security's price usually rises when interest rates fall, and
vice versa.
Money market securities may be unsecured (backed by the issuer's general
creditworthiness only) or secured (also backed by specified collateral).
Certain money market securities have interest rates that are adjusted
periodically. These interest rate adjustments tend to minimize fluctuations
in the securities' principal values. When calculating its weighted average
maturity, the fund may shorten the maturity of these securities in accordance
with Rule 2a-7.
Asset-Backed Securities
An underlying pool of assets, such as credit card or automobile trade
receivables or corporate loans or bonds, backs these bonds and provides the
interest and principal payments to investors. On occasion, the pool of assets
may also include a swap obligation, which is used to change the cash flows on
the underlying assets. As an example, a swap may be used to allow floating
rate assets to back a fixed rate obligation. Credit quality depends primarily
on the quality of the underlying assets, the level of credit support, if any,
provided by the issuer, and the credit quality of the swap counterparty, if
any. The underlying assets (i.e., loans) are sometimes subject to
prepayments, which can shorten the security's weighted average life and may
lower its return. The value of these securities also may change because of
actual or perceived changes in the creditworthiness of the originator, the
servicing agent, the financial institution providing the credit support, or
the swap counterparty. There is no limit on fund investments in these
securities.
<PAGE>
T. ROWE PRICE
Foreign Securities
Investments may be made in certain foreign securities: dollar-denominated
money market securities of foreign issuers, foreign branches of U.S. banks,
and U.S. branches of foreign banks. 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; and possible problems arising from
accounting, disclosure, settlement, and regulatory practices that differ from
U.S. standards.
. Foreign securities increase the fund's diversification and may enhance
return, but they involve special risks, especially from developing
countries.
Operating policy There is no limit on fund investments in U.S.
dollar-denominated foreign securities.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy Fund investments in illiquid securities are limited to 10%
of net assets.
Types of Investment Management Practices
Borrowing Money and Transferring Assets
Fund borrowings may be made from banks and other T. Rowe Price funds for
temporary emergency purposes to facilitate redemption requests, or for other
purposes consistent with fund policies as set forth in this prospectus. Such
borrowings may be collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
Operating policy Fund transfers of portfolio securities as collateral will
not be made except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of fund
total assets. Fund purchases of additional securities will not be made when
borrowings exceed 5% of total assets.
Lending of Portfolio Securities
Fund securities may be lent to broker-dealers, other institutions, or other
persons to earn additional income. The principal risk is the potential
insolvency of the broker-dealer or other borrower. In this event, a fund
could experience delays in recovering its securities, and capital losses.
<PAGE>
ABOUT THE FUNDS
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
New Income Fund
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with its investment program. The following pages describe various
types of fund securities and investment management practices.
Fundamental policy The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer, or if more than 10% of
the outstanding voting securities of the issuer would be held by the fund.
These limitations do not apply to the fund's purchase of securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
Bonds
A bond is an interest-bearing security - an IOU - issued by companies or
governmental units. The issuer has a contractual obligation to pay interest
at a stated rate on specific dates and to repay principal (the bond's face
value) on a specified date. An issuer may have the right to redeem or "call"
a bond before maturity, and the investor may have to reinvest the proceeds at
lower market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays consistent
with current market conditions.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates that are adjusted periodically. These
interest rate adjustments tend to minimize fluctuations in the bonds'
principal values. The maturity of those securities may be shortened under
certain specified conditions.
Bonds may be designated as senior or subordinated obligations. Senior
obligations generally have the first claim on a corporation's earnings and
assets and, in the event of liquidation, are paid before subordinated debt.
<PAGE>
T. ROWE PRICE
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, preferred
stock may be purchased 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
Investments may be made in debt or preferred equity securities convertible
into, or exchangeable for, equity securities. Traditionally, convertible
securities have paid dividends or interest at rates higher than common stocks
but lower than nonconvertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants
(generally, two or more years). Warrants can be highly volatile, have no
voting rights, and pay no dividends.
Operating policy Without regard to quality, the fund may invest up to 25% of
its total assets (not including cash) in preferred and common stocks and
convertible securities, convertible into or which carry warrants for common
stocks or other equity securities.
Foreign Securities
Investments may be made in foreign securities. These include nondollar-
denominated securities traded outside of the U.S. and dollar-denominated
securities of foreign issuers traded in the U.S. (such as Yankee bonds). Such
investments increase a portfolio's diversification and may enhance return,
but they also involve some special risks such as exposure to potentially
adverse local, political, and economic developments; nationalization and
exchange controls; potentially lower liquidity and higher volatility;
possible problems arising from accounting, disclosure, settlement, and
regulatory practices that differ from U.S. standards; and the chance that
fluctuations in foreign exchange rates will decrease the investment's value
(favorable changes can increase its value). These risks are heightened for
investments in developing countries.
Operating policy There is no limit on fund investments in U.S.
dollar-denominated debt securities issued by foreign issuers, foreign
branches of U.S. banks,
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ABOUT THE FUNDS
and U.S. branches of foreign banks. The fund may also invest up to 20% of its
total assets (excluding reserves) in non-U.S. dollar-denominated fixed income
securities principally traded in financial markets outside the United States.
Asset-Backed Securities
An underlying pool of assets, such as credit card or automobile trade
receivables or corporate loans or bonds, backs these bonds and provides the
interest and principal payments to investors. Credit quality depends
primarily on the quality of the underlying assets and the level of credit
support, if any, provided by the issuer. The underlying assets (i.e., loans)
are sometimes subject to prepayments which can shorten the security's
weighted average life and may lower its return. The value of these securities
also may change because of actual or perceived changes in the
creditworthiness of the originator, servicing agent, or of the financial
institution providing the credit support. There is no limit on fund
investments in these securities.
Mortgage-Backed Securities
The fund may invest in a variety of mortgage-backed securities. Mortgage
lenders pool individual home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the fund. Interest
and principal payments generated by the underlying mortgages are passed
through to the investors. The "big three" issuers are the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
GNMA certificates are backed by the full faith and credit of the U.S.
government, while others, such as Fannie Mae and Freddie Mac certificates,
are only supported by the ability to borrow from the U.S. Treasury or
supported only by the credit of the agency. Private mortgage bankers and
other institutions also issue mortgage-backed securities.
Mortgage-backed securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates. In addition,
when interest rates fall, the pace of mortgage prepayments picks up. These
refinanced mortgages are paid off at face value (par), causing a loss for any
investor who may have purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation of these
securities and can negatively affect the fund's net asset value. When rates
rise, the prices of mortgage-backed securities can be expected to decline,
although historically these securities have experienced smaller price
declines than comparable quality bonds. In addition, when rates rise and
prepayments slow, the effective duration of mortgage-backed securities
extends, resulting in increased volatility.
<PAGE>
T. ROWE PRICE
. There is no limit on fund investments in mortgage-backed securities.
Additional mortgage-backed securities in which the fund may invest include:
. Collateralized Mortgage Obligations (CMOs) CMOs are debt securities that are
fully collateralized by a portfolio of mortgages or mortgage-backed
securities. All interest and principal payments from the underlying mortgages
are passed through to the CMOs in such a way as to create some classes with
more stable average lives than the underlying mortgages and other classes
with more volatile average lives. CMO classes may pay fixed or variable rates
of interest, and certain classes have priority over others with respect to
the receipt of prepayments.
. Stripped Mortgage Securities Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest and
principal payments generated by a pool of mortgage-backed securities or a CMO
to create additional classes of securities. Generally, one class receives
only interest payments (IOs), and another receives principal payments (POs).
Unlike with other mortgage-backed securities and POs, the value of IOs tends
to move in the same direction as interest rates. The fund can use IOs as a
hedge against falling prepayment rates (interest rates are rising) and/or a
bear market environment. POs can be used as a hedge against rising prepayment
rates (interest rates are falling) and/or a bull market environment. IOs and
POs are acutely sensitive to interest rate changes and to the rate of
principal prepayments.
A rapid or unexpected increase in prepayments can severely depress the price
of IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. Of course, under the opposite conditions these securities
may appreciate in value. These securities can be very volatile in price and
may have lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMO classes may also exhibit these qualities, especially those
that pay variable rates of interest that adjust inversely with, and more
rapidly than, short-term interest rates. In addition, if interest rates rise
rapidly and prepayment rates slow more than expected, certain CMO classes, in
addition to losing value, can exhibit characteristics of longer-term
securities and become more volatile. There is no guarantee that fund
investments in CMOs, IOs, or POs will be successful, and fund total return
could be adversely affected as a result.
Operating policy Fund investments in stripped mortgage securities are
limited to 10% of total assets.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an
efficient means of pursuing a
<PAGE>
ABOUT THE FUNDS
variety of investment goals, including currency hedging, duration management,
and increased total return. Hybrids may or may not bear interest or pay
dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more
steeply and rapidly than the benchmark. These benchmarks may be sensitive to
economic and political events, such as commodity shortages and currency
devaluations, which cannot be readily foreseen by the purchaser of a hybrid.
Under certain conditions, the redemption value of a hybrid could be zero.
Thus, an investment in a hybrid may entail significant market risks that are
not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed
rate or floating rate of interest. The purchase of hybrids also exposes the
fund to the credit risk of the issuer of the hybrid. These risks may cause
significant fluctuations in the net asset value of the fund.
. Hybrids can have volatile prices and limited liquidity, and their use may
not be successful.
Operating policy Fund investments in hybrid instruments are limited to 10%
of total assets.
Deferrable Subordinated Securities
These are securities with long maturities that are deeply subordinated in the
issuer's capital structure. They generally have 30-year maturities and permit
the issuer to defer distributions for up to five years. These characteristics
give the issuer more financial flexibility than is typically the case with
traditional bonds. As a result, the securities may be viewed as possessing
certain "equity-like" features by rating agencies and bank regulators.
However, the securities are treated as debt securities by market
participants, and the fund intends to treat them as such as well. These
securities may offer a mandatory put or remarketing option that creates an
effective maturity date significantly shorter than the stated one. Fund
investments will be made in these securities to the extent their yield,
credit, and maturity characteristics are consistent with the fund's
investment objective and program.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy Fund investments in illiquid securities are limited to 15%
of net assets.
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T. ROWE PRICE
Utility Industry Concentration
The fund may, under certain circumstances, invest a substantial amount of its
assets in the utility industry. Investments in this industry 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.
Operating policy The fund has no current intention of concentrating in the
utility industry.
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.
Types of Investment Management Practices
Reserve Position
A certain portion of fund assets will be held in money market reserves. Fund
reserve positions are expected to consist primarily of shares of one or more
T. Rowe Price internal money market funds. Short-term, high-quality U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, may also be held. For temporary, defensive purposes, there is no
limit on fund investments in money market reserves. The effect of taking such
a position is that the fund may not achieve its investment objective. The
reserve position provides flexibility in meeting redemptions, paying
expenses, and in the timing of new investments and can serve as a short-term
defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets
Fund borrowings may be made from banks and other T. Rowe Price funds for
temporary emergency purposes to facilitate redemption requests, or for other
purposes consistent with fund policies as set forth in this prospectus. Such
borrowings may be collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
Operating policy Fund transfers of portfolio securities as collateral will
not be made except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of fund
total assets. Fund purchases of additional securities will not be made when
borrowings exceed 5% of total assets.
Futures and Options
Futures, a type of potentially high-risk derivative, are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options, another type of potentially
high-risk deriva-
<PAGE>
ABOUT THE FUNDS
tive, give the investor the right (where the investor purchases the option),
or the obligation (where the investor "writes" or sells the option), to buy
or sell an asset at a predetermined price in the future. Futures and options
contracts may be bought or sold for any number of reasons, including: to
manage fund exposure to changes in interest rates, bond prices, and foreign
currencies; as an efficient means of adjusting fund overall exposure to
certain markets; in an effort to enhance income; to protect the value of
portfolio securities; as a cash management tool; and to adjust portfolio
duration. Call and put options may be purchased or sold 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 fund total return, and
the potential loss from the use of futures can exceed the fund's initial
investment in such contracts.
Operating policies Futures: Initial margin deposits and premiums on options
used for nonhedging purposes will not exceed 5% of fund net asset value.
Options on securities: The total market value of securities against which
call or put options are written may not exceed 25% of fund total assets. No
more than 5% of fund total assets will be committed to premiums when
purchasing call or put options.
Managing Foreign Exchange 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."
The fund may also use these contracts to create a synthetic bond - issued by
a U.S. company, for example, but with the dollar component transformed into a
foreign currency. If the fund were to engage in foreign currency
transactions, they would be used primarily to protect the fund's foreign
securities from adverse currency movements relative to the dollar. Such
transactions involve the risk that anticipated currency movements will not
occur, and the fund's total return could be reduced.
Operating policy The fund will not commit more than 20% of its total assets
to forward currency contracts.
Lending of Portfolio Securities
Fund securities may be lent to broker-dealers, other institutions, or other
persons to earn additional income. The principal risk is the potential
insolvency of the broker-dealer or other borrower. In this event, a fund
could experience delays in recovering its securities, and capital losses.
<PAGE>
T. ROWE PRICE
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
When-Issued Securities and Forward Commitment Contracts
The fund may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. There is no
limit on fund investments in these securities. The price of these securities
is fixed at the time of the commitment to buy, but delivery and payment can
take place a month or more later. During the interim period, the market value
of the securities can fluctuate, and no interest accrues to the purchaser. At
the time of delivery, the value of the securities may be more or less than
the purchase or sale price. To the extent the fund remains fully or almost
fully invested (in securities with a remaining maturity of more than one
year) at the same time it purchases these securities, there will be greater
fluctuations in the fund's net asset value than if the fund did not purchase
them.
Portfolio Turnover
The fund will not generally trade in securities for short term profits, but,
when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. A high turnover rate may increase
transaction costs, result in additional capital gain distributions, and
reduce the fund's performance. The fund portfolio turnover rates are listed
in the table in the Financial Highlights section.
Equity Income Fund
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
various types of fund portfolio securities and investment management
practices.
Fundamental policy The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer, or if more than 10% of
the voting securities of the issuer would be held by the fund.
Fund investments are primarily in common stocks (normally, at least 65% of
total assets) and, to a lesser degree, other types of securities as described
below.
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
<PAGE>
ABOUT THE FUNDS
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, preferred
stock may be purchased 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
Investments may be made in debt or preferred equity securities convertible
into, or exchangeable for, equity securities. Traditionally, convertible
securities have paid dividends or interest at rates higher than common stocks
but lower than nonconvertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
Investments may be made in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure to
potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and higher
volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of fund foreign investments that may be made in such countries.
Operating policy Fund investments in foreign securities are limited to 25%
of total assets (excluding reserves).
Fixed Income Securities
From time to time, we may invest in debt securities of any type, including
municipal securities, without regard to quality or rating. Such securities
would be purchased in companies, municipalities, or entities which meet the
investment criteria for the fund. The price of a bond fluctuates with changes
in interest rates, generally rising when interest rates fall and falling when
interest rates rise.
<PAGE>
T. ROWE PRICE
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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities.
There is no limit on fund investments in convertible securities.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities index.
Such securities may bear interest or pay dividends at below market or even
relatively nominal rates. Under some conditions, the redemption value of such
an investment could be zero.
. Hybrids can have volatile prices and limited liquidity, and their use may
not be successful.
Operating policy Fund investments in hybrid instruments are limited to 10%
of total equity assets.
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy Fund investments in illiquid securities are limited to 15%
of net assets.
Types of Investment Management Practices
Reserve Position
A certain portion of fund assets will be held in money market reserves. Fund
reserve positions are expected to consist primarily of shares of one or more
T. Rowe Price internal money market funds. Short-term, high-quality U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, may also be held. For temporary, defensive purposes, there is no
<PAGE>
ABOUT THE FUNDS
limit on fund investments in money market reserves. The effect of taking such
a position is that the fund may not achieve its investment objective. The
reserve position provides flexibility in meeting redemptions, expenses, and
the timing of new investments and can serve as a short-term defense during
periods of unusual market volatility.
Borrowing Money and Transferring Assets
Fund borrowings may be made from banks and other T. Rowe Price funds for
temporary emergency purposes to facilitate redemption requests, or for other
purposes consistent with fund policies as set forth in this prospectus. Such
borrowings may be collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
Operating policy Fund transfers of portfolio securities as collateral will
not be made except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. Fund purchases of additional securities will not be made
when borrowings exceed 5% of total assets.
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
Futures and options contracts may be bought or sold for any number of
reasons, including: to manage fund exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting fund overall
exposure to certain markets; in an effort to enhance income; as a cash
management tool; and to protect the value of portfolio securities. Call and
put options may be purchased or sold 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 fund 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 nonhedging purposes will not exceed 5% of fund net asset value.
Options on securities: The total market value of securities against which
call or put options are written may not exceed 25% of fund total assets. No
more than 5% of fund total assets will be committed to premiums when
purchasing call or put options.
<PAGE>
T. ROWE PRICE
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."
Foreign currency transactions, if used, would be designed primarily to
protect a fund's foreign securities from adverse currency movements relative
to the dollar. Such transactions involve the risk that anticipated currency
movements will not occur, and fund total return could be reduced.
Lending of Portfolio Securities
Fund securities may be lent to broker-dealers, other institutions, or other
persons to earn additional income. The principal risk is the potential
insolvency of the broker-dealer or other borrower. In this event, the fund
could experience delays in recovering its securities and capital losses.
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
Portfolio Turnover
The fund will not generally trade in securities for short-term profits, but,
when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. A high turnover rate may increase
transaction costs and result in higher capital gain distributions by the
fund. The fund's portfolio turnover rates for the fiscal years ending
December 31 are listed in the table in the Financial Highlights section.
International Stock Fund
Types of Portfolio Securities
In seeking to meet its investment objective, we may invest in any type of
security or instrument (including certain potentially high-risk derivatives
described in this section) whose investment characteristics are consistent
with the fund's investment program. The following pages describe various
types of fund portfolio securities and investment management practices.
Fundamental policy The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer, or if more than 10% of
the voting securities of the issuer would be held by the fund.
Fund investments are primarily in common stocks (normally, at least 65% of
total assets) and, to a lesser degree, other types of securities as described
below.
<PAGE>
ABOUT THE FUNDS
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, preferred
stock may be purchased 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
Investments may be made in debt or preferred equity securities convertible
into, or exchangeable for, equity securities. Traditionally, convertible
securities have paid dividends or interest at rates higher than common stocks
but lower than nonconvertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants
(generally, two or more years).
Fixed Income Securities
From time to time, we may invest in investment-grade, fixed-income
securities. These securities would be purchased in companies that meet fund
investment criteria. The price of a bond fluctuates with changes in interest
rates, generally rising when interest rates fall and falling when interest
rates rise.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities index.
Such securities may bear interest or pay dividends at below market or even
relatively nominal rates. Under some conditions, the redemption value of such
an investment could be zero.
. Hybrids can have volatile prices and limited liquidity, and their use may
not be successful.
Operating policy Fund investments in hybrid instruments are limited to 10%
of total assets.
<PAGE>
T. ROWE PRICE
Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy Fund investments in illiquid securities are limited to 15%
of net assets.
Types of Investment Management Practices
Reserve Position
A certain portion of fund assets will be held in money market reserves. Fund
reserve positions are expected to consist primarily of shares of one or more
T. Rowe Price internal money market funds. Short-term, high-quality U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, may also be held. For temporary, defensive purposes, there is no
limit on fund investments in money market reserves. The effect of taking such
a position is that the fund may not achieve its investment objective. The
reserve position provides flexibility in meeting redemptions, expenses, and
the timing of new investments and can serve as a short-term defense during
periods of unusual market volatility.
Borrowing Money and Transferring Assets
Fund borrowings may be made from banks and other T. Rowe Price funds as a
temporary measure for emergency purposes, to facilitate redemption requests,
or for other purposes consistent with fund policies as set forth in this
prospectus. Such borrowings may be collateralized with fund assets, subject
to restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
Operating policy Fund transfers of portfolio securities as collateral will
not be made except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. Fund purchases of additional securities will not be made
when borrowings exceed 5% of total assets.
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 contract with a term greater than one year.
<PAGE>
ABOUT THE FUNDS
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 move substantially against another currency, it may enter into a
forward contract to sell or buy the former foreign currency (or another
currency that acts as a proxy for that currency). The contract may
approximate 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 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 some markets where it is not possible to engage in effective
foreign currency hedging. This is generally true, for example, for the
currencies of various emerging markets where the foreign exchange markets are
not sufficiently developed to permit hedging activity to take place.
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
Futures and options contracts may be bought or sold for any number of
reasons, including: to manage fund exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting fund overall
exposure to certain markets; in an effort to enhance income; as a cash
management tool; and to protect the value of portfolio securities. Call and
put options may be purchased or sold 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 fund 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 nonhedging purposes will not exceed 5% of fund net asset value.
Options on securities: The total market value of securities against which
call or
<PAGE>
T. ROWE PRICE
put options are written may not exceed 25% of its total assets. No more than
5% of fund total assets will be committed to premiums when purchasing call or
put options.
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 the fund
is expected to comply with such limits, the extent to which these limits
apply is subject to tax regulations as yet unissued. Hedging may also result
in the application of the mark-to-market and 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 and could
affect whether dividends paid by the fund are classified as capital gains or
ordinary income.
Lending of Portfolio Securities
Fund securities may be lent to broker-dealers, other institutions, or other
persons to earn additional income. The principal risk is the potential
insolvency of the broker-dealer or other borrower. In this event, the fund
could experience delays in recovering its securities and possibly capital
losses.
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
Portfolio Turnover
Turnover is an indication of frequency. The fund will not generally trade in
securities for short-term profits, but when circumstances warrant, securities
may be purchased and sold without regard to the length of time held. A high
turnover rate may increase transaction costs and result in higher capital
gain distributions by the fund. The fund's portfolio turnover rates for the
fiscal years ended October 31, 1999, 1998, and 1997 were 17.6%, 12.2%, and
15.8%, respectively.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 10, which provides information about the funds' financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the funds' financial statements, which are included in annual reports
and are incorporated by reference into the Statements of Additional
Information (available upon request). The total returns in the table
represent the rate that an investor would have earned or lost on an
investment in the funds (assuming reinvestment of all dividends and
distributions and no payment of account or (if applicable) redemption fees).
The financial statements in the annual report were audited by the funds'
independent accountants, PricewaterhouseCoopers LLP.
<PAGE>
ABOUT THE FUNDS
Prime Reserve Fund
<TABLE>
Table 10 Financial Highlights
<CAPTION>
Year ended May 31
1996 1997 1998 1999 2000
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income From Investment Operations
Net investment income 0.051 0.048 0.050 0.047 0.051
--------------------------------------------------
Net gains or losses
on securities (both
realized and -- -- -- -- --
unrealized)
--------------------------------------------------
Total from investment
operations 0.051 0.048 0.050 0.047 0.051
Less Distributions
Dividends (from net (0.051) (0.048) (0.050) (0.047) (0.051)
investment income)
--------------------------------------------------
Distributions (from -- -- -- -- --
capital gains)
--------------------------------------------------
Returns of capital -- -- -- -- --
--------------------------------------------------
Total distributions (0.051) (0.048) (0.050) (0.047) (0.051)
--------------------------------------------------
Net asset value, $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
end of period
--------------------------------------------------
Total return 5.25% 4.92% 5.16% 4.82% 5.22%
Ratios/Supplemental Data
Net assets, end of $ 4,011 $ 4,561 $ 4,889 $ 5,169 $ 5,618
period (in millions)
--------------------------------------------------
Ratio of expenses to 0.66% 0.64% 0.63% 0.66% 0.62%
average net assets
--------------------------------------------------
Ratio of net income 5.07% 4.83% 5.06% 4.70% 5.11%
to average net assets
-------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTING WITH T. ROWE PRICE
New Income Fund
<TABLE>
Table 10 Financial Highlights (continued)
<CAPTION>
Year ended May 31
1996 1997 1998 1999 2000
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <S>
Net asset value,
beginning of period $ 8.97 $ 8.70 $ 8.77 $ 9.09 $ 8.50
Income From Investment Operations
Net investment income 0.60 0.58 0.57 0.54 0.52
----------------------------------------------
Net gains or losses on
securities (both (0.27) 0.07 0.36 (0.45) (0.43)
realized and unrealized)
----------------------------------------------
Total from investment
operations 0.33 0.65 0.93 0.09 0.09
Less Distributions
Dividends (from net (0.60) (0.58) (0.57) (0.54) (0.52)
investment income)
----------------------------------------------
Distributions (from -- -- (0.04) (0.14) --
capital gains)
----------------------------------------------
Returns of capital -- -- -- -- --
----------------------------------------------
Total distributions (0.60) (0.58) (0.61) (0.68) (0.52)
----------------------------------------------
Net asset value, end $ 8.70 $ 8.77 $ 9.09 $ 8.50 $ 8.07
of period
----------------------------------------------
Total return 3.70% 7.70% 10.84% 1.02% 1.13%
Ratios/Supplemental Data
Net assets, end of
period $1,634 $1,711 $2,076 $1,942 $ 1,633
(in millions)
----------------------------------------------
Ratio of expenses to 0.75% 0.74% 0.71% 0.72% 0.73%
average net assets
----------------------------------------------
Ratio of net income to 6.66% 6.65% 6.31% 6.16% 6.32%
average net assets
----------------------------------------------
Portfolio turnover rate 35.5% 87.1% 147.3% 94.3% 83.6%
------------------------------------------------------------------------------
</TABLE>
<PAGE>
ABOUT THE FUNDS
Equity Income Fund
<TABLE>
Table 10 Financial Highlights (continued)
<CAPTION>
Year ended December 31
1995 1996 1997 1998 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 15.98 $ 20.01 $ 22.54 $ 26.07 $ 26.32
Income From Investment Operations
Net investment income 0.66 0.64 0.66 0.61 0.54
--------------------------------------------------------------------
Net gains or losses
on securities (both
realized and 4.56 3.38 5.67 1.74 0.45
unrealized)
--------------------------------------------------------------------
Total from investment
operations 5.22 4.02 6.33 2.35 0.99
Less Distributions
Dividends (from net (0.65) (0.65) (0.66) (0.61) (0.53)
investment income)
--------------------------------------------------------------------
Distributions (from (0.54) (0.84) (2.14) (1.49) (1.97)
capital gains)
--------------------------------------------------------------------
Returns of capital -- -- -- -- --
--------------------------------------------------------------------
Total distributions (1.19) (1.49) (2.80) (2.10) (2.50)
--------------------------------------------------------------------
Net asset value, $ 20.01 $ 22.54 $ 26.07 $ 26.32 $ 24.81
end of period
--------------------------------------------------------------------
Total return 33.35% 20.40% 28.82% 9.23% 3.82%
Ratios/Supplemental Data
Net assets, end of $5,214,778 $7,818,134 $12,771,185 $13,495,050 $12,321,213
period (in thousands)
--------------------------------------------------------------------
Ratio of expenses to 0.85% 0.81% 0.79% 0.77% 0.77%
average net assets
--------------------------------------------------------------------
Ratio of net income 3.69% 3.08% 2.67% 2.26% 1.95%
to average net assets
--------------------------------------------------------------------
Portfolio turnover 21.4% 25.0% 23.9% 22.6% 21.8%
rate
-------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
T. ROWE PRICE
International Stock Fund
<TABLE>
Table 10 Financial Highlights (continued)
<CAPTION>
Year ended October 31
1995 1996 1997 1998 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.84 $12.09 $ 13.47 $14.14 $ 14.39
Income From Investment Operations
Net investment income 0.18 0.19 0.19 0.23 0.17
-----------------------------------------------
Net gains or losses on
securities (both
realized and (0.19) 1.57 0.86 0.77 2.71
unrealized)
-----------------------------------------------
Total from investment
operations (0.01) 1.76 1.05 1.00 2.88
Less Distributions
Dividends (from net (0.12) (0.18) (0.18) (0.20) (0.22)
investment income)
-----------------------------------------------
Distributions (from (0.62) (0.20) (0.20) (0.55) (0.35)
capital gains)
-----------------------------------------------
Returns of capital -- -- -- -- --
-----------------------------------------------
Total distributions (0.74) (0.38) (0.38) (0.75) (0.57)
-----------------------------------------------
Net asset value, end $12.09 $13.47 $ 14.14 $14.39 $ 16.70
of period
-----------------------------------------------
Total return/a/ 0.38% 14.87% 7.90% 7.48% 20.67%
Ratios/Supplemental Data
Net assets, end of $6,386 $8,776 $10,005 $9,537 $10,615
period (in millions)
-----------------------------------------------
Ratio of expenses to 0.91% 0.88% 0.85% 0.85% 0.85%
average net assets
-----------------------------------------------
Ratio of net income to 1.56% 1.58% 1.33% 1.50% 1.05%
average net assets
-----------------------------------------------
Portfolio turnover rate 17.8% 11.6% 15.8% 12.2% 17.6%
------------------------------------------------------------------------------
</TABLE>
/a/Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
<PAGE>
ABOUT THE FUNDS
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or tax identification number on a
signed New Account Form or W-9 Form. Otherwise, federal law requires the funds
to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts ($25,000 minimum initial investment for
Summit Funds only)
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts, except for IRA Roll-
<PAGE>
T. ROWE PRICE
over checks that are properly endorsed. In addition, T. Rowe Price does not
accept purchases made by credit card check.
via U.S. Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300
via private carriers/overnight services
T. Rowe Price Account Services Mailcode 17300 4515 Painters Mill Road Owings
Mills, MD 21117-4903
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
Receiving Bank: PNC Bank, N.A. (Pittsburgh) Receiving Bank ABA#: 043000096
Beneficiary: T. Rowe Price [fund name] Beneficiary Account: 1004397951
Originator to Beneficiary Information (OBI): name of owner(s) and account
number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until we receive a signed New Account Form. Also, retirement plan accounts and
IRAs cannot be opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Information About Your Services). The new account will
have the same registration as the account from which you are exchanging.
Services for the new account may be carried over by telephone request if
preauthorized on the existing account. For limitations on exchanging, see
explanation of Excessive Trading under Transaction Procedures and Special
Requirements.
In Person
Drop off your New Account Form at any location listed on the back cover and
obtain a receipt.
<PAGE>
ABOUT THE FUNDS
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase ($1,000 minimum purchase for Summit Funds); $50 minimum
for retirement plans, Automatic Asset Builder, and gifts or transfers to minors
(UGMA/ UTMA) accounts ($100 minimum for Summit Funds)
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address listed in Opening a New
Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
3. Remember to provide your account number and the fund name on the memo line
of your check.
via U.S. Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300
/(For //mail via private carriers and overnight services//, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.)
<PAGE>
T. ROWE PRICE
Redemptions
Redemption proceeds can be mailed to your account address, sent by ACH transfer
to your bank, or wired to your bank (provided your bank information is already
on file). For charges, see Electronic Transfers - By Wire under Information
About Your Services. Please note that large redemption requests initiated
through automated services may be routed to a service representative.
Some of the T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on
shares held for less than six months, one year, or two years, as specified in
the prospectus. The fee is paid to the fund.
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer or Tele*Access (if you have
previously authorized these services), mailgram, or express mail. For exchange
policies, please see Transaction Procedures and Special Requirements - Excessive
Trading.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to specify any fund you
are exchanging out of and the fund or funds you are exchanging into. T. Rowe
Price requires the signatures of all owners exactly as registered, and possibly
a signature guarantee (see Transaction Procedures and Special Requirements -
Signature Guarantees). Please use the appropriate address below:
For nonretirement and IRA accounts:
via U.S. Postal Service
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302
via private carriers/overnight services
T. Rowe Price Account Services Mailcode 17302 4515 Painters Mill Road Owings
Mills, MD 21117-4903
<PAGE>
ABOUT THE FUNDS
For employer-sponsored retirement accounts:
via U.S. Postal Service
T. Rowe Price Trust Company P.O. Box 17479 Baltimore, MD 21297-1479
via private carriers/overnight services
T. Rowe Price Trust Company Mailcode 17479 4515 Painters Mill Road Owings Mills,
MD 21117-4903
Requests for redemptions from employer-sponsored retirement accounts must be in
writing; please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUNDS
----------------------------------------------------------
T. Rowe Price funds and their agents reserve the following rights: (1) to waive
or lower investment minimums; (2) to accept initial purchases by telephone or
mailgram; (3) to refuse any purchase or exchange order; (4) to cancel or rescind
any purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) upon notice
to the shareholder within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; (5)
to freeze any account and suspend account services when notice has been received
of a dispute between the registered or beneficial account owners or there is
reason to believe a fraudulent transaction may occur; (6) to otherwise modify
the conditions of purchase and any services at any time; and (7) to act on
instructions believed to be genuine. These actions will be taken when, in the
sole discretion of management, they are deemed to be in the best interest of the
fund.
<PAGE>
T. ROWE PRICE
In an effort to protect T. Rowe Price funds from the possible adverse effects of
a substantial redemption in a large account, as a matter of general policy, no
shareholder or group of shareholders controlled by the same person or group of
persons will knowingly be permitted to purchase in excess of 5% of the
outstanding shares of a fund, except upon approval of the fund's management.
INFORMATION ABOUT YOUR SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 Investor Services 1-800-638-5660
Many services are available to you as a shareholder; some you receive
automatically, and others you must authorize or request on the New Account Form.
By signing up for services on the New Account Form rather than later on, you
avoid having to complete a separate form and obtain a signature guarantee. This
section discusses some of the services currently offered. Our Services Guide,
which we mail to all new shareholders, contains detailed descriptions of these
and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k)s, and 403(b)(7)s. For
information on IRAs, call Investor Services. For information on all other
retirement plans or our no-load variable annuity, please call our Trust Company
at 1-800-492-7670.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via a toll-free number enables you to (1) access information on
fund performance, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers in this section).
<PAGE>
ABOUT THE FUNDS
Web Address www.troweprice.com
You can sign up online to conduct account transactions through our Web site on
the Internet. If you subscribe to America Online/(R)/, you can access our Web
site via keyword "T. Rowe Price" and conduct transactions in your account.
Plan Account Line 1-800-401-3279
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the back cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
$50 minimum ($100 minimum for Summit Funds) You can invest automatically in
several different ways, including:
Automatic Asset Builder
You can instruct us to move $50 ($100 for Summit Funds) or more from your bank
account, or you can instruct your employer to send all or a portion of your
paycheck to the fund or funds you designate.
<PAGE>
T. ROWE PRICE
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
T. ROWE PRICE BROKERAGE
----------------------------------------------------------
To Open an Account 1-800-638-5660 For Existing Brokerage Customers
1-800-225-7720
Investments available through our brokerage service include stocks, options,
bonds, and others at commission savings over full-service brokers*. We also
provide a wide range of services, including:
Automated Telephone and Computer Services
You can enter stock and option orders, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades entered through Tele-Trader save you an additional
10% on commissions. For stock trades entered through Internet-Trader, you will
pay a commission of $24.95 for up to 1,000 shares plus $.02 for each share over
1,000. Option trades entered through Internet-Trader save you 10% over our
standard commission schedule. All trades are subject to a $35 minimum commission
except stock trades placed through Internet-Trader.
Investor Information
A variety of informative reports, such as our Brokerage Insights series and S&P
Market Month newsletter, as well as access to on-line research tools can help
you better evaluate economic trends and investment opportunities.
Dividend Reinvestment Service
If you elect to participate in this service, the cash dividends from the
eligible securities held in your account will automatically be reinvested in
additional shares of the same securities free of charge. Dividend payments must
be $10.00 or greater to qualify for reinvestment. Most securities listed on
national securities exchanges or on Nasdaq are eligible for this service.
/*Services //v//ary //b//y //f//irm./
/T. Rowe Price// Brokerage is a division of //T. Rowe Price// Investment /
/Services, Inc., Member NASD/SIPC./
<PAGE>
ABOUT THE FUNDS
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements. Most of this information is also
available on our Web site at www.troweprice.com.
Shareholder Reports
Fund managers' review of their strategies and performance. If several members of
a household own the same fund, only one fund report is mailed to that address.
To receive additional copies, please call Shareholder Services or write to us at
P.O. Box 17630, Baltimore, Maryland 21297-1630.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies
and including the Performance Update, a review of all T. Rowe Price fund
results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
informative reports.
A fund Statement of Additional Information has been filed with the Securities
and Exchange Commission and is incorporated by reference into this prospectus.
Further information about fund investments, including a review of market
conditions and the manager's recent strategies and their impact on performance,
is available in the annual and semiannual shareholder reports. To obtain free
copies of any of these documents, or for shareholder inquiries, call
1-800-638-5660.
Fund information and Statements of Additional Information are also available
from the Public Reference Room of the Securities and Exchange Commission. Infor-
mation on the operation of the Public Reference Room may be obtained by calling
the SEC at 1-202-942-8090. Fund reports and other fund information are available
on the EDGAR Database on the SEC's Internet site at http://www.sec.gov. Copies
of this information may be obtained, after paying a duplicating fee, by
electronic request at [email protected], or by writing the Public Reference
Room, Washington D.C. 20549-0102.
Walk-in
Investor Centers
For directions, call 1-800-225-5132 or visit our Web site
Baltimore Area
Downtown
105 East Lombard Street
Owings Mills
Three Financial Center 4515 Painters Mill Road
Boston Area
386 Washington Street Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center 21800 Oxnard Street Suite 270 Woodland Hills
Tampa
4200 West Cypress Street 10th Floor
Washington, D.C.
900 17th Street, N.W. Farragut Square
For Mutual Fund or T. Rowe Price Brokerage Information
Investor Services
1-800-638-5660 TDD
1-800-367-0763
For Existing Accounts
Shareholder Services
1-800-225-5132
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
24 hours, 7 days 1-800-638-2587
Internet Address
www.troweprice.com
Plan Account Line
For retirement plan investors: The appropriate 800 number appears on your
retirement account statement.
(LOGO)
T. Rowe Price Associates, Inc. 100 East Pratt Street Baltimore, MD 21202
1940 Act File No. 811-2603;811-2396; 811-4400; 811-2958
C00-040 10/1/00
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is October 1, 2000.
T. ROWE PRICE CORPORATE INCOME FUND, INC.
T. ROWE PRICE GNMA FUND
T. ROWE PRICE HIGH YIELD FUND, INC.
T. Rowe Price High Yield Fund-Advisor Class
T. ROWE PRICE NEW INCOME FUND, INC.
T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
T. Rowe Price Personal Strategy Balanced Fund
T. Rowe Price Personal Strategy Growth Fund49
T. Rowe Price Personal Strategy Income Fund
T. ROWE PRICE PRIME RESERVE FUND, INC.
T. Rowe Price Prime Reserve Fund-PLUS Class
RESERVE INVESTMENT FUNDS, INC.
Government Reserve Investment Fund
Reserve Investment Fund
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
and
T. ROWE PRICE U.S. TREASURY FUNDS, INC.
U.S. Treasury Intermediate Fund
U.S. Treasury Long-Term Fund
U.S. Treasury Money Fund
-------------------------------------------------------------------------------
Mailing Address: T. Rowe Price Investment Services, Inc. 100 East Pratt
Street Baltimore, Maryland 21202 1-800-638-5660
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate fund prospectus dated October 1,
2000, which may be obtained from T. Rowe Price Investment Services, Inc.
("Investment Services").
Each fund's financial statements for the year ended May 31, 2000, and the
report of independent accountants are included in each fund's Annual Report
and incorporated by reference into this Statement of Additional Information.
If you would like a prospectus or an annual or semiannual shareholder report
for a fund of which you are not a shareholder, please call 1-800-638-5660. A
prospectus with more complete information, including management fees and
expenses, will be sent to you. Please read it carefully.
Government Reserve and Reserve Investment Funds are not available for direct
purchase by members of the public.
C22-043 3/31/00
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock 67 Management of the Funds 38
------------------------------ --------------------------------------------
Code of Ethics 54 Net Asset Value Per Share 62
------------------------------ --------------------------------------------
Custodian 54 Portfolio Management Practices 21
------------------------------ --------------------------------------------
Distributor for the 53 Portfolio Transactions 55
Funds
------------------------------ --------------------------------------------
Dividends and 62 Pricing of Securities 60
Distributions
------------------------------ --------------------------------------------
Federal Registration 69 Principal Holders of Securities 47
of Shares
------------------------------ --------------------------------------------
Independent 69 Ratings of Commercial Paper 71
Accountants
------------------------------ --------------------------------------------
Investment Management 48 Ratings of Corporate Debt Securities 72
Services
------------------------------ --------------------------------------------
Investment Objectives 2 Risk Factors 3
and Policies
------------------------------ --------------------------------------------
Investment Performance 65 Services 52
by Outside Parties
------------------------------ --------------------------------------------
Investment Program 7 Tax Status 62
------------------------------ --------------------------------------------
Investment 35 Yield Information 64
Restrictions
------------------------------ --------------------------------------------
Legal Counsel 69
------------------------------ --------------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each fund's
investment objectives and policies discussed in each fund's prospectus.
The funds will not substantively change their investment objectives without
obtaining shareholder approval. Unless otherwise specified, the investment
programs and restrictions of the funds are not fundamental policies. Each
fund's operating policies are subject to change by each Board of
Directors/Trustees without shareholder approval. However, shareholders will
be notified of a material change in an operating policy. Each fund's
fundamental policies may not be changed without the approval of at least a
majority of the outstanding shares of the fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the holders of 50%
or more of the shares are represented. References to the following are as
indicated:
Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
T. Rowe Price International, Inc. ("T. Rowe Price
International")
Throughout this Statement of Additional Information, "the fund" is intended
to refer to each fund listed on the cover page, unless otherwise indicated.
2
<PAGE>
RISK FACTORS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the fund.
All Funds
Debt Obligations
Yields on short-, intermediate-, and long-term debt securities are dependent
on a variety of factors, including the general conditions of the money and
bond markets, the size of a particular offering, the maturity of the
obligation, and the credit quality and rating of the issue. Debt securities
with longer maturities tend to have higher yields and are generally subject
to potentially greater capital appreciation and depreciation than obligations
with shorter maturities and lower yields. The market prices of debt
securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio debt securities,
and a decline in interest rates will generally increase the value of
portfolio debt securities. The ability of the fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
debt securities in which the fund invests to meet their obligations for the
payment of interest and principal when due. Although the fund seeks to reduce
risk by portfolio diversification, credit analysis, and attention to trends
in the economy, industries, and financial markets, such efforts will not
eliminate all risk. There can, of course, be no assurance that the fund will
achieve its investment objective.
After purchase by the fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the fund.
Neither event will require a sale of such security by the fund. However, T.
Rowe Price will consider such events in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus. When purchasing unrated securities, T. Rowe
Price, under the supervision of the fund's Board of Directors/Trustees,
determines whether the unrated security is of a quality comparable to that
which the fund is allowed to purchase.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
There can be no assurance that the fund will achieve its investment objective
or be able to maintain its net asset value per share at $1.00. The price of
the fund is not guaranteed or insured by the U.S. government and its yield is
not fixed. 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.
All Funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Because of its investment policy, the fund may or may not be suitable or
appropriate for an individual investor. The fund is not a money market fund
and is not an appropriate investment for those whose primary objective is
principal stability. The value of the portfolio securities of the fund will
fluctuate based upon market conditions. Although the fund seeks to reduce
risk by investing in a diversified portfolio, such diversification does not
eliminate all risk. There can, of course, be no assurance that the fund will
achieve its investment objective.
Mortgage-backed securities differ from conventional bonds in that principal
is paid back over the life of the security rather than at maturity. As a
result, the holder of a mortgage-backed security (i.e., the fund) receives
monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. The incidence of unscheduled principal prepayments is also likely
to increase in mortgage pools owned by the fund when prevailing mortgage loan
rates fall below the mortgage rates of the securities underlying the
individual pool. The effect of such prepayments in a falling rate environment
is to (1) cause the fund to reinvest principal payments at the then lower
prevailing interest
3
<PAGE>
rate, and (2) reduce the potential for capital appreciation beyond the face
amount of the security. Conversely, the fund may realize a gain on
prepayments of mortgage pools trading at a discount. Such prepayments will
provide an early return of principal which may then be reinvested at the then
higher prevailing interest rate.
The market value of adjustable rate mortgage securities ("ARMs"), like other
U.S. government securities, will generally vary inversely with changes in
market interest rates, declining when interest rates rise and rising when
interest rates decline. Because of their periodic adjustment feature, ARMs
should be more sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage-backed
securities. Thus, while having less risk of a decline during periods of
rapidly rising rates, ARMs may also have less potential for capital
appreciation than other investments of comparable maturities. Interest rate
caps on mortgages underlying ARM securities may prevent income on the ARM
from increasing to prevailing interest rate levels and cause the securities
to decline in value. In addition, to the extent ARMs are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may
result in some loss of the holders' principal investment to the extent of the
premium paid. On the other hand, if ARMs are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal
will increase current and total returns and will accelerate the recognition
of income which when distributed to shareholders will be taxable as ordinary
income.
Corporate Income, High Yield, and Personal Strategy Funds
Special Risks of Investing in Junk Bonds The following special considerations
are additional risk factors associated with the fund's investments in
lower-rated debt securities.
. Youth and Growth of the Lower-Rated Debt Securities Market The market for
lower-rated debt securities is relatively new and its growth has paralleled a
long economic expansion. Past experience may not, therefore, provide an
accurate indication of future performance of this market, particularly during
periods of economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market, the value
of lower-rated debt securities in the fund's portfolio, the fund's net asset
value and the ability of the bonds' issuers to repay principal and interest,
meet projected business goals, and obtain additional financing than on
higher-rated securities. These circumstances also may result in a higher
incidence of defaults than with respect to higher-rated securities. An
investment in this fund is more speculative than investment in shares of a
fund which invests only in higher-rated debt securities.
. Sensitivity to Interest Rate and Economic Changes Prices of lower-rated debt
securities may be more sensitive to adverse economic changes or corporate
developments than higher-rated investments. Debt securities with longer
maturities, which may have higher yields, may increase or decrease in value
more than debt securities with shorter maturities. Market prices of
lower-rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may
be more volatile than securities which pay interest periodically and in cash.
Where it deems it appropriate and in the best interests of fund shareholders,
the fund may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect the
interests of security holders of its portfolio companies.
. Liquidity and Valuation Because the market for lower-rated securities may be
thinner and less active than for higher-rated securities, there may be market
price volatility for these securities and limited liquidity in the resale
market. Nonrated securities are usually not as attractive to as many buyers
as rated securities are, a factor which may make nonrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the fund and may also limit the ability of the
fund to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market. To the extent the fund
owns or may acquire illiquid or restricted lower-rated securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties. Changes in values of debt
securities which the fund owns will affect its net asset value per share. If
market quotations are not readily available for the fund's lower-rated or
nonrated securities, these securities will be valued by a method
4
<PAGE>
that the fund's Board of Directors believes accurately reflects fair value.
Judgment plays a greater role in valuing lower-rated debt securities than
with respect to securities for which more external sources of quotations and
last sale information are available.
. Taxation Special tax considerations are associated with investing in
lower-rated debt securities structured as zero coupon or pay-in-kind
securities. The fund accrues income on these securities prior to the receipt
of cash payments. The fund must distribute substantially all of its income to
its shareholders to qualify for pass-through treatment under the tax laws and
may, therefore, have to dispose of its portfolio securities to satisfy
distribution requirements.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
Risk Factors of Foreign Investing There are special risks in foreign
investing. Certain of these risks are inherent in any mutual fund while
others relate more to the countries in which the fund will invest. Many of
the risks are more pronounced for investments in developing or emerging
market countries, such as many of the countries of Asia, Latin America,
Eastern Europe, Russia, Africa, and the Middle East. Although there is no
universally accepted definition, a developing country is generally considered
to be a country which is in the initial stages of its industrialization cycle
with a per capita gross national product of less than $8,000.
. Political and Economic Factors Individual foreign economies of some
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
The internal politics of some 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 1994-1995, the Mexican peso plunged in
value setting off a severe crisis in the Mexican economy. Asia is still
coming to terms with its own crisis and recessionary conditions sparked off
by widespread currency weakness in late 1997. In 1998, there was substantial
turmoil in markets throughout the world. In 1999, the democratically elected
government of Pakistan was overthrown by a military coup. The Russian
government also defaulted on all its domestic debt. 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 and hostile relations between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
. Currency Fluctuations The fund invests in securities denominated in various
currencies. Accordingly, a change in the value of any such currency against
the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the fund's assets denominated in that currency. Such changes will
also affect the fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of the fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens) the value of the fund's
securities denominated in that currency would be expected to decline.
. Investment and Repatriation Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the fund.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by
these or other countries in which the fund invests. 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. In 1998, the
government of Malaysia imposed currency
5
<PAGE>
controls which effectively made it impossible for foreign investors to
convert Malaysian ringgits to foreign currencies.
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on securities exchanges located
in the countries in which the respective principal offices of the issuers of
the various securities are located, if that is the best available market.
Investments in certain markets may be made through American Depository
Receipts ("ADRs") and Global Depository Receipts ("GDRs") traded in the
United States or on foreign exchanges. Foreign securities markets are
generally not as developed or efficient as, and more volatile than, those in
the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and the fund's portfolio securities may be less
liquid and subject to more rapid and erratic price movements than securities
of comparable U.S. companies. Securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Commissions on foreign securities trades are generally
higher than commissions on United States exchanges, and while there is an
increasing number of overseas securities markets that have adopted a system
of negotiated rates, a number are still subject to an established schedule of
minimum commission rates. There is generally less government supervision and
regulation of foreign securities exchanges, brokers, and listed companies
than in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement." Failed settlements can
result in losses to the fund.
. Investment Funds The fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The fund's investment in these funds
is subject to the provisions of the 1940 Act. If the fund invests in such
investment funds, the fund's shareholders will bear not only their
proportionate share of the expenses of the fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
. Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also is often more difficult to
keep currently informed of corporate actions which affect the prices of
portfolio securities.
. Taxes The dividends and interest payable on certain of the fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the fund's
shareholders.
. Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
. Eastern Europe and Russia Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs,
growing consumer spending, and substantial economic growth. However,
investment in most 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. The collapse of the ruble from its crawling peg
exchange rate against the U.S. dollar has set back the path of reform for
several years. 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
6
<PAGE>
sensitive to the country's national interest. Further, the governments in
such countries may require governmental or quasi-governmental authorities to
act as custodian of the fund's assets invested in such countries, and these
authorities may not qualify as a foreign custodian under the 1940 Act and
exemptive relief from such Act may be required. All of these considerations
are among the factors which could cause significant risks and uncertainties
to investment in Eastern Europe and Russia. The fund will only invest in a
company located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk.
. Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may experience sudden and
large adjustments in their currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. In 1999, the Brazilian real lost 30% of its value against the U.S.
dollar. Certain Latin American countries may impose restrictions on the free
conversion of their currency into foreign currencies, including the U.S.
dollar. There is no significant foreign exchange market for many currencies
and it would, as a result, be difficult for the fund to engage in foreign
currency transactions designed to protect the value of the fund's interests
in securities denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
INVESTMENT PROGRAM
-------------------------------------------------------------------------------
Types of Securities
Set forth below is additional information about certain of the investments
described in each fund's prospectus.
Debt Securities
Fixed income securities in which the fund may invest include, but are not
limited to, those described below.
All Funds
. U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
7
<PAGE>
The GNMA, U.S. Treasury Money, Intermediate, and Long-Term Funds and GRIF may
only invest in these securities if they are supported by the full faith and
credit of the U.S. government.
All Funds except GNMA, Government Reserve Investment, U.S. Treasury Money,
Intermediate, and Long-Term Funds
. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Corporate Debt Securities Outstanding nonconvertible corporate debt
securities (e.g., bonds and debentures) which have one year or less remaining
to maturity. Corporate notes may have fixed, variable, or floating rates.
. Commercial Paper and Commercial Notes Short-term promissory notes issued by
corporations primarily to finance short-term credit needs. Certain notes may
have floating or variable rates and may contain options, exercisable by
either the buyer or the seller, that extend or shorten the maturity of the
note.
. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
. Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
. Supranational Agencies Securities of certain supranational entities, such as
the International Development Bank.
All Funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Mortgage-Related Securities
Mortgage-related securities in which the fund may invest include, but are not
limited to, those described below. The GNMA, U.S. Treasury Intermediate and
U.S. Treasury Long-Term Funds may only invest in these securities to the
extent they are backed by the full faith and credit of the U.S. government.
. Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the fund.
This is in contrast to traditional bonds where principal is normally paid
back at maturity in a lump sum. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. (When
a mortgage in the underlying mortgage pool is prepaid, an unscheduled
principal prepayment is passed through to the fund. This principal is
returned to the fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies.
. U.S. Government Agency Mortgage-Backed Securities These are obligations
issued or guaranteed by the United States government or one of its agencies
or instrumentalities, such as the Government National Mortgage Association
("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie
Mae" or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie Mac" or
"FHLMC"), and the Federal Agricultural Mortgage Corporation ("Farmer Mac" or
"FAMC"). FNMA, FHLMC, and FAMC obligations are not backed by the full faith
and credit of the U.S. government as GNMA certificates are, but they are
supported by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro-rata share of monthly payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage
8
<PAGE>
loans, net of any fees paid to the guarantor of such securities and the
servicer of the underlying mortgage loans. Each of GNMA, FNMA, FHLMC, and
FAMC guarantees timely distributions of interest to certificate holders. GNMA
and FNMA guarantee timely distributions of scheduled principal. FHLMC has in
the past guaranteed only the ultimate collection of principal of the
underlying mortgage loan; however, FHLMC now issues mortgage-backed
securities (FHLMC Gold PCS) which also guarantee timely payment of monthly
principal reductions.
. Ginnie Mae Certificates Ginnie Mae is a wholly owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of
mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
guaranteed by the Department of Veterans Affairs under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other
eligible mortgage loans. The Housing Act provides that the full faith and
credit of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In order to meet
its obligations under such guaranty, Ginnie Mae is authorized to borrow from
the United States Treasury with no limitations as to amount.
. Fannie Mae Certificates Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. FNMA Certificates represent a pro-rata
interest in a group of mortgage loans purchased by Fannie Mae. FNMA
guarantees the timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith and credit
of the U.S. government.
. Freddie Mac Certificates Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended ("FHLMC Act"). Freddie Mac Certificates represent a pro-rata interest
in a group of mortgage loans ("Freddie Mac Certificates") purchased by
Freddie Mac. Freddie Mac guarantees timely payment of interest and principal
on certain securities it issues and timely payment of interest and eventual
payment of principal on other securities it issues. The obligations of
Freddie Mac are obligations solely of Freddie Mac and are not backed by the
full faith and credit of the U.S. government.
. Farmer Mac Certificates Farmer Mac is a federally chartered instrumentality
of the United States established by Title VIII of the Farm Credit Act of
1971, as amended ("Charter Act"). Farmer Mac was chartered primarily to
attract new capital for financing of agricultural real estate by making a
secondary market in certain qualified agricultural real estate loans. Farmer
Mac provides guarantees of timely payment of principal and interest on
securities representing interests in, or obligations backed by, pools of
mortgages secured by first liens on agricultural real estate ("Farmer Mac
Certificates"). Similar to Fannie Mae and Freddie Mac, Farmer Mac
Certificates are not supported by the full faith and credit of the U.S.
government; rather, Farmer Mac may borrow from the U.S. Treasury to meet its
guaranty obligations.
As discussed above, prepayments on the underlying mortgages and their effect
upon the rate of return of a mortgage-backed security, is the principal
investment risk for a purchaser of such securities, like the fund. Over time,
any pool of mortgages will experience prepayments due to a variety of
factors, including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and (3)
increased amortization by the mortgagee. These factors, in turn, depend upon
general economic factors, such as level of interest rates and economic
growth. Thus, investors normally expect prepayment rates to increase during
periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly,
the life of the mortgage-backed security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment rates, it is not possible to predict
the life of a particular mortgage-backed security, but FHA statistics
indicate that 25- to 30-year single family dwelling mortgages have an average
life of approximately 12 years. The majority of Ginnie Mae Certificates are
backed by mortgages of this type, and, accordingly, the generally accepted
practice treats Ginnie Mae Certificates as 30-year securities which prepay in
full in the 12th year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
9
<PAGE>
Fixed rate mortgage-backed securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less certain
fees to GNMA, FNMA, and FHLMC for providing the guarantee, and the issuer for
assembling the pool and for passing through monthly payments of interest and
principal.
Payments to holders of mortgage-backed securities consist of the monthly
distributions of interest and principal less the applicable fees. The actual
yield to be earned by a holder of mortgage-backed securities is calculated by
dividing interest payments by the purchase price paid for the mortgage-backed
securities (which may be at a premium or a discount from the face value of
the certificate).
Monthly distributions of interest, as contrasted to semiannual distributions
which are common for other fixed interest investments, have the effect of
compounding and thereby raising the effective annual yield earned on
mortgage-backed securities. Because of the variation in the life of the pools
of mortgages which back various mortgage-backed securities, and because it is
impossible to anticipate the rate of interest at which future principal
payments may be reinvested, the actual yield earned from a portfolio of
mortgage-backed securities will differ significantly from the yield estimated
by using an assumption of a certain life for each mortgage-backed security
included in such a portfolio as described above.
. Collateralized Mortgage Obligations (CMOs) CMOs are bonds that are
collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO deal are divided into groups, and each group of
bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay principal to
the CMO bondholders. The bonds issued under such CMO structure are retired
sequentially as opposed to the pro-rata return of principal found in
traditional pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required to pay the stated interest) is
used to retire the bonds. Under the CMO structure, the repayment of principal
among the different tranches is prioritized in accordance with the terms of
the particular CMO issuance. The "fastest-pay" tranche of bonds, as specified
in the prospectus for the issuance, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the prospectus, receive all of the
principal payments until they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash flows of long
maturity, monthly-pay collateral to formulate securities with short,
intermediate and long final maturities and expected average lives.
In recent years, new types of CMO tranches have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal
and interest received by each tranche from the underlying collateral. Under
certain of these new structures, given classes of CMOs have priority over
others with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the fund invests, the
investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments
on the underlying mortgages serving as collateral and from the structure of
the deal (priority of the individual tranches not prepayments). An increase
or decrease in prepayment rates (resulting from a decrease or increase in
mortgage interest rates) will affect the yield, average life and price of
CMOs. The prices of certain CMOs, depending on their structure and the rate
of prepayments, can be volatile. Some CMOs may also not be as liquid as other
securities.
. U.S. Government Agency Multiclass Pass-Through Securities Unlike CMOs, U.S.
Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multiclass pass-through securities.
. Multi-Class Residential Mortgage Securities Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi--
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Class Residential Mortgage Securities is not guaranteed by the U.S.
government or any of its agencies. Accordingly, yields on Multi-Class
Residential Mortgage Securities have been historically higher than the yields
on U.S. government mortgage securities. However, the risk of loss due to
default on such instruments is higher since they are not guaranteed by the
U.S. government or its agencies. Additionally, pools of such securities may
be divided into senior or subordinated segments. Although subordinated
mortgage securities may have a higher yield than senior mortgage securities,
the risk of loss of principal is greater because losses on the underlying
mortgage loans must be borne by persons holding subordinated securities
before those holding senior mortgage securities.
. Privately Issued Mortgage-Backed Certificates These are pass-through
certificates issued by non-governmental issuers. Pools of conventional
residential or commercial mortgage loans created by such issuers generally
offer a higher rate of interest than government and government-related pools
because there are no direct or indirect government guarantees of payment.
Timely payment of interest and principal of these pools is, however,
generally supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurance or the
mortgage poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-related security meets the fund's quality standards. The fund may
buy mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers, the
investment manager determines that the securities meet the fund's quality
standards.
. Stripped Mortgage-Backed Securities These instruments are a type of
potentially high-risk derivative. They represent interests in a pool of
mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. IOs and POs are usually structured as tranches of a CMO.
Stripped Mortgage-Backed Securities may be issued by U.S. government agencies
or by private issuers similar to those described above with respect to CMOs
and privately issued mortgage-backed certificates. As interest rates rise and
fall, the value of IOs tends to move in the same direction as interest rates.
The value of the other mortgage-backed securities described herein, like
other debt instruments, will tend to move in the opposite direction compared
to interest rates. Under the Code, POs may generate taxable income from the
current accrual of original issue discount, without a corresponding
distribution of cash to the fund.
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets. In the case of IOs, prepayments affect the amount, but not
the timing, of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of cash flows
received by investors in POs. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to fully recoup
its initial investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a full faith and
credit obligation. Conversely, if the underlying mortgage assets experience
slower than anticipated prepayments of principal, the price on a PO class
will be affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the SEC has advised the fund that it believes the fund should
treat IOs and POs, other than government-issued IOs or POs backed by fixed
rate mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid securities,
to 15% of the fund's net assets. Under the staff's position, the
determination of whether a particular government-issued IO or PO backed by
fixed rate mortgages is liquid may be made on a case by case basis under
guidelines and standards established by the fund's Board of
Directors/Trustees. The fund's Board of Directors/Trustees has delegated to
T. Rowe Price the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of collateral,
including age and prepayment characteristics; rate of interest on coupon
relative to current market rates and the effect of the rate on the potential
for prepayments; complexity of the issue's structure, including the number of
tranches; size of the issue and the number of dealers who make a market in
the IO or PO.
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. Adjustable Rate Mortgage Securities ARMs, like fixed rate mortgages, have a
specified maturity date, and the principal amount of the mortgage is repaid
over the life of the mortgage. Unlike fixed rate mortgages, the interest rate
on ARMs is adjusted at regular intervals based on a specified, published
interest rate "index" such as a Treasury rate index. The new rate is
determined by adding a specific interest amount, the "margin," to the
interest rate of the index. Investment in ARM securities allows the fund to
participate in changing interest rate levels through regular adjustments in
the coupons of the underlying mortgages, resulting in more variable current
income and lower price volatility than longer-term fixed rate mortgage
securities. ARM securities are a less effective means of locking in long-term
rates than fixed rate mortgages since the income from adjustable rate
mortgages will increase during periods of rising interest rates and decline
during periods of falling rates.
. Characteristics of Adjustable Rate Mortgage Securities-Interest Rate Indices
The interest rates paid on adjustable rate securities are readjusted
periodically to an increment over some predetermined interest rate index.
Such readjustments occur at intervals ranging from one to 60 months or
longer. There are three main categories of indexes: (1) those based on U.S.
Treasury securities; (2) those derived from a calculated measure such as a
cost of funds index ("COFI") or a moving average of mortgage rates; and (3)
those based on actively traded or prominently posted short-term, interest
rates. Commonly utilized indexes include the one-year, three-year and
five-year constant maturity Treasury rates, the three-month Treasury bill
rate, the 180-day Treasury bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or
one-year London Interbank Offered Rate ("LIBOR"), the prime rate of a
specific bank, or commercial paper rates. Some indexes, such as the one-year
constant maturity Treasury rate, closely mirror changes in market interest
rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds
index, tend to lag behind changes in market rate levels. The market value of
the fund's assets and of the net asset value of the fund's shares will be
affected by the length of the adjustment period, the degree of volatility in
the applicable indexes and the maximum increase or decrease of the interest
rate adjustment on any one adjustment date, in any one year and over the life
of the securities. These maximum increases and decreases are typically
referred to as "caps" and "floors," respectively.
A number of factors affect the performance of the COFI and may cause the COFI
to move in a manner different from indices based upon specific interest
rates, such as the One Year Treasury Index. Additionally, there can be no
assurance that the COFI will necessarily move in the same direction or at the
same rate as prevailing interest rates. Furthermore, any movement in the COFI
as compared to other indices based upon specific interest rates may be
affected by changes instituted by the FHLB of San Francisco in the method
used to calculate the COFI. To the extent that the COFI may reflect interest
changes on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later than would be
produced by such other indices, and in a period of declining interest rates,
the COFI may remain higher than other market interest rates which may result
in a higher level of principal prepayments on mortgage loans which adjust in
accordance with the COFI than mortgage loans which adjust in accordance with
other indices.
LIBOR is the interest rate that the most creditworthy international banks
dealing in U.S. dollar-denominated deposits and loans charge each other for
large dollar-denominated loans. LIBOR is also usually the base rate for large
dollar-denominated loans in the international market. LIBOR is generally
quoted for loans having rate adjustments at one-, three-, six-, or 12- month
intervals.
Caps and Floors 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
result, the principal volatility of ARM
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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. Several characteristics of ARMs may make them
more susceptible to prepayments than other Mortgage-Backed Securities. An
adjustable rate mortgagor has greater incentives to refinance into a fixed
rate mortgage during favorable interest rate environments, in order to avoid
interest rate risk. Also, homes financed with adjustable rate mortgages may
be sold more frequently because of the prevalence of first-time home buyers
in the adjustable rate mortgage market. Also, delinquency and foreclosure
rates are higher in this market since many buyers use adjustable rate
mortgages to purchase homes that they could not otherwise finance on a fixed
rate basis. Significant increases in the index rates for the adjustable rate
mortgages may also result in increased delinquency and default rates, which
in turn, may affect prepayment rates on the ARMs.
. Other Mortgage-Related Securities The fund expects that governmental,
government-related or private entities may create mortgage loan pools
offering pass-through investments in addition to those described above. The
mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may differ from customary
long-term fixed rate mortgages. As new types of mortgage-related securities
are developed and offered to investors, the investment manager will,
consistent with the fund's objective, policies and quality standards,
consider making investments in such new types of securities.
All Funds except GNMA, Government Reserve Investment, U.S. Treasury Money,
Intermediate, and Long-Term Funds
Asset-Backed Securities
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or
any other affiliated entities and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets, which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
. Methods of Allocating Cash Flows While many asset-backed securities are
issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes
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whose right to payments on the asset-backed security is made subordinate to
the right to such payments of the remaining class or classes. See "Types of
Credit Support." Second, multiple classes may permit the issuance of
securities with payment terms, interest rates or other characteristics
differing both from those of each other and from those of the underlying
assets. Examples include so-called "strips" (asset-backed securities
entitling the holder to disproportionate interests with respect to the
allocation of interest and principal of the assets backing the security), and
securities with class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest
rates (i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying assets
are allocated in a manner different than those described above may be issued
in the future. The fund may invest in such asset-backed securities if such
investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the fund.
. Types of Credit Support Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering
the pool of assets, to ensure that scheduled payments on the underlying pool
are made in a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the assets in
the pool. Such protection may be provided through guarantees, insurance
policies or letters of credit obtained from third parties "external credit
enhancement," through various means of structuring the transaction "internal
credit enhancement," or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of
the transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as
to the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class)
and asset-backed securities that have "reserve funds" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have
been "over collateralized" (where the scheduled payments on, or the principal
amount of, the underlying assets substantially exceeds that required to make
payment of the asset-backed securities and pay any servicing or other fees).
The degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with
such payments. Depending upon the type of assets securitized, historical
information on credit risk and prepayment rates may be limited or even
unavailable. Delinquency or loss in excess of that anticipated could
adversely affect the return on an investment in an asset-backed security.
. Automobile Receivable Securities The fund may invest in asset-backed
securities which are backed by receivables from motor vehicle installment
sales contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities"). Since installment sales contracts for motor vehicles
or installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing
a financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also, although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not
amended to reflect the assignment of the seller's security
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interest for the benefit of the holders of the Automobile Receivable
Securities. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on the securities. In addition, various state and federal securities
laws give the motor vehicle owner the right to assert against the holder of
the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.
. Credit Card Receivable Securities The fund may invest in asset-backed
securities backed by receivables from revolving credit card agreements
("Credit Card Receivable Securities"). Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such securities
provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder and principal
payments received on such Accounts are used to fund the transfer to the pool
of assets supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events which signal
a potential deterioration in the quality of the assets backing the security,
such as the imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying account during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges
on an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other
asset-backed securities, Accounts are unsecured obligations of the
cardholder.
. Other Assets Asset-backed securities backed by assets other than those
described above, including, but not limited to, small-business loans and
accounts receivable, equipment leases, commercial real estate loans, boat
loans and manufacturing housing loans. The fund may invest in such securities
in the future if such investment is otherwise consistent with its investment
objective and policies.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.
High Yield Fund
Collateralized Bond or Loan Obligations
Collateralized Bond Obligations ("CBOs") are bonds collateralized by
corporate bonds and Collateralized Loan Obligations ("CLOs") are bonds
collateralized by bank loans. CBOs and CLOs are structured into tranches, and
payments are allocated such that each tranche has a predictable cash flow
stream and average life. CBOs are fairly recent entrants to the fixed income
market. Most CBOs issued to date have been collateralized by high yield bonds
or loans, with heavy credit enhancement.
Loan Participations and Assignments
Loan participations and assignments (collectively "participations") will
typically be participating interests in loans made by a syndicate of banks,
represented by an agent bank which has negotiated and structured the loan, to
corporate borrowers to finance internal growth, mergers, acquisitions, stock
repurchases, leveraged buy-outs and other corporate activities. Such loans
may also have been made to governmental borrowers, especially governments of
developing countries which is referred to as Loans to Developing Countries
debt ("LDC debt"). LDC debt will involve the risk that the governmental
entity responsible for the repayment of the debt may be unable or unwilling
to do so when due. The loans underlying such participations may be secured or
unsecured, and the fund may invest in loans collateralized by mortgages on
real property or which
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have no collateral. The loan participations themselves may extend for the
entire term of the loan or may extend only for short "strips" that correspond
to a quarterly or monthly floating rate interest period on the underlying
loan. Thus, a term or revolving credit that extends for several years may be
subdivided into shorter periods.
The loan participations in which the fund will invest will also vary in legal
structure. Occasionally, lenders assign to another institution both the
lender's rights and obligations under a credit agreement. Since this type of
assignment relieves the original lender of its obligations, it is called a
novation. More typically, a lender assigns only its right to receive payments
of principal and interest under a promissory note, credit agreement or
similar document. A true assignment shifts to the assignee the direct
debtor-creditor relationship with the underlying borrower. Alternatively, a
lender may assign only part of its rights to receive payments pursuant to the
underlying instrument or loan agreement. Such partial assignments, which are
more accurately characterized as "participating interests," do not shift the
debtor-creditor relationship to the assignee, who must rely on the original
lending institution to collect sums due and to otherwise enforce its rights
against the agent bank which administers the loan or against the underlying
borrower.
There may not be a recognizable, liquid public market for loan
participations. To the extent this is the case, the fund would consider the
loan participation as illiquid and subject to the fund's restriction on
investing no more than 15% of its net assets in illiquid securities.
Where required by applicable SEC positions, the fund will treat both the
corporate borrower and the bank selling the participation interest as an
issuer for purposes of its fundamental investment restriction on
diversification.
Various service fees received by the fund from loan participations, may be
treated as non-interest income depending on the nature of the fee
(commitment, takedown, commission, service or loan origination). To the
extent the service fees are not interest income, they will not qualify as
income under Section 851(b) of the Code. Thus the sum of such fees plus any
other non-qualifying income earned by the fund cannot exceed 10% of total
income.
Trade Claims
Trade claims are non-securitized rights of payment arising from obligations
other than borrowed funds. Trade claims typically arise when, in the ordinary
course of business, vendors and suppliers extend credit to a company by
offering payment terms. Generally, when a company files for bankruptcy
protection, payments on these trade claims cease and the claims are subject
to compromise along with the other debts of the company. Trade claims
typically are bought and sold at a discount reflecting the degree of
uncertainty with respect to the timing and extent of recovery. In addition to
the risks otherwise associated with low-quality obligations, trade claims
have other risks, including the possibility that the amount of the claim may
be disputed by the obligor.
Over the last few years a market for the trade claims of bankrupt companies
has developed. Many vendors are either unwilling or lack the resources to
hold their claim through the extended bankruptcy process with an uncertain
outcome and timing. Some vendors are also aggressive in establishing reserves
against these receivables, so that the sale of the claim at a discount may
not result in the recognition of a loss.
Trade claims can represent an attractive investment opportunity because these
claims typically are priced at a discount to comparable public securities.
This discount is a reflection of both a less liquid market, a smaller
universe of potential buyers and the risks peculiar to trade claim investing.
It is not unusual for trade claims to be priced at a discount to public
securities that have an equal or lower priority claim.
As noted above, investing in trade claims does carry some unique risks which
include:
. Establishing the Amount of the Claim Frequently, the supplier's estimate of
its receivable will differ from the customer's estimate of its payable.
Resolution of these differences can result in a reduction in the amount of
the claim. This risk can be reduced by only purchasing scheduled claims
(claims already listed as liabilities by the debtor) and seeking
representations from the seller.
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. Defenses to Claims The debtor has a variety of defenses that can be asserted
under the bankruptcy code against any claim. Trade claims are subject to
these defenses, the most common of which for trade claims relates to
preference payments. (Preference payments are all payments made by the debtor
during the 90 days prior to the filing. These payments are presumed to have
benefited the receiving creditor at the expense of the other creditors. The
receiving creditor may be required to return the payment unless it can show
the payments were received in the ordinary course of business.) While none of
these defenses can result in any additional liability of the purchaser of the
trade claim, they can reduce or wipe out the entire purchased claim. This
risk can be reduced by seeking representations and indemnification from the
seller.
. Documentation/Indemnification Each trade claim purchased requires
documentation that must be negotiated between the buyer and seller. This
documentation is extremely important since it can protect the purchaser from
losses such as those described above. Legal expenses in negotiating a
purchase agreement can be fairly high. Additionally, it is important to note
that the value of an indemnification depends on the seller's credit.
. Volatile Pricing Due to Illiquid Market There are only a handful of brokers
for trade claims and the quoted price of these claims can be volatile.
Generally, it is expected that Trade Claims would be considered illiquid
investments.
. No Current Yield/Ultimate Recovery Trade claims are almost never entitled to
earn interest. As a result, the return on such an investment is very
sensitive to the length of the bankruptcy, which is uncertain. Although not
unique to trade claims, it is worth noting that the ultimate recovery on the
claim is uncertain and there is no way to calculate a conventional yield to
maturity on this investment. Additionally, the exit for this investment is a
plan of reorganization which may include the distribution of new securities.
These securities may be as illiquid as the original trade claim investment.
. Tax Issue Although the issue is not free from doubt, it is likely that Trade
Claims would be treated as non-securities investments. As a result, any gains
would be considered "non-qualifying" under the Code. The fund may have up to
10% of its gross income (including capital gains) derived from non-qualifying
sources.
Zero Coupon and Pay-in-Kind Bonds
A zero coupon security has no cash coupon payments. Instead, the issuer sells
the security at a substantial discount from its maturity value. The interest
received by the investor from holding this security to maturity is the
difference between the maturity value and the purchase price. The advantage
to the investor is that reinvestment risk of the income received during the
life of the bond is eliminated. However, zero-coupon bonds, like other bonds,
retain interest rate and credit risk and usually display more price
volatility than those securities that pay a cash coupon.
Pay-in-Kind ("PIK") Instruments are securities that pay interest in either
cash or additional securities, at the issuer's option, for a specified
period. PIKs, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. PIK bonds can be either senior or
subordinated debt and trade flat (i.e., without accrued interest). The price
of PIK bonds is expected to reflect the market value of the underlying debt
plus an amount representing accrued interest since the last payment. PIK's
are usually less volatile than zero coupon bonds, but more volatile than cash
pay securities.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
fund until the maturity or call date of the bond. The fund will nonetheless
be required to distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions could reduce
the amount of cash available for investment by the fund.
High Yield, New Income, and Personal Strategy Funds
Warrants
The fund may acquire warrants. Warrants can be highly volatile and 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 securities at a specific price valid for a specific period of time.
They do not represent ownership of
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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.
Corporate Income, High Yield, New Income, Personal Strategy, Short-Term Bond,
and Short-Term U.S. Government Funds
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of course, there is no guarantee that the strategy will be successful,
and the fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid
Instruments.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures, and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be
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magnified by the terms of the Hybrid Instrument and have an even more
dramatic and substantial effect upon the value of the Hybrid Instrument.
Also, the prices of the Hybrid Instrument and the Benchmark or Underlying
Asset may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counterparty or issuer of the Hybrid Instrument would be an additional risk
factor which the fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the fund. Accordingly, the fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it
is possible that the fund's investment in Hybrid Instruments will account for
more than 10% of the fund's return (positive or negative).
All Funds
When-Issued Securities and Forward Commitment Contracts
The price of such securities, which may be expressed in yield terms, is fixed
at the time the commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs within 90 days of
the purchase for When-Issueds, but may be substantially longer for Forwards.
During the period between purchase and settlement, no payment is made by the
fund to the issuer and no interest accrues to the fund. The purchase of these
securities will result in a loss if their value declines prior to the
settlement date. This could occur, for example, if interest rates increase
prior to settlement. The longer the period between purchase and settlement,
the greater the risks are. At the time the fund makes the commitment to
purchase these securities, it will record the transaction and reflect the
value of the security in determining its net asset value. The fund will cover
these securities by maintaining cash, liquid, high-grade debt securities, or
other suitable cover as permitted by the SEC with its custodian bank equal in
value to commitments for them during the time between the purchase and the
settlement. Therefore, the longer this period, the longer the period during
which alternative investment options are not available to the fund (to the
extent of the securities used for cover). Such securities either will mature
or, if necessary, be sold on or before the settlement date.
To the extent the fund remains fully or almost fully invested (in securities
with a remaining maturity of more than one year) at the same time it
purchases these securities. These investments will have a leveraging effect,
i.e., they will increase the potential for an increase or decrease in the
fund's NAV.
Additional Adjustable Rate Securities
Certain securities may be issued with adjustable interest rates that are
reset periodically by predetermined formulas or indexes in order to minimize
movements in the principal value of the investment. 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:
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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 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 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 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.
Corporate Income, High Yield, New Income, Personal Strategy, Prime Reserve,
Reserve Investment, Short-Term Bond, and Short-Term U.S. Government Funds
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in accordance with procedures prescribed
by the fund's Board of Directors/Trustees. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, the fund should
be in a position where more than 15% (10% for Government Reserve Investment;
Prime Reserve; Reserve Investment; and U.S. Treasury Money Funds) of the
value of its net assets is invested in illiquid assets, including restricted
securities, the fund will take appropriate steps to protect liquidity.
Notwithstanding the above, the fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price, under the
supervision of the fund's Board of Directors/Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
fund's restriction of investing no more than 15% (10% for Government Reserve
Investment; Prime Reserve; Reserve Investment; and U.S. Treasury Money Funds)
of its net assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, T. Rowe Price will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, T. Rowe Price could consider the following: (1)
frequency of trades and quotes; (2) number of dealers and potential
purchases; (3) dealer undertakings to make a market; and (4) the nature of
the security and of marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers, and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored and, if
as a result of changed conditions it is determined that a Rule 144A security
is no longer liquid, the fund's holdings of illiquid securities would be
reviewed to determine what, if any, steps are required to assure
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that the fund does not invest more than 15% (10% for Government Reserve
Investment; Prime Reserve; Reserve Investment; and U.S. Treasury Money Funds)
of its net assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of the fund's assets invested
in illiquid securities if qualified institutional buyers are unwilling to
purchase such securities.
New Income and Short-Term Bond Funds
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 S&P'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 Restrictions").
PORTFOLIO MANAGEMENT PRACTICES
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Lending of Portfolio Securities
Securities loans are made to broker-dealers, institutional investors, or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent, marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit,
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The fund has a right to call each loan and obtain the securities,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation of any important vote. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms deemed
by T. Rowe Price to be of good standing and will not be made unless, in the
judgment of T. Rowe Price, the consideration to be earned from such loans
would justify the risk.
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Interfund Borrowing and Lending
The fund is a party to an exemptive order received from the SEC on December
8, 1998, amended on November 23, 1999, that permits it to borrow money from
and/or lend money to other funds in the T. Rowe Price complex ("Price
Funds"). All loans are set at an interest rate between the rate charged on
overnight repurchase agreements and short-term bank loans. All loans are
subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The program is subject to the oversight
and periodic review of the Boards of Directors of the Price Funds.
Repurchase Agreements
The fund may enter into a repurchase agreement through which an investor
(such as the fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified
interest. Repurchase agreements are generally for a short period of time,
often less than a week. Repurchase agreements which do not provide for
payment within seven days will be treated as illiquid securities. The fund
will only enter into repurchase agreements where (i) (A) Prime Reserve, U.S.
Treasury Money, Government Reserve Investment, and Reserve Investment
Funds--the underlying securities are either U.S. government securities or
securities that, at the time the repurchase agreement is entered into, are
rated in the highest rating category by the requisite number of NRSROs (as
required by Rule 2a-7 under the 1940 Act) and otherwise are of the type
(excluding maturity limitations) which the fund's investment guidelines would
allow it to purchase directly, (B) GNMA, High Yield, New Income, Personal
Strategy, Short-Term Bond, Short-Term U.S. Government, and U.S. Treasury
Intermediate and Long-Term Funds--the underlying securities are of the type
(excluding maturity limitations) which the fund's investment guidelines would
allow it to purchase directly; (ii) the market value of the underlying
security, including interest accrued, will be equal to or exceed the value of
the repurchase agreement; and (iii) payment for the underlying security is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the fund
could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying
security during the period while the fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements
Although the fund has no current intention of engaging in reverse repurchase
agreements, the fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a fund is the seller
of, rather than the investor in, securities, and agrees to repurchase them at
an agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the fund, subject to
Investment Restriction (1). (See "Investment Restrictions.")
Money Market Reserves
It is expected that the fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price. Currently,
two such money market funds are in operation-Reserve Investment Fund ("RIF")
and Government Reserve Investment Fund ("GRF"), each a series of the Reserve
Investment Funds, Inc. (The Prime Reserve and U.S. Treasury Money Funds will
not purchase shares of either fund, and the GNMA and U.S. Treasury
Intermediate and U.S. Treasury Long-Term Funds can only purchase shares of
GRF.) Additional series may be created in the future. These funds were
created and operate under an Exemptive Order issued by the SEC (Investment
Company Act Release No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest
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credit rating. The GRF invests primarily in a portfolio of U.S.
government-backed securities, primarily U.S. Treasuries, and repurchase
agreements thereon.
The RIF and GRF provide a very efficient means of managing the cash reserves
of the fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.
Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.
High Yield Fund
Short Sales
The fund may make short sales for hedging purposes to protect the fund
against companies whose credit is deteriorating. Short sales are transactions
in which the fund sells a security it does not own in anticipation of a
decline in the market value of that security. The fund's short sales would be
limited to situations where the fund owns a debt security of a company and
would sell short the common or preferred stock or another debt security at a
different level of the capital structure of the same company. No securities
will be sold short if, after the effect is given to any such short sale, the
total market value of all securities sold short would exceed 2% of the value
of the fund's net assets.
To complete a short sale transaction, the fund must borrow the security to
make delivery to the buyer. The fund then is obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at
which the security was sold by the fund. Until the security is replaced, the
fund is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow the security,
the fund also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
Until the fund replaces a borrowed security in connection with a short sale,
the fund will: (a) maintain daily a segregated account, containing cash, U.S.
government securities or other suitable cover as permitted by the SEC, at
such a level that (i) the amount deposited in the account plus the amount
deposited with the broker as collateral will equal the current value of the
security sold short and (ii) the amount deposited in the segregated account
plus the amount deposited with the broker as collateral will not be less than
the market value of the security at the time its was sold short; or (b)
otherwise cover its short position.
The fund will incur a loss as a result of the short sale if the price of the
security sold short increases between the date of the short sale and the date
on which the fund replaces the borrowed security. The fund will realize a
gain if the security sold short declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a
long position in a security. The amount of any gain will be decreased, and
the amount of any loss increased, by the amount of any premium, dividends or
interest the fund may be required to pay in connection with a short sale. Any
gain or loss on the security sold short would be separate from a gain or loss
on the fund security being hedged by the short sale.
The Taxpayer Relief Act of 1997 requires a mutual fund to recognize gain upon
entering into a constructive sale of stock, a partnership interest, or
certain debt positions occurring after June 8, 1997. A constructive sale is
deemed to occur if the fund enters into a short sale, an offsetting notional
principal contract, or a futures or forward contract which is substantially
identical to the appreciated position. Some of the transactions in which the
fund is permitted to invest may cause certain appreciated positions in
securities held by the fund to qualify as a "constructive sale," in which
case it would be treated as sold and the resulting gain subjected to tax or,
in the case of a mutual fund, distributed to shareholders. If this were to
occur, the fund would be required to distribute such gains even though it
would receive no cash until the later sale of the security. Such
distributions could reduce the amount of cash available for investment by the
fund. Because these rules do not
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apply to "straight" debt transactions, it is not anticipated that they will
have a significant impact on the fund; however, the effect cannot be
determined until the issuance of clarifying regulations.
All Funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Options
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by the fund. In
writing covered call options, the fund expects to generate additional premium
income which should serve to enhance the fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long
term, are deemed to be attractive investments for the fund.
A call option gives the holder (buyer) the "right to purchase," and the
writer (seller) has the "obligation to sell," a security or currency at a
specified price (the exercise price) at expiration of the option (European
style) or at any time until a certain date (the expiration date) (American
style). So long as the obligation of the writer of a call option continues,
he may be assigned an exercise notice by the broker-dealer through whom such
option was sold, requiring him to deliver the underlying security or currency
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold. To secure his obligation to deliver the underlying
security or currency in the case of a call option, a writer is required to
deposit in escrow the underlying security or currency or other assets in
accordance with the rules of a clearing corporation.
The fund generally will write only covered call options. This means that the
fund will either own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an
exercise price equal to or less than the exercise price of the "covered"
option. From time to time, the fund will write a call option that is not
covered as indicated above but where the fund will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as permitted by the SEC having a value equal to the
fluctuating market value of the optioned securities or currencies. While such
an option would be "covered" with sufficient collateral to satisfy SEC
prohibitions on issuing senior securities, this type of strategy would expose
the fund to the risks of writing uncovered options.
Portfolio securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the fund
generally will not do), but capable of enhancing the fund's total return.
When writing a covered call option, a fund, in return for the premium, gives
up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the
risk of loss should the price of the security or currency decline. Unlike one
who owns securities or currencies not subject to an option, the fund has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer. If a call option which the fund
has written expires, the fund will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call
option is exercised, the fund will realize a gain or loss from the sale of
the underlying security or currency. The fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the fund's
policy which limits the pledging or mortgaging of its assets. If the fund
writes an uncovered option as described above, it will bear the risk of
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having to purchase the security subject to the option at a price higher than
the exercise price of the option. As the price of a security could appreciate
substantially, the fund's loss could be significant.
The premium received is the market value of an option. The premium the fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, T. Rowe Price, in
determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the fund for writing covered
call options will be recorded as a liability of the fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
fund is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the fund will be able to
effect such closing transactions at favorable prices. If the fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may
be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the fund may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the fund.
The fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options
The fund may write American or European style covered put options and
purchase options to close out options previously written by the fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at
the exercise price during the option period (American style) or at the
expiration of the option (European style). So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option
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was sold, requiring him to make payment to the exercise price against
delivery of the underlying security or currency. The operation of put options
in other respects, including their related risks and rewards, is
substantially identical to that of call options.
The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.)
The fund would generally write covered put options in circumstances where T.
Rowe Price wishes to purchase the underlying security or currency for the
fund's portfolio at a price lower than the current market price of the
security or currency. In such event the fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the fund. In addition, the
fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
The fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The fund may purchase American or European style put options. As the holder
of a put option, the fund has the right to sell the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The fund may
enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided next.
The fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The fund may also purchase put options at a time when the fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
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The fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the fund when purchasing
a put option will be recorded as an asset of the fund. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed (close of New York Stock Exchange), or, in the absence of such sale,
the latest bid price. This asset will be terminated upon expiration of the
option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
Purchasing Call Options
The fund may purchase American or European style call options. As the holder
of a call option, the fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase call options
for the purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The fund may also purchase call
options in order to acquire the underlying securities or currencies. Examples
of such uses of call options are provided next.
Call options may be purchased by the fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option
to expire, incurring a loss only to the extent of the premium paid for the
option.
The fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the fund would look to a clearing
corporation to exercise exchange-traded options, if the fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the fund as well as loss
of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the fund writes
a dealer option, it generally will be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the fund originally wrote the option. While the fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the fund, there can be no assurance that the fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the fund may be unable to
liquidate a dealer option. With respect to options written by the fund, the
inability to enter into a closing transaction may result in material losses
to the fund. For example, since the fund must maintain a secured position
with respect to any call option on a security it writes, the fund may not
sell the assets which it has segregated to secure the position while it is
obligated under the option. This
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requirement may impair a fund's ability to sell portfolio securities or
currencies at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The fund may treat the cover used for written Over-the-Counter ("OTC")
options as liquid if the dealer agrees that the fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
High Yield Fund
Spread Option Transactions
The fund may purchase from and sell to securities dealers covered spread
options. Such covered spread options are not presently exchange listed or
traded. The purchase of a spread option gives the fund the right to put, or
sell, a security that it owns at a fixed dollar spread or fixed yield spread
in relationship to another security that the fund does not own, but which is
used as a benchmark. The risk to the fund in purchasing covered spread
options is the cost of the premium paid for the spread options and any
transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used
to protect the fund against adverse changes in prevailing credit quality
spreads, i.e., the yield spread between high-quality and lower-quality
securities. Such protection is only provided during the life of the spread
option. The security covering the spread option will be maintained in a
segregated account by the fund's custodian. The fund does not consider a
security covered by a spread option to be "pledged" as that term is used in
the fund's policy limiting the pledging or mortgaging of its assets. The fund
may also buy and sell uncovered spread options. Such options would be used
for the same purposes and be subject to similar risks as covered spread
options. However, in an uncovered spread option, the fund would not own
either of the securities involved in the spread.
All Funds except Government Reserve Investment, Prime Reserve, Reserve
Investment, and U.S. Treasury Money Funds
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The funds may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
Stock index futures contracts may be used to provide a hedge for a portion of
the fund's portfolio, as a cash management tool, or as an efficient way for
T. Rowe Price to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the fund's portfolio successfully, the fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the fund. In this regard, the
fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Although
techniques other than
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the sale and purchase of futures contracts could be used for the
above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the fund's objectives in these
areas.
Regulatory Limitations
If the fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors/Trustees without a shareholder vote and does not limit
the percentage of the fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a fund's
assets to cover or identified accounts could impede portfolio management or
the fund's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the fund would comply with such new
restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
units of a debt security) for a specified price, date, time and place
designated at the time the contract is made. Brokerage fees are incurred when
a futures contract is bought or sold and margin deposits must be maintained.
Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the fund purchases or sells a security, no price would be paid or
received by the fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the fund's open positions
in futures contracts, the fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, or liquid assets known as "initial margin." The margin required for
a particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to market."
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery
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date. If the offsetting purchase price is less than the original sale price,
the fund realizes a gain; if it is more, the fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the fund realizes a gain; if it is less, the fund realizes a loss. The
transaction costs must also be included in these calculations. There can be
no assurance, however, that the fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular
time. If the fund is not able to enter into an offsetting transaction, the
fund will continue to be required to maintain the margin deposits on the
futures contract.
As an example of an offsetting transaction in which the underlying instrument
is not delivered, the contractual obligations arising from the sale of one
contract of September Treasury bills on an exchange may be fulfilled at any
time before delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one contract of
September Treasury bills on the same exchange. In such instance, the
difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction
costs, represents the profit or loss to the fund.
For example, the S&P's 500 Stock Index is made up of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. The S&P 500
Index assigns relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of those common
stocks. In the case of futures contracts on the S&P 500 Index, the contracts
are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $37,500 (250 units x $150). The stock index
futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash occurs. Over the life
of the contract, the gain or loss realized by the fund will equal the
difference between the purchase (or sale) price of the contract and the price
at which the contract is terminated. For example, if the fund enters into a
futures contract to buy 250 units of the S&P 500 Index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $154 on that
future date, the fund will gain $1,000 (250 units x gain of $4). If the fund
enters into a futures contract to sell 250 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$152 on that future date, the fund will lose $500 (250 units x loss of $2).
Special Risks of Transactions in Futures Contracts
. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Margin deposits required on futures trading are low. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit, if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
. Liquidity The fund may elect to close some or all of its futures positions
at any time prior to their expiration. The fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The fund may close its positions by taking opposite positions which would
operate to terminate the fund's position
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in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
fund, and the fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the fund's underlying
instruments sought to be hedged.
Successful use of futures contracts by the fund for hedging purposes is also
subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the fund's portfolio might decline. If this
were to occur, the fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, T. Rowe Price believes that over time
the value of the fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that, if
the fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
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Options on Futures Contracts
The fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on interest
rate futures, the fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the fund and other T. Rowe Price funds. Such aggregated orders would be
allocated among the funds and the other T. Rowe Price funds in a fair and
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. In addition, where the fund seeks to
close out an option position by writing or buying an offsetting option
covering the same index, underlying instrument or contract and having the
same exercise price and expiration date, its ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions, or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (6) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers'
orders.
Additional Futures and Options Contracts
Although the fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a
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position taken on the market may be liquidated by a transaction on another
market. Moreover, such laws or regulations will vary depending on the foreign
country in which the foreign futures or foreign options transaction occurs.
For these reasons, when the fund trades foreign futures or foreign options
contracts, it may not be afforded certain of the protective measures provided
by the Commodity Exchange Act, the CFTC's regulations and the rules of the
National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the CFTC and arbitration proceedings
provided by the National Futures Association or any domestic futures
exchange. In particular, funds received from the fund for foreign futures or
foreign options transactions may not be provided the same protections as
funds received in respect of transactions on United States futures exchanges.
In addition, the price of any foreign futures or foreign options contract
and, therefore, the potential profit and loss thereon may be affected by any
variance in the foreign exchange rate between the time the fund's order is
placed and the time it is liquidated, offset or exercised.
U.S. Treasury Intermediate and Long-Term Funds
Limitations on Futures and Options for Intermediate and Long-Term Funds
The funds will not purchase a futures contract or option thereon if, with
respect to positions in futures or options on futures which do not represent
bona fide hedging, the aggregate initial margin and premiums on such
positions would exceed 5% of the fund's net asset value. In addition, neither
of the funds will enter into a futures transaction if it would be obligated
to purchase or deliver under outstanding open futures contracts amounts which
would exceed 15% of the fund's total assets.
A fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities covering call options or subject to
delivery under put options exceeds 15% of the market value of the fund's
total assets.
A fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities subject to such put options or
covering call options exceeds 15% of the market value of the fund's total
assets.
The funds have no current intention of investing in options on securities.
However, they reserve the right to do so in the future and could be subject
to the following limitations: a fund may invest up to 15% of its total assets
in premiums on put options and 15% of its total assets in premiums on call
options. The total amount of a fund's total assets invested in futures and
options will not exceed 15% of the fund's total assets.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The fund's use of such contracts would include, but not be limited
to, the following:
First, when the fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the fund may hedge all or part of its
33
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foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy
for other currencies. In such a case, the fund may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the
value of the securities denominated in such currency. The use of this basket
hedging technique may be more efficient and economical than entering into
separate forward contracts for each currency held in the fund. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency
parties will be incorporated into the longer-term investment decisions made
with regard to overall diversification strategies. However, T. Rowe Price
believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interest of the fund will
be served.
Third, the 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 in U.S. dollars but the
dollar component would be transformed into a foreign currency through a
forward contract.
The fund may enter into forward contacts for any other purpose consistent
with the fund's investment objective and program. However, the fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the fund's holdings of liquid, high-grade debt securities, currency
available for cover of the forward contract(s), or other suitable cover as
permitted by the SEC. In determining the amount to be delivered under a
contract, the fund may net offsetting positions.
At the maturity of a forward contract, the fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the fund retains the portfolio security and engages in an offsetting
transaction, the fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and there are costs
associated with currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to
the fund at one rate, while offering a lesser rate of exchange should the
fund desire to resell that currency to the dealer.
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Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts
The fund may enter into certain options, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will
be treated as Section 1256 contracts or straddles.
Transactions that are considered Section 1256 contracts will be considered to
have been closed at the end of the fund's fiscal year and any gains or losses
will be recognized for tax purposes at that time. Such gains or losses from
the normal closing or settlement of such transactions will be characterized
as 60% long-term capital gain (taxable at a maximum rate of 20%) or loss and
40% short-term capital gain or loss regardless of the holding period of the
instrument (ordinary income or loss for foreign exchange contracts). The fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures, and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar-denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.
In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures, or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the fund. See
"Portfolio Management Practices-Short Sales" for further discussion.
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
fund's Board of Directors/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the fund. Calculation of the
fund's total assets for compliance with any of the following fundamental or
operating policies or any other investment restrictions set forth in the
fund's prospectus or Statement of Additional Information will not include
cash collateral held in connection with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the fund may not:
(1) Borrowing Borrow money except that the fund may (i) borrow for
non-leveraging, temporary, or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\%
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of the value of the fund's total assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage
permitted by law. Any borrowings which come to exceed this amount will be
reduced in accordance with applicable law. The fund may borrow from
banks, other Price Funds, or other persons to the extent permitted by
applicable law;
(2) Commodities Purchase or sell physical commodities; except that the fund
(other than the Prime Reserve, U.S. Treasury Money, Government Reserve
Investment, and Reserve Investment Funds) may enter into futures
contracts and options thereon;
(3) (a)
Industry Concentration (All Funds except High Yield, New Income, Prime
Reserve, Reserve Investment, and Short-Term Bond Funds) Purchase the
securities of any issuer if, as a result, more than 25% of the value of
the fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry;
(b)
Industry Concentration (High Yield Fund) Purchase the securities of any
issuer if, as a result, more than 25% of the value of the fund's total
assets would be invested in the securities of issuers having their
principal business activities in the same industry; provided, however,
that the fund will normally concentrate 25% or more of its assets in
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;
(c) Industry Concentration (New Income Fund) Purchase the securities of
any issuer if, as a result, more than 25% of the value of the fund's
total assets would be invested in the securities of issuers having their
principal business activities in the same industry; provided, however,
that the fund will invest more than 25% of its total 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, and further provided that this limitation does not
apply to securities of the banking industry including, but not limited
to, certificates of deposit and bankers' acceptances;
(d)
Industry Concentration (Prime Reserve and Reserve Investment Funds)
Purchase the securities of any issuer if, as a result, more than 25% of
the value of the fund's total assets would be invested in the securities
of issuers having their principal business activities in the same
industry; provided, however, that this limitation does not apply to
securities of the banking industry including, but not limited to,
certificates of deposit and bankers' acceptances; and
(e)
Industry Concentration (Short-Term Bond Fund) Purchase the securities of
any issuer if, as a result, more than 25% of the value of the fund's
total assets would be invested in the securities of issuers having their
principal business activities in the same industry; provided, however,
that the fund will normally invest more than 25% of its total assets in
the securities of the banking industry including, but not limited to,
bank certificates of deposit and bankers' acceptances 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 more
than 25% of its total 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;
(4) Loans Make loans, although the fund may (i) lend portfolio securities and
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly distributed or privately placed
debt securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of its total assets,
more than 5% of the value of the fund's total assets would be invested in
the securities of a single issuer, except securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of the fund's total
assets, more than 10% of the outstanding voting securities of any
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<PAGE>
issuer would be held by the fund (other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities);
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act; or
(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the fund may be deemed to be an underwriter within the
meaning of the 1933 Act 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 restriction (1), the Government Reserve
Investment, Prime Reserve, Reserve Investment, and U.S. Treasury Money
Funds have no current intention of engaging in any borrowing
transactions.
With respect to investment restriction (2), the fund does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state, or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.
For purposes of investment restriction (4), the fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.
For purposes of investment restriction (5), the fund will consider a
repurchase agreement fully collateralized with U.S. government securities
to be U.S. government securities.
Operating Policies
As a matter of operating policy, the fund may not:
(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) (a)
Equity Securities (All Funds, except High Yield and New Income Funds)
Purchase any equity security or security convertible into an equity
security except as set forth in its prospectus and operating policy on
investment companies;
(b)
Equity Securities (High Yield Fund) Invest more than 20% of the fund's
total assets in equity securities (including up to 10% in warrants);
(c)
Equity Securities (New Income Fund) Invest more than 25% of the fund's
total assets in equity securities;
(4) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the fund's net asset value;
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<PAGE>
(5) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% (10% for the Government Reserve Investment, Prime Reserve,
Reserve Investment, and U.S. Treasury Money Funds) of its net assets
would be invested in such securities;
(6) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; (ii)
securities of the Reserve Investment or Government Reserve Investment
Funds; or (iii) in the case of the Government Reserve Investment, Prime
Reserve, Reserve Investment, and U.S. Treasury Money Funds, only
securities of other money market funds;
(7) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(8) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging, or hypothecating may not exceed
33/1//\\/3/\\% of the fund's total assets at the time of borrowing or
investment;
(9) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the fund would be invested in such
programs;
(10) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(11) (a) Short Sales (All Funds except High Yield Fund) Effect short sales of
securities;
(b)
Short Sales (High Yield Fund) Effect short sales of securities, other
than as set forth in its prospectus and Statement of Additional
Information; or
(12) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the fund would be invested in warrants.
Personal Strategy Funds
Notwithstanding anything in the above fundamental and operating restrictions
to the contrary, the fund may invest all of its assets in a single investment
company or a series thereof in connection with a "master-feeder" arrangement.
Such an investment would be made where the fund (a "Feeder"), and one or more
other funds with the same investment objective and program as the fund,
sought to accomplish its investment objective and program by investing all of
its assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as the
fund. The fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
MANAGEMENT OF THE FUNDS
-------------------------------------------------------------------------------
The officers and directors/trustees of the fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the fund's
directors/trustees who are considered "interested persons" of T. Rowe Price
as defined under Section 2(a)(19) of the 1940 Act are noted with an asterisk
(*). These directors/trustees are referred to as inside directors by virtue
of their officership, directorship, and/or employment with T. Rowe Price.
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All Funds except Personal Strategy Funds
Independent Directors/Trustees/(a)/
CALVIN W. BURNETT, PH.D., 3/16/32, President, Coppin State College; formerly:
Director, Maryland Chamber of Commerce and Provident Bank of Maryland;
formerly: President, Baltimore Area Council Boy Scouts of America; Vice
President and Board of Directors, The Walters Art Gallery; Address: 2500 West
North Avenue, Baltimore, Maryland 21216
ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, President, and
Chief Executive Officer, The Rouse Company, real estate developers, Columbia,
Maryland; Address: 10275 Little Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, 8/22/34, President, F. Pierce Linaweaver & Associates,
Inc.; Consulting Environmental & Civil Engineers; formerly (1987-1991)
Executive Vice President, EA Engineering, Science, and Technology, Inc., and
President, EA Engineering, Inc., Baltimore, Maryland; Address: Green Spring
Station, 2360 West Joppa Road, Suite 224, Lutherville, Maryland 21093
JOHN G. SCHREIBER, 10/21/46, Owner/President, Schreiber Investments, Inc., a
real estate investment company; Director, AMLI Residential Properties Trust
and Urban Shopping Centers, Inc.; Partner, Blackstone Real Estate Partners,
L.P.; Director and formerly Executive Vice President, JMB Realty Corporation,
a national real estate investment manager and developer; Address: Centaur
Capital Partners, One Westminster Place, Lake Forest, IL 60045
Personal Strategy Funds
DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm; formerly (5/89-6/95) Principal,
Overseas Partners, Inc., a financial investment firm; formerly (6/65-3/89)
Director and Vice President, Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc., Baltimore,
Maryland; Address: P.O.Box 491, Chilmark, Massachusetts 02535
DAVID K. FAGIN, 4/9/38, Director, Western Exploration and Development, Ltd.
(7/97 to present); Director, Dayton Mining Corporation (6/98 to present);
Chairman and President, Nye Corporation (6/88 to present); Director, Nescor
Corporation (6/94 to present); Director of Canyon Resources, Corp.; formerly:
Chairman (5/92 to 12/97) and Chief Executive Officer (5/92 to 5/96) of
Golden Star Resources Ltd.; formerly: President, Chief Operating Officer, and
Director, Homestake Mining Company (5/86 to 7/91); Address: 1700 Lincoln
Street, Suite 4710, Denver, Colorado 80203
HANNE M. MERRIMAN, 11/16/41, Retail Business Consultant; Director, Ann Taylor
Stores Corporation, Central Illinois Public Service Company, Ameren Corp.,
Finlay Enterprises, Inc., The Rouse Company, State Farm Mutual Automobile
Insurance Company and USAirways Group, Inc.; Address: 3201 New Mexico Avenue,
N.W., Suite 350, Washington, D.C. 20016
HUBERT D. VOS, 8/2/33, Owner/President, Stonington Capital Corporation, a
private investment company; Address: 1114 State Street, Suite 247, P.O. Box
90409, Santa Barbara, California 93190-0409
PAUL M. WYTHES, 6/23/33, Founding Partner of Sutter Hill Ventures, a venture
capital limited partnership, providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation and InterVentional Technologies Inc.; Address: 755 Page Mill
Road, Suite A200, Palo Alto, California 94304-1005
(a) Unless otherwise indicated, the Independent Directors/Trustees have
been at their respective companies for at least five years.
Inside Directors/Trustees/Officers
All Funds
* JAMES S. RIEPE, 6/25/43, Director/Trustee and Vice President-Vice Chairman
of the Board and Managing Director, T. Rowe Price; Chairman of the Board and
Director, T. Rowe Price Investment Services, Inc.,
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<PAGE>
T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Services,
Inc.; Chairman of the Board, President, Director, and Trust Officer, T. Rowe
Price Trust Company; Director, T. Rowe Price International and General Re
Corporation
HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, T. Rowe Price
International and T. Rowe Price Retirement Plan Services, Inc.; Director and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price
Trust Company
PATRICIA B. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
JOSEPH A. CARRIER, 12/30/60, Treasurer-Vice President, T. Rowe Price and T.
Rowe Price Investment Services, Inc.
DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price
Corporate Income Fund
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer,
Director, and Managing Director, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst
ROBERT M. RUBINO, 8/2/53, President-Vice President, T. Rowe Price
MARK J. VASELKIV, 7/22/58, Executive Vice President-Managing Director and
Vice President, T. Rowe Price
STEVEN G. BROOKS, 8/5/54, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
DEBRA R. DIES, 5/12/71, Vice President-Assistant Vice President, T. Rowe
Price; formerly employed at J.P. Morgan Securities
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
VIRGINIA A. STIRLING, 9/5/51, Vice President-Vice President, T. Rowe Price
THOMAS E. TEWKSBURY, 8/1/61, Vice President-Vice President, T. Rowe Price;
formerly senior bond trader, Scudder, Stevens & Clark, New York, New York
THEA N. WILLIAMS, 12/20/61, Vice President-Vice President, T. Rowe Price
GNMA Fund
* WILLIAM T. REYNOLDS, 5/26/48, Trustee-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Trustee-Chairman of the Board, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer,
Director, and Managing Director, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst
CONNICE A. BAVELY, 3/5/51, President-Vice President and Senior Portfolio
Manager, T. Rowe Price; formerly founding partner and Senior Vice President
of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
Manager at Weiss Peck and Greer
ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price;
formerly Senior Vice President and Director of Research at Aubrey G. Lanston
& Co., Inc.
40
<PAGE>
EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
High Yield Fund
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer,
Director, and Managing Director, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst
MARK J. VASELKIV, 7/22/58, President-Managing Director and Vice President, T.
Rowe Price
JANET G. ALBRIGHT, 3/31/57, Vice President-Vice President, T. Rowe Price
ANDREW M. BROOKS, 2/16/56, Vice President-Vice President, T. Rowe Price
PAUL A. KARPERS, 11/14/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly an Investment Analyst at the Vanguard Group, Philadelphia,
Pennsylvania
NATHANIEL S. LEVY, 07/13/62, Vice President-Vice President, T. Rowe Price
KEVIN P. LOOME, 10/19/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly a Corporate Finance Analyst for Morgan Stanley in both London
and New York
MICHAEL J. MCGONIGLE, 10/14/66, Vice President-Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
HUBERT M. STILES, JR., 6/22/47, Vice President-Vice President, T. Rowe Price
THOMAS E. TEWKSBURY, 8/1/61, Vice President-Vice President, T. Rowe Price;
formerly senior bond trader, Scudder, Stevens & Clark, New York, New York
THEA N. WILLIAMS, 12/20/61, Vice President-Vice President, T. Rowe Price
WALTER P. STUART, 3/27/60, Vice President-Employee, T. Rowe Price
New Income Fund
* WILLIAM T. REYNOLDS, 5/26/48, Director and President-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board and Director, T.
Rowe Price International; Vice Chairman of the Board, Chief Investment
Officer, Director, and Managing Director, T. Rowe Price; Vice President and
Director, T. Rowe Price Trust Company; Chartered Financial Analyst
ROBERT M. RUBINO, 8/2/53, Executive Vice President-Vice President, T. Rowe
Price
CONNICE A. BAVELY, 3/5/51, Vice President-Vice President and Senior Portfolio
Manager, T. Rowe Price; formerly founding partner and Senior Vice President
of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
Manager at Weiss Peck and Greer
STEVEN G. BROOKS, 8/5/54, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
DEBRA R. DIES, 5/12/71, Vice President-Assistant Vice President, T. Rowe
Price; formerly employed at J.P. Morgan Securities
VEENA A. KUTLER, 12/22/56, Vice President-Vice President, T. Rowe Price, T.
Rowe Price Trust Company, and T. Rowe Price International
41
<PAGE>
ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price;
formerly Senior Vice President and Director of Research at Aubrey G. Lanston
& Co., Inc.
JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price
EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price
THEODORE E. ROBSON, 2/10/65, Vice President-Assistant Vice President, T. Rowe
Price
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
VIRGINIA A. STIRLING, 9/5/51, Vice President-Vice President, T. Rowe Price
SUSAN G. TROLL, 8/27/66, Vice President-Vice President and Analyst, T. Rowe
Price; formerly Vice President at Merrill Lynch Asset Management; Certified
Public Accountant
Personal Strategy Funds
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Chairman of the Board-Chairman of the Board, T.
Rowe Price International; Vice Chairman of the Board, Chief Investment
Officer, Director, and Managing Director, T. Rowe Price; Vice President and
Director, T. Rowe Price Trust Company; Chartered Financial Analyst
EDMUND M. NOTZON, 10/1/45, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst
STEPHEN W. BOESEL, 12/28/44, Executive Vice President-Managing Director, T.
Rowe Price
LARRY J. PUGLIA, 8/25/60, Executive Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
JOHN H. LAPORTE, JR., 7/26/45, Vice President-Director and Managing Director,
T. Rowe Price; Chartered Financial Analyst
M. CHRISTINE MUNOZ, 12/2/62, Vice President-Assistant Vice President, T. Rowe
Price
DONALD J. PETERS, 7/3/59, Vice President-Vice President, T. Rowe Price
WILLIAM T. REYNOLDS, 5/26/48, Vice President-Director and Managing Director,
T. Rowe Price; Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, Vice President-Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
MARK J. VASELKIV, 7/22/58, Vice President-Managing Director and Vice
President, T. Rowe Price
JUDITH B. WARD, 10/12/62, Vice President-Assistant Vice President, T. Rowe
Price
RICHARD T. WHITNEY, 5/7/58, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International and T. Rowe Price Trust Company;
Chartered Financial Analyst
J. JEFFREY LANG, 1/10/62, Assistant Vice President-Assistant Vice President,
T. Rowe Price; Vice President, T. Rowe Price Trust Company
Prime Reserve Fund
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
42
<PAGE>
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer,
Director, and Managing Director, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst
EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price and T. Rowe
Price Trust Company; Chartered Financial Analyst
ROBERT P. CAMPBELL, 1/31/56, Executive Vice President-Vice President, T. Rowe
Price and T. Rowe Price Trust Company
JAMES M. MCDONALD, 9/29/49, Executive Vice President-Vice President, T. Rowe
Price
PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
Price
BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
Price
JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price
ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
SUSAN G. TROLL, 8/27/66, Vice President-Vice President and Analyst, T. Rowe
Price; formerly Vice President at Merrill Lynch Asset Management; Certified
Public Accountant
Reserve Investment Funds
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer,
Director, and Managing Director, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst
EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price and T. Rowe
Price Trust Company; Chartered Financial Analyst
ROBERT P. CAMPBELL, 1/31/56, Executive Vice President-Vice President, T. Rowe
Price and T. Rowe Price Trust Company
JAMES M. MCDONALD, 9/29/49, Executive Vice President-Vice President, T. Rowe
Price
PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
Price
BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
Price
JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price
ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
Short-Term Bond Fund
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board and Director, T.
Rowe Price International; Vice Chairman of the Board, Chief Investment
Officer, Director, and Managing Director, T. Rowe Price; Vice President and
Director, T. Rowe Price Trust Company; Chartered Financial Analyst
EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price and T. Rowe
Price Trust Company; Chartered Financial Analyst
43
<PAGE>
CONNICE A. BAVELY, 3/5/51, Vice President-Vice President and Senior Portfolio
Manager, T. Rowe Price; formerly founding partner and Senior Vice President
of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
Manager at Weiss Peck and Greer
STEVEN G. BROOKS, 8/5/54, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT P. CAMPBELL, 1/31/56, Vice President-Vice President, T. Rowe Price and
T. Rowe Price Trust Company
PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES B. HILL, 9/22/61, Vice President-Vice President, T. Rowe Price
CHERYL A. MICKEL, 1/11/67, Vice President-Assistant Vice President, T. Rowe
Price
ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
Short-Term U.S. Government Fund
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board and Director, T.
Rowe Price International; Vice Chairman of the Board, Chief Investment
Officer, Director, and Managing Director, T. Rowe Price; Vice President and
Director, T. Rowe Price Trust Company; Chartered Financial Analyst
CONNICE A. BAVELY, 3/5/51, President-Vice President and Senior Portfolio
Manager, T. Rowe Price; formerly founding partner and Senior Vice President
of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
Manager at Weiss Peck and Greer
JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price
EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
DANIEL O. SHACKELFORD, 3/11/58, Vice President-Vice President, T. Rowe Price
EDWARD A. WIESE, 4/12/59, Vice President-Vice President, T. Rowe Price and T.
Rowe Price Trust Company; Chartered Financial Analyst
U.S. Treasury Funds
* WILLIAM T. REYNOLDS, 5/26/48, Director and President-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer,
Director, and Managing Director, T. Rowe Price; Vice President and Director,
T. Rowe Price Trust Company; Chartered Financial Analyst
EDWARD A. WIESE, 4/12/59, Executive Vice President-Vice President, T. Rowe
Price and T. Rowe Price Trust Company; Chartered Financial Analyst
CONNICE A. BAVELY, 3/5/51, Vice President-Vice President and Senior Portfolio
Manager, T. Rowe Price; formerly founding partner and Senior Vice President
of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
Manager at Weiss Peck and Greer
PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
Price
BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
Price
44
<PAGE>
ROBERT P. CAMPBELL, 1/31/56, Vice President-Vice President, T. Rowe Price and
T. Rowe Price Trust Company
JEROME A. CLARK, 1/2/61, Vice President-Vice President, T. Rowe Price
ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price;
formerly Senior Vice President and Director of Research at Aubrey G. Lanston
& Co., Inc.
JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price
CHERYL A. MICKEL, 1/11/67, Vice President-Assistant Vice President, T. Rowe
Price
EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price
ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
Compensation Table
The funds do not pay pension or retirement benefits to their independent
officers or directors/trustees. Also, any director/trustee of a fund who is
an officer or employee of T. Rowe Price or T. Rowe Price International does
not receive any remuneration from the fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Total Compensation from Fund and
Position Fund(a) Fund Complex Paid to Directors/
-------------------------------- -------------------------------------------- Trustees(b)
--------------------------------------------------
<S> <C> <C>
Corporate Income Fund
Calvin W. Burnett, Ph.D.,
Trustee $1,301 $65,000
Anthony W. Deering, Trustee 1,263 81,000
F. Pierce Linaweaver, Trustee 1,301 66,000
John G. Schreiber, Trustee 1,301 65,500
------------------------------------------------------------------------------------------------------------------------------------
GNMA Fund
Calvin W. Burnett, Ph.D.,
Trustee $2,417 $65,000
Anthony W. Deering, Trustee 1,630 81,000
F. Pierce Linaweaver, Trustee 2,417 66,000
John G. Schreiber, Trustee 2,417 65,500
------------------------------------------------------------------------------------------------------------------------------------
High Yield Fund
Calvin W. Burnett, Ph.D.,
Director $3,038 $65,000
Anthony W. Deering, Director 1,816 81,000
F. Pierce Linaweaver, Director 3,038 66,000
John G. Schreiber, Director 3,038 65,500
------------------------------------------------------------------------------------------------------------------------------------
New Income Fund
Calvin W. Burnett, Ph.D.,
Director $3,215 $65,000
Anthony W. Deering, Director 1,853 81,000
F. Pierce Linaweaver, Director 3,215 66,000
John G. Schreiber, Director 3,215 65,500
------------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Balanced Fund
Donald W. Dick, Jr., Director $1,142 $81,000
David K. Fagin, Director 1,258 65,000
Hanne M. Merriman, Director 1,258 65,000
Hubert D. Vos, Director 1,258 66,000
Paul M. Wythes, Director 1,142 80,000
------------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Growth Fund
Donald W. Dick, Jr., Director $1,056 $81,000
David K. Fagin, Director 1,104 65,000
Hanne M. Merriman, Director 1,104 65,000
Hubert D. Vos, Director 1,104 66,000
Paul M. Wythes, Director 1,056 80,000
------------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Income Fund
Donald W. Dick, Jr., Director $1,051 $81,000
David K. Fagin, Director 1,085 65,000
Hanne M. Merriman, Director 1,085 65,000
Hubert D. Vos, Director 1,085 66,000
Paul M. Wythes, Director 1,051 80,000
------------------------------------------------------------------------------------------------------------------------------------
Prime Reserve Fund
Calvin W. Burnett, Ph.D.,
Director $6,976 $65,000
Anthony W. Deering, Director 3,094 81,000
F. Pierce Linaweaver, Director 6,976 66,000
John G. Schreiber, Director 6,976 65,500
------------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Fund
Calvin W. Burnett, Ph.D.,
Director $1,639 $65,000
Anthony W. Deering, Director 1,417 81,000
F. Pierce Linaweaver, Director 1,639 66,000
John G. Schreiber, Director 1,639 65,500
------------------------------------------------------------------------------------------------------------------------------------
Short-Term U.S. Government Fund
Calvin W. Burnett, Ph.D.,
Director $1,391 $65,000
Anthony W. Deering, Director 1,293 81,000
F. Pierce Linaweaver, Director 1,391 66,000
John G. Schreiber, Director 1,391 65,500
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Intermediate Fund
Calvin W. Burnett, Ph.D.,
Director $1,514 $65,000
Anthony W. Deering, Director 1,334 81,000
F. Pierce Linaweaver, Director 1,514 66,000
John G. Schreiber, Director 1,514 65,500
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Long-Term Fund
Calvin W. Burnett, Ph.D.,
Director $1,603 $65,000
Anthony W. Deering, Director 1,356 81,000
F. Pierce Linaweaver, Director 1,603 66,000
John G. Schreiber, Director 1,603 65,500
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Money Fund
Calvin W. Burnett, Ph.D.,
Director $2,229 $65,000
Anthony W. Deering, Director 1,562 81,000
F. Pierce Linaweaver, Director 2,229 66,000
John G. Schreiber, Director 2,229 65,500
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
46
<PAGE>
(a) Amounts in this column are based on accrued compensation from June 1,
1999 to May 31, 2000.
(b) Amounts in this column are based on compensation received from January 1,
1999, to December 31, 1999. The T. Rowe Price complex included 88 funds as of
December 31, 1999.
Note: Government Reserve Investment and Reserve Investments Funds will not
incur director's fees.
All Funds
The fund's Executive Committee, consisting of the fund's interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the funds in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors/trustees of the
fund, as a group, owned less than 1% of the outstanding shares of the fund.
As of January 31, 2000, the following shareholders of record owned more than
5% of the outstanding shares of the fund:
Corporate Income Fund: T. Rowe Price RPS Inc., OMNIPLAN Account, Corporate
Income Fund, Fund #02/ 112, P.O. Box 17215, Baltimore, MD 21297-1215; Walnut
Street Partners, P.O. Box 6829 c/o Curt Walmer, 850 N. Wyomissing Blvd., Ste.
200, Wyomissing, Pennsylvania 19610-1764;
GNMA: Yachtcrew & Co., T. Rowe Price Associates, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202; T. Rowe Price Trust Company, Inc., ATTN: RPS
Control Dept., 10090 Red Run Blvd., Owings Mills, MD 21117-4842;
High Yield, New Income, and U.S. Treasury Long-Term Funds: Yachtcrew & Co.,
T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, Maryland
21202;
47
<PAGE>
Government Reserve Investment Fund: Barnaclesail, c/o T. Rowe Price
Associates, Inc., 100 East Pratt Street, Baltimore, Maryland 21202;
Bridgesail & Co., c/o T. Rowe Price Associates, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202;
Reserve Investment Fund: Eye & Co., c/o T. Rowe Price Associates, Inc., 100
East Pratt Street, Baltimore, Maryland 21202; Taskforce & Co., c/o T. Rowe
Price Associates, Inc., 100 East Pratt Street, Baltimore, Maryland 21202;
Shorebird & Co., c/o T. Rowe Price Associates, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202; Tuna & Co., c/o T. Rowe Price Associates, Inc.,
100 East Pratt Street, Baltimore, Maryland 21202;
U.S. Treasury Intermediate Fund: First American Trust Co., Managed Omnibus,
421 N Main Street, Santa Ana, California 92701-4699;
U.S. Treasury Money Fund: T. Rowe Price, Retirement Plan Service, Inc., ATTN.
RPS Cash, 10090 Red Run Blvd, Owings Mills, MD 21117-4827.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, T. Rowe Price provides the fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the fund in accordance with
the fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services, T.
Rowe Price provide the fund with certain corporate administrative services,
including: maintaining the fund's corporate existence and corporate records;
registering and qualifying fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the fund; maintaining
liaison with the agents employed by the fund such as the fund's custodian and
transfer agent; assisting the fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors/trustees, and committee members of the fund without cost to the
fund.
The Management Agreement also provides that T. Rowe Price, its
directors/trustees, officers, employees, and certain other persons performing
specific functions for the fund will only be liable to the fund for losses
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
All Funds except Government Reserve Investment and Reserve Investment Funds
Management Fee
The fund pays T. Rowe Price a fee ("Fee") which consists of two components: a
Group Management Fee ("Group Fee") and an Individual Fund Fee ("Fund Fee").
The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is calculated as described next.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group Fee
accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee
Accrual for any particular day is computed by multiplying the Price Funds'
group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Price Fund's net assets for that day to the sum
of the aggregate net assets of the Price Funds for that day. The Daily Price
Funds' Group Fee Accrual for any particular day is calculated by 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:
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
------------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
------------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Next $40 billion
------------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion 0.295% Thereafter
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
For the purpose of calculating the Group Fee, the Price Funds include all the
mutual funds distributed by Investment Services, (excluding the T. Rowe Price
Spectrum Funds, and any institutional, index, or private label mutual funds).
For the purpose of calculating the Daily Price Funds' Group Fee Accrual for
any particular day, the net assets of each Price Fund are determined in
accordance with the funds' prospectus as of the close of business on the
previous business day on which the fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee
accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate and multiplying this product by the net assets of the fund for that day,
as determined in accordance with the fund's prospectus as of the close of
business on the previous business day on which the fund was open for
business. The individual fund fees of each fund are listed in the following
chart:
<TABLE>
<CAPTION>
<S> <C>
Corporate Income Fund 0.15%
GNMA Fund 0.15
High Yield Fund 0.30
High Yield Fund-Advisor Class 0.30
New Income Fund 0.15
Personal Strategy Balanced Fund 0.25
Personal Strategy Growth Fund 0.30
Personal Strategy Income Fund 0.15
Prime Reserve Fund 0.05
Prime Reserve Fund-PLUS Class 0.05
Short-Term Bond Fund 0.10
Short-Term U.S. Government Fund 0.10
U.S. Treasury Intermediate Fund 0.05
U.S. Treasury Long-Term Fund 0.05
U.S. Treasury Money Fund 0.00
</TABLE>
The following chart sets forth the total management fees, if any, paid to T.
Rowe Price by each fund, during the last three years:
<TABLE>
<CAPTION>
Fund 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 112,000 $ 71,000 0(a)
GNMA 5,086,000 5,388,000 $ 4,928,000
High Yield 10,209,000 10,598,000 9,797,000
High Yield Fund-Advisor Class - 0(b) 0(b)
New Income 8,438,000 9,740,000 9,047,000
Personal Strategy Balanced 3,341,000 2,479,000 1,685,000
Personal Strategy Growth 1,493,000 1,010,000 514,000
Personal Strategy Income 1,044,000 897,000 206,000
Prime Reserve 19,755,000 18,779,000 17,281,000
Prime Reserve Fund-PLUS Class 127,000 15,000 0(b)
Short-Term Bond 1,276,000 1,423,000 1,478,000
Short-Term U.S. Government 474,000 457,000 317,000
U.S. Treasury Intermediate 901,000 931,000 724,000
U.S. Treasury Long-Term 1,200,000 1,150,000 687,000
U.S. Treasury Money 2,922,000 2,890,000 2,668,000
------------------------------- ----------------
</TABLE>
49
<PAGE>
(a) Due to the fund's expense limitation in effect at that time, no
management fee was paid by the fund to T. Rowe Price.
(b) Prior to commencement of operations.
Limitation on Fund Expenses
The Management Agreement between the fund and T. Rowe Price provides that the
fund will bear all expenses of its operations not specifically assumed by T.
Rowe Price.
The following chart sets forth expense ratio limitations and the periods for
which they are effective. For each, T. Rowe Price has agreed to bear any fund
expenses which would cause the fund's ratio of expenses to average net assets
to exceed the indicated percentage limitations. (The expense limitation for
the High Yield Fund-Advisor Class relates to operating expenses other than
management fees). The expenses borne by T. Rowe Price are subject to
reimbursement by the fund through the indicated reimbursement date, provided
no reimbursement will be made if it would result in the fund's expense ratio
exceeding its applicable limitation.
<TABLE>
<CAPTION>
Expense Reimbursement
Fund Limitation Period ------- -------------
---- ----------------- Ratio Date
----- ----
Limitation
----------
<S> <S> <C> <C>
Corporate Income Fund June 1, 1999-May 31, May 31, 200
(a) 2001 0.80% 3
High Yield March 31,
Fund-Advisor Class 2000-December 31, 2001 1.05% December 31, 2003
Personal Strategy June 1, 2000-May 31,
Income Fund (b) 2002 0.90% May 31, 2004
Personal Strategy June 1, 2000-May 31,
Growth Fund (c) 2002 1.10% May 31, 2004
Prime Reserve May 1, 2000-April 30, April 30, 200
Fund-PLUS Class (d) 2002 1.00% 4
October 1, 2000-May
Short-Term Bond Fund 31, 2002 0.55% May 31, 2004
Short-Term U.S. June 1, 2000-May 31, May 31, 200
Government Fund (e) 2002 0.70% 4
</TABLE>
(a) The Corporate Income Fund previously operated under a 0.80%
limitation that expired May 31, 1999. The reimbursement period for
this limitation extends through May 31, 2001.
(b) The Personal Strategy Income Fund previously operated under a 0.90%
limitation that expired May 31, 2000. The reimbursement period for
this limitation extends through May 31, 2002.
(c) The Personal Strategy Growth Fund previously operated under a 1.10%
limitation that expired May 31, 2000. The reimbursement period for
this limitation extends through May 31, 2002.
(d) The Prime Reserve Fund-PLUS Class previously operated under a 1.00%
limitation that expired April 30, 2000. The reimbursement period for
this limitation extends through April 30, 2002.
(e) The Short-Term U.S. Government Fund previously operated under a 0.70%
limitation that expired May 31, 2000. The reimbursement period for
this limitation extends through May 31, 2002.
Each of the above-referenced fund's Management Agreement also provides that
one or more additional expense limitations periods (of the same or different
time periods) may be implemented after the expiration of the current expense
limitation, and that with respect to any such additional limitation period,
the fund may reimburse T. Rowe Price, provided the reimbursement does not
result in the fund's aggregate expenses exceeding the additional expense
limitation.
50
<PAGE>
Corporate Income Fund
Pursuant to the current expense limitation, $121,000 of management fees were
not accrued by the fund for the year ended May 31, 2000. Additionally,
$320,000 of unaccrued fees and expenses related to a previous expense
limitation are subject to reimbursement through May 31, 2001.
Personal Strategy Growth Fund
Pursuant to the Personal Strategy Growth Fund's expense limitation, $10,000
of management fees were not accrued by the fund for the year ended May 31,
2000. Additionally, $77,000 of unaccrued management fees related to a
previous expense limitation are subject to reimbursement through May 31,
2002.
Personal Strategy Income Fund
Pursuant to the Personal Strategy Income Fund's previous expense agreement,
$86,000 of unaccrued management fees were repaid during the year ended May
31, 2000, and $10,000 remains subject to reimbursement through May 31, 2002.
Short-Term U.S. Government Fund
Pursuant to the current expense limitation, $69,000 of management fees were
not accrued by the fund for the year ended May 31, 2000. Additionally,
$92,000 of unaccrued management fees remain subject to reimbursement through
May 31, 2002.
GNMA, High Yield, New Income, Short-Term Bond, and U.S. Treasury Long-Term
Funds
T. Rowe Price Spectrum Fund, Inc.
The funds listed above are a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum
Fund"), T. Rowe Price, and various other T. Rowe Price funds which, along
with such fund, are funds in which Spectrum Fund invests (collectively all
such funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors/Trustees of any
Underlying Price Fund determines that such Underlying Fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of
numerous separate shareholder accounts which are or would have been invested
directly in the Underlying Price Funds and the resulting reduction in
shareholder servicing costs. Although such cost savings are not certain, the
estimated savings to the Underlying Price Funds generated by the operation of
Spectrum Fund are expected to be sufficient to offset most, if not all, of
the expenses incurred by Spectrum Fund.
Management Fee
Government Reserve Investment and Reserve Investment Funds
Neither fund pays T. Rowe Price an investment management fee.
Management Related Services
As noted above, the Management Agreement spells out the expenses to be paid
by the fund. In addition to the Management Fee, the fund pays for the
following: shareholder service expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing prospectuses and reports sent to
shareholders; registration fees and expenses; proxy and annual meeting
expenses (if any); and director/trustee fees and expenses.
T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
acts as the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services. Services for certain types of
retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly owned subsidiary. The address for each is 100 East Pratt
St., Baltimore, MD 21202. Additionally, T. Rowe Price, under a separate
agreement with the funds, provides accounting services to the funds.
51
<PAGE>
The funds paid the expenses shown in the following table for the fiscal year
ended May 31, 2000, to T. Rowe Price and its affiliates.
<TABLE>
<CAPTION>
Transfer Agent and Retirement
Fund ------------------ ---------- Accounting Services
---- Shareholder Services Subaccounting -------------------
-------------------- -------------
Services
--------
<S> <C> <C> <C>
Corporate Income $ 70,597 $ 20,624 $ 77,867
GNMA 694,837 232,052 115,748
Government Reserve
Investment 7,503 -- 63,033
High Yield 1,186,135 190,144 150,696
New Income 860,034 1,306,570 105,404
Personal Strategy
Balanced 159,022 1,710,584 79,521
Personal Strategy
Growth 186,632 617,519 78,513
Personal Strategy
Income 83,474 413,175 78,466
Prime Reserve 4,437,564 4,670,290 97,684
Prime Reserve
Fund-PLUS Class 38,949 -- 608
Reserve Investment 23,733 (24) 63,033
Short-Term Bond 329,072 235,346 107,483
Short-Term U.S.
Government 160,232 19,601 95,610
U.S. Treasury
Intermediate 224,448 154,032 63,619
U.S. Treasury
Long-Term 171,327 36,749 63,619
U.S. Treasury Money 674,266 304,105 63,034
------------------------
</TABLE>
SERVICES BY OUTSIDE PARTIES
-------------------------------------------------------------------------------
The shares of some fund shareholders are held in omnibus accounts maintained
by various third parties, including retirement plan sponsors, insurance
companies, banks and broker-dealers. The fund has adopted an administrative
fee payment ("AFP") program that authorizes the fund to make payments to
these third parties. The payments are made for transfer agent, recordkeeping
and other administrative services provided by, or on behalf of, the third
parties with respect to such shareholders and the omnibus accounts. Under the
AFP program, the funds paid the amounts set forth below to various third
parties in 1999 calendar year.
<TABLE>
<CAPTION>
<S> <C>
High Yield Fund $31,006.75
New Income Fund 41,556.17
Personal Strategy Balanced Fund 3,921.24
Personal Strategy Growth Fund 4,311.22
Personal Strategy Income Fund 1,988.58
Prime Reserve Fund 16,153.92
U.S. Treasury Intermediate Fund 23,738.44
</TABLE>
The Advisor Class has adopted an Advisor Class administrative fee payment
program ("Advisor Class AFP") under which various intermediaries, including
intermediaries receiving 12b-1 payments, may receive payments from the
Advisor Class in addition to 12b-1 fees for providing various recordkeeping
and transfer agent type services to the Advisor classes and/or shareholders
thereof. These services include: mailings of fund prospectuses, reports,
notices, proxies, and other materials to shareholders; transmission of net
purchase and redemption orders; maintenance of separate records for
shareholders reflecting purchases, redemptions, and
52
<PAGE>
share balances; mailing of shareholder confirmations and periodic statements;
and telephone services in connection with the above.
All Funds except Government Reserve Investment and Reserve Investment Funds
DISTRIBUTOR FOR THE FUNDS
-------------------------------------------------------------------------------
Investment Services, a Maryland corporation formed in 1980 as a wholly owned
subsidiary of T. Rowe Price, serves as the fund's distributor. Investment
Services is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. The offering of the fund's shares is continuous.
Investment Services is located at the same address as the fund and T. Rowe
Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
fund will pay all fees and expenses in connection with: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling fund shares, except for those fees and expenses
specifically assumed by the fund. Investment Services' expenses are paid by
T. Rowe Price.
Investment Services acts as the agent of the fund in connection with the sale
of its shares in the various states in which Investment Services is qualified
as a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for fund shares at net asset value. No sales charges are paid
by investors or the fund.
High Yield Fund-Advisor Class
Distribution and Shareholder Services Plan
The fund Directors/Trustees adopted a Plan pursuant to Rule 12b-1 on February
9, 2000 with respect to each Advisor Class. Each Plan provides that the
Advisor Class may compensate Investment Services or such other persons as the
fund or Investment Services designates, to finance any or all of the
distribution, shareholder servicing, maintenance of shareholder accounts,
and/or other administrative services with respect to Advisor Class shares. It
is expected that most, if not all, payments under the Plan will be made
(either directly, or indirectly through Investment Services) to brokers,
dealers, banks, insurance companies, and intermediaries other than Investment
Services. Under the Plan, each Advisor Class pays a fee at the annual rate of
up to 0.25% of that class's average daily net assets. Normally, the full
amount of the fee is paid to the intermediary on shares sold through that
intermediary. However, a lesser amount may be paid based on the level of
services provided. Intermediaries may use the payments for, among other
purposes, compensating employees engaged in sales and/or shareholder
servicing of the Advisor Class, as well as for a wide variety of other
purposes associated with supporting, distributing, and servicing the Advisor
Class shares. The amount of fees paid by an Advisor Class during any year may
be more or less than the cost of distribution and other services provided to
the Advisor Class and its investors. NASD rules limit the amount of annual
distribution and service fees that may be paid by a mutual fund and impose a
ceiling on the cumulative distribution fees paid. The Plan complies with
these rules.
The Plan requires that Investment Services provide, or cause to be provided,
to the fund Directors/Trustees for their review a quarterly written report
identifying the amounts expended by each Advisor Class and the purposes for
which such expenditures were made.
53
<PAGE>
Prior to approving the Plan, the fund considered various factors relating to
the implementation of the Plan and determined that there is a reasonable
likelihood that the Plan will benefit each fund, its Advisor Class and the
Advisor Class's shareholders. The fund Directors/Trustees noted that to the
extent the Plan allows a fund to sell Advisor Class shares in markets to
which it would not otherwise have access, the Plan may result in additional
sales of fund shares. This may enable a fund to achieve economies of scale
that could reduce expenses. In addition, certain ongoing shareholder services
may be provided more effectively by intermediaries with which shareholders
have an existing relationship.
The Plan continues until March 31, 2001. The Plan is renewable thereafter
from year to year with respect to each fund, so long as its continuance is
approved at least annually (1) by the vote of a majority of the fund
Directors/Trustees and (2) by a vote of the majority of the Rule 12b-1
Directors/Trustees, cast in person at a meeting called for the purpose of
voting on such approval. The Plan may not be amended to increase materially
the amount of fees paid by any Advisor Class thereunder unless such amendment
is approved by a majority vote of the outstanding shares of such Advisor
Class and by the fund Directors/Trustees in the manner prescribed by Rule
12b-1 under the 1940 Act. The Plan is terminable with respect to an Advisor
Class at any time by a vote of a majority of the Rule 12b-1
Directors/Trustees or by a majority vote of the outstanding shares in the
Advisor Class.
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the fund's U.S.
securities and cash, but it does not participate in the fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
The fund (other than GNMA, Prime Reserve, U.S. Treasury Intermediate,
Long-Term, Money, Government Reserve Investment, and Reserve Investment
Funds) has entered into a Custodian Agreement with The Chase Manhattan Bank,
N.A., London, pursuant to which portfolio securities which are purchased
outside the United States are maintained in the custody of various foreign
branches of The Chase Manhattan Bank and such other custodians, including
foreign banks and foreign securities depositories as are approved in
accordance with regulations under the 1940 Act. The address for The Chase
Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
2HD, England.
CODE OF ETHICS
-------------------------------------------------------------------------------
The fund, its investment adviser (T. Rowe Price), and its principal
underwriter (T. Rowe Price Investment Services), have a written Code of
Ethics which requires all Access Persons to obtain prior clearance before
engaging in personal securities transactions. In addition, all Access Persons
must report their personal securities transactions within 10 days of their
execution. Access Persons will not be permitted to effect transactions in a
security: if there are pending client orders in the security; the security
has been purchased or sold by a client within seven calendar days; the
security is being considered for purchase for a client; or the security is
subject to internal trading restrictions. In addition, Access Persons are
prohibited from profiting from short-term trading (e.g., purchases and sales
involving the same security within 60 days). Any person becoming an Access
Person must file a statement of personal securities holdings within 10 days
of this date. All Access Persons are required to file an annual statement
with respect to their personal securities holdings. Any material violation of
the Code of Ethics is reported to the Board of the fund. The Board also
reviews the administration of the Code of Ethics on an annual basis.
54
<PAGE>
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
The fund's purchases and sales of fixed income portfolio securities are
normally done on a principal basis and do not involve the payment of a
commission although they may involve the designation of selling concessions.
That part of the discussion below relating solely to brokerage commissions
would not normally apply to the fund (except to the extent it purchases
equity securities (High Yield, New Income, and Personal Strategy Funds
only)). However, it is included because T. Rowe Price does manage a
significant number of common stock portfolios which do engage in agency
transactions and pay commissions and because some research and services
resulting from the payment of such commissions may benefit the fund.
How Brokers and Dealers Are Selected
Equity Securities
In purchasing and selling equity securities, it is T. Rowe Price's policy to
obtain quality execution at the most favorable prices through responsible
brokers and dealers and 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. 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, their expertise in
particular markets 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; (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.
55
<PAGE>
Descriptions of Research Services Received From Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts, and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians,
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently
provided by brokers and dealers. T. Rowe Price pays cash for certain research
services received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash. While receipt
of research services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could be materially
increased if it attempted to generate such additional information through its
own staff. To the extent that research services of value are provided by
brokers or dealers, T. Rowe Price may be relieved of expenses which it might
otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in return for
products or services other than brokerage or research services. In accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934,
T. Rowe Price may from time to time receive services and products which serve
both research and non-research functions. In such event, T. Rowe Price makes
a good faith determination of the anticipated research and non-research use
of the product or service and allocates brokerage only with respect to the
research component.
Commissions to Brokers Who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would
have charged for effecting the same transaction, if the adviser determines in
good faith that the commission paid is reasonable in relation to the value of
the brokerage and research services provided. The determination may be viewed
in terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the
total brokerage and research services provided by each particular broker. T.
Rowe Price may receive research, as defined in Section 28(e), in connection
with selling concessions and designations in fixed price offerings in which
the funds participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of business
to any broker or dealer over any specific time period. Historically, the
majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion
of its discretionary client brokerage business where special needs do not
exist, or where the business may be allocated among several brokers or
dealers which are able to meet the needs of the transaction.
56
<PAGE>
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations but
can, and often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above. In no case
is a broker or dealer excluded from receiving business from T. Rowe Price
because it has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the fund.
From time to time, orders for clients may be placed through a computerized
transaction network.
The fund does not allocate business to any broker-dealer on the basis of its
sales of the fund's shares. However, this does not mean that broker-dealers
who purchase fund shares for their clients will not receive business from the
fund.
Some of T. Rowe Price's other clients have investment objectives and programs
similar to those of the fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution
which generally results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of transactions at
various prices on a given day, each participating client's proportionate
share of such order reflects the average price paid or received with respect
to the total order. T. Rowe Price has established a general investment policy
that it will ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price funds) if, as a result
of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.
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.
57
<PAGE>
Other
For the fiscal years ended May 31, 2000, 1999, and 1998, the fund's engaged
in portfolio transactions involving broker-dealers in the following amounts:
<TABLE>
<CAPTION>
Fund 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 87,158,000 $ 148,017,000 $ 151,154,000
GNMA 1,340,767,000 1,928,467,000 3,404,198,000
Government Reserve
Investment 208,368,283,000 125,867,962,000 46,218,342,000
High Yield 2,228,594,000 3,133,849,000 5,081,624,000
New Income 2,787,051,000 3,883,982,000 7,287,233,000
Personal Strategy
Balanced 572,235,000 443,414,000 589,959,000
Personal Strategy Growth 232,667,000 177,166,000 225,909,000
Personal Strategy Income 169,938,000 263,137,000 188,714,000
Prime Reserve 44,694,574,000 32,055,326,000 64,296,588,000
Reserve Investment 85,643,368,000 82,675,097,000 66,138,193,000
Short-Term Bond 267,997,000 268,240,000 1,113,884,000
Short-Term U.S.
Government 133,005,000 355,887,000 332,928,000
U.S. Treasury
Intermediate 253,839,000 343,197,000 507,228,000
U.S. Treasury Long-Term 155,975,000 509,554,000 604,802,000
U.S. Treasury Money 5,655,456,000 4,583,442,000 5,373,760,000
-------------------------- -----------------
</TABLE>
With respect to the GNMA, Government Reserve, Prime Reserve, Reserve
Investment, Short-Term U.S. Government, U.S. Treasury Intermediate, Long-Term
and Money Funds, the entire amount for each of these years represented
principal transactions as to which the funds have no knowledge of the profits
or losses realized by the respective broker-dealers for the fiscal years
ended May 31, 2000, 1999, and 1998.
With respect to the Corporate Income, High Yield, New Income, Short-Term
Bond, Personal Strategy Balanced, Personal Strategy Growth, and Personal
Strategy Income Funds, the following amounts consisted of principal
transactions as to which the funds have no knowledge of the profits or losses
realized by the respective broker-dealers for the fiscal years ended May 31,
2000, 1999, and 1998.
<TABLE>
<CAPTION>
Fund 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 81,635,000 $ 132,909,000 $ 147,537,000
High Yield 1,950,820,000 2,667,387,000 3,854,884,000
New Income 2,589,971,000 3,624,940,000 7,223,043,000
Personal Strategy Balanced 241,804,000 245,489,000 441,500,000
Personal Strategy Growth 69,314,000 78,262,000 147,604,000
Personal Strategy Income 89,593,000 148,720,000 159,536,000
Short-Term Bond 216,139,000 237,228,000 1,085,314,000
---------------------------- ----------------
</TABLE>
58
<PAGE>
The following amounts involved trades with brokers acting as agents or
underwriters for the fiscal years ended May 31, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
Fund 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 5,523,000 $ 15,108,000 $ 3,617,000
High Yield 277,774,000 466,462,000 1,226,740,000
New Income 197,080,000 259,042,000 64,189,000
Personal Strategy Balanced 330,431,000 197,925,000 148,459,000
Personal Strategy Growth 163,353,000 98,904,000 78,305,000
Personal Strategy Income 80,344,000 114,417,000 29,178,000
Short-Term Bond 51,858,000 31,012,000 28,570,000
---------------------------- ----------------
</TABLE>
The amounts shown below involved trades with brokers acting as agents or
underwriters, in which such brokers received total commissions, including
discounts received in connection with underwritings for the fiscal years
ended May 31, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
Fund 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 35,000 $ 53,000 $ 79,000
High Yield 7,250,000 11,755,000 30,944,000
New Income 700,000 1,041,000 133,000
Personal Strategy Balanced 448,000 281,000 174,000
Personal Strategy Growth 208,000 82,000 46,000
Personal Strategy Income 112,000 134,000 47,000
Short-Term Bond 105,000 105,000 123,000
---------------------------- ----------------
</TABLE>
The percentage of total portfolio transactions, placed with firms which
provided research, statistical, or other services to T. Rowe Price in
connection with the management of the funds, or in some cases, to the funds
for the fiscal years ended May 31, 2000, 1999, and 1998, are shown below:
<TABLE>
<CAPTION>
Fund 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income 93% 96% 92%
GNMA 94 86 98
Government Reserve Investment 98 78 97
High Yield 86 95 88
New Income 92 94 95
Personal Strategy Balanced 25 20 21
Personal Strategy Growth 30 29 32
Personal Strategy Income 25 16 39
Prime Reserve 94 78 87
Reserve Investment 93 65 77
Short-Term Bond 90 93 85
Short-Term U.S. Government 98 100 95
U.S. Treasury Intermediate 95 100 96
U.S. Treasury Long-Term 71 99 100
U.S. Treasury Money 98 61 57
------------------------------- ----------------
</TABLE>
59
<PAGE>
The portfolio turnover rates for the following funds for the fiscal years
ended May 31, 2000, 1999, and 1998, are as follows:
<TABLE>
<CAPTION>
Fund 2000 1999 1998
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income 90.9% 140.8% 146.0%
GNMA 63.8 86.7 120.6
High Yield 75.9 95.6 129.6
New Income 83.6 94.3 147.3
Personal Strategy Balanced 48.2 34.3 41.5
Personal Strategy Growth 42.6 36.1 33.3
Personal Strategy Income 45.4 48.9 30.9
Short-Term Bond 50.7 51.6 73.0
Short-Term U.S. Government 54.7 145.3 107.5
U.S. Treasury Intermediate 48.5 61.2 112.8
U.S. Treasury Long-Term 21.7 74.1 80.8
---------------------------- ----------------
</TABLE>
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
The fund, in pursuing its objectives, may engage in short-term trading to
take advantage of market variations. The fund will seek to protect principal,
improve liquidity of its securities, or enhance yield by purchasing and
selling securities based upon existing or anticipated market discrepancies.
PRICING OF SECURITIES
-------------------------------------------------------------------------------
Corporate Income, GNMA, High Yield, New Income, Personal Strategy, Short-Term
Bond, Short-Term U.S. Government, U.S. Treasury Intermediate, and Long-Term
Funds
Debt 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 a bid-side
valuation as furnished by dealers who make markets in such securities or by
an independent pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices quoted by
dealers who make markets in such securities. 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. The Personal Strategy Funds
value short-term debt securities at their cost in local currency which, when
combined with accrued interest, approximates fair value.
There are a number of pricing services available, and the Board of
Directors/Trustees, on the basis of an ongoing evaluation of these services,
may use or may discontinue the use of any pricing service in whole or part.
Corporate Income, High Yield, New Income, and Personal Strategy Funds
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price at the time the valuations are made. A
security that is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such
security. Listed securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the mean of the
latest bid and asked prices. Other equity securities are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors/Trustees, or by persons delegated by the Board, best to reflect
fair value.
60
<PAGE>
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
Securities are valued at amortized cost.
Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
Bond Funds
For the purposes of determining the fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
All Funds
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.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
Maintenance of Money Fund's Net Asset Value Per Share at $1.00
It is the policy of the fund to attempt to maintain a net asset value of
$1.00 per share by using the amortized cost method of valuation permitted by
Rule 2a-7 under the 1940 Act. Under this method, securities are valued by
reference to the fund's acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than by reference to their market
value. Under Rule 2a-7:
(a) The Board of Directors must establish written procedures reasonably
designed, taking into account current market conditions and the fund's
investment objectives, to stabilize the fund's net asset value per share,
as computed for the purpose of distribution, redemption and repurchase,
at a single value;
(b) The fund must (i) maintain a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable price per share,
(ii) not purchase any instrument with a remaining maturity greater than
397 days, and (iii) maintain a dollar-weighted average portfolio maturity
of 90 days or less;
(c) The fund must limit its purchase of portfolio instruments, including
repurchase agreements, to those U.S. dollar-denominated instruments which
the fund's Board of Directors determines present minimal credit risks,
and which are eligible securities as defined by Rule 2a-7; and
(d) The Board of Directors must determine that (i) it is in the best interest
of the fund and its shareholders to maintain a stable net asset value per
share under the amortized cost method; and (ii) the fund will continue to
use the amortized cost method only so long as the Board of Directors
believes that it fairly reflects the market based net asset value per
share.
Although the fund believes that it will be able to maintain its net asset
value at $1.00 per share under most conditions, there can be no absolute
assurance that it will be able to do so on a continuous basis. If the fund's
net asset value per share declined, or was expected to decline, below $1.00
(rounded to the nearest one cent), the Board of Directors of the fund might
temporarily reduce or suspend dividend payments in an effort to maintain the
net asset value at $1.00 per share. As a result of such reduction or
suspension of dividends, an investor would receive less income during a given
period than if such a reduction or suspension had not taken place. Such
action could result in an investor receiving no dividend for the period
during which he holds his shares and in his receiving, upon redemption, a
price per share lower than that which he paid. On the other hand, if the
fund's net asset value per share were to increase, or were anticipated to
increase above $1.00 (rounded to the nearest one cent), the Board of
Directors of the fund might supplement dividends in an effort to maintain the
net asset value at $1.00 per share.
61
<PAGE>
Prime Reserve and Reserve Investment Funds
Prime Money Market Securities Defined
Prime money market securities are those which are described as First Tier
Securities under Rule 2a-7 of the 1940 Act. These include any security with a
remaining maturity of 397 days or less that is rated (or that has been issued
by an issuer that is rated with respect to a class of short-term debt
obligations, or any security within that class that is comparable in priority
and security with the security) by any two nationally recognized statistical
rating organizations (NRSROs) (or if only one NRSRO has issued a rating, that
NRSRO) in the highest rating category for short-term debt obligations (within
which there may be sub-categories). First Tier Securities also include
unrated securities comparable in quality to rated securities, as determined
by T. Rowe Price under the supervision of the fund's Board of Directors.
All Funds
NET ASSET VALUE PER SHARE
-------------------------------------------------------------------------------
The purchase and redemption price of the fund's shares is equal to the fund's
net asset value per share or share price. The fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the fund is normally
calculated as of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the fund may by order permit such
a suspension for the protection of the fund's shareholders; provided that
applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c),
or (d) exist.
DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, the fund's annual capital gain distribution, if
any, will be reinvested on the reinvestment date using the NAV per share of
that date. The reinvestment date normally precedes the payment date by one
day, although the exact timing is subject to change and can be as great as 10
days.
TAX STATUS
-------------------------------------------------------------------------------
The fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.
A portion of the dividends paid by certain funds may be eligible for the
dividends-received deduction applicable to corporate shareholders. Long-term
capital gain distributions paid from the fund are never eligible for the
dividend received deduction. For tax purposes, it does not make any
difference whether dividends and capital gain distributions are paid in cash
or in additional shares. Each fund must declare dividends by December 31 of
each year equal to at least 98% of ordinary income (as of December 31) and
capital gains (as
62
<PAGE>
of October 31) in order to avoid a federal excise tax and distribute within
12 months 100% of ordinary income and capital gains as of December 31 to
avoid a federal income tax.
At the time of your purchase, the fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held
by the fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, the fund is permitted to carry
forward its net realized capital losses, if any, for eight years and realize
net capital gains up to the amount of such losses without being required to
pay taxes on, or distribute, such gains.
If, in any taxable year, the fund should not qualify as a regulated
investment company under the code: (i) the fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
fund's distributions to the extent made out of the fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
To the extent the fund invests in foreign securities, the following would
apply:
Passive Foreign Investment Companies
The fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. Such trusts have been the
only or primary way to invest in certain countries. In addition to bearing
their proportionate share of the trust's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses
of such trusts. Capital gains on the sale of such holdings are considered
ordinary income regardless of how long the fund held 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.
To avoid such tax and interest, the fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; deductions for losses are allowable only to the extent
of any gains resulting from these deemed sales for prior taxable years. Such
gains and losses will be treated as ordinary income. The fund will be
required to distribute any resulting income even though it has not sold the
security and received cash to pay such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the ordinary income dividend paid by the fund will be
increased. If the result is a loss, the income dividend paid by the fund will
be decreased, or to the extent such dividend has already been paid, it may be
classified as a return of capital. Adjustments to reflect these gains and
losses will be made at the end of the fund's taxable year.
63
<PAGE>
YIELD INFORMATION
-------------------------------------------------------------------------------
GNMA and Short-Term U.S. Government Funds
In conformity with regulations of the SEC, an income factor is calculated for
each security in the portfolio based upon the security's coupon rate. The
income factors are then adjusted for any gains or losses which have resulted
from prepayments of principal during the period. The income factors are then
totaled for all securities in the portfolio. Next, expenses of the fund for
the period, net of expected reimbursements, are deducted from the income to
arrive at net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset value on the
last day of the period to produce a monthly yield which is then annualized.
Quoted yield factors are for comparison purposes only, and are not intended
to indicate future performance or forecast the dividend per share of the
fund.
The yields of the GNMA and Short-Term U.S. Government Funds calculated under
the above-described method for the month ended May 31, 2000, were 6.72% and
6.48%, respectively.
Corporate Income, High Yield, New Income, Short-Term Bond, U.S. Treasury
Intermediate, and Long-Term Funds
An income factor is calculated for each security in the portfolio based upon
the security's market value at the beginning of the period and yield as
determined in conformity with regulations of the SEC. The income factors are
then totaled for all securities in the portfolio. Next, expenses of the fund
for the period, net of expected reimbursements, are deducted from the income
to arrive at net income, which is then converted to a per share amount by
dividing net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset value on the
last day of the period to produce a monthly yield which is then annualized.
If applicable, a taxable-equivalent yield is calculated by dividing this
yield by one minus the effective federal, state, and/or city or local income
tax rates. Quoted yield factors are for comparison purposes only, and are not
intended to indicate future performance or forecast the dividend per share of
the fund.
The yields of the Corporate Income, High Yield, New Income, Short-Term Bond,
Intermediate, and Long-Term Treasury Funds calculated under the
above-described method for the month ended May 31, 2000, were 8.98%, 11.47%,
7.46%, 6.73%, 6.89%, and 6.27%, respectively.
Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
Treasury Money Funds
The fund's current and historical yield for a period is calculated by
dividing the net change in value of an account (including all dividends
accrued and dividends reinvested in additional shares) by the account value
at the beginning of the period to obtain the base period return. This base
period return is divided by the number of days in the period, 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 yields ending May 31, 2000, for the Prime Reserve, and U.S.
Treasury Money Funds were 5.98% and 5.33%, respectively, and the funds'
compound yield for the same period were 6.15% and 5.48%, respectively.
64
<PAGE>
All Funds
INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------
Total Return Performance
The fund's calculation of total return performance includes the reinvestment
of all capital gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a shareholder in the
fund. Total return is calculated as the percentage change between the
beginning value of a static account in the fund and the ending value of that
account measured by the then current net asset value, including all shares
acquired through reinvestment of income and capital gain dividends. The
results shown are historical and should not be considered indicative of the
future performance of the fund. Each average annual compound rate of return
is derived from the cumulative performance of the fund over the time period
specified. The annual compound rate of return for the fund over any other
period of time will vary from the average.
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
Fund Ended Ended Ended Inception Date
---- 5/31/00 5/31/00 5/31/00 5/31/00 ----
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Corporate Income -0.63% -- -- 23.57% 10/31/95
GNMA 2.13 31.26% 100.94% 180.71 11/26/85
High Yield -0.63 44.69 143.70 300.57 12/31/84
New Income 1.13 26.46 95.70 739.08 08/31/73
Personal Strategy Balanced 5.68 88.69 -- 115.77 07/29/94
Personal Strategy Growth 7.49 112.49 -- 145.73 07/29/94
Personal Strategy Income 4.39 69.16 -- 90.98 07/29/94
Prime Reserve 5.22 28.06 58.90 459.22 01/26/76
Prime Reserve Fund-PLUS Class 5.04 -- -- 7.66 11/01/98
Short-Term Bond 3.39 28.00 72.67 189.94 03/02/84
Short-Term U.S. Government 3.23 28.23 -- 47.31 09/30/91
U.S. Treasury Intermediate 1.97 28.44 93.71 103.00 09/29/89
U.S. Treasury Long-Term 2.43 36.52 122.12 128.81 09/29/89
U.S. Treasury Money 4.75 26.33 55.29 174.02 06/28/82
------------------------------- -----------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
Fund Ended Ended Ended Inception Date
---- 5/31/00 5/31/00 5/31/00 5/31/00 ----
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Corporate Income -0.63% -- -- 4.73% 10/31/95
GNMA 2.13 5.59% 7.23% 7.37 11/26/85
High Yield -0.63 7.67 9.32 9.42 12/31/84
New Income 1.13 4.81 6.94 8.28 08/31/73
Personal Strategy Balanced 5.68 13.54 -- 14.08 07/29/94
Personal Strategy Growth 7.49 16.27 -- 16.65 07/29/94
Personal Strategy Income 4.39 11.09 -- 11.72 07/29/94
Prime Reserve 5.22 5.07 4.74 7.33 01/26/76
Prime Reserve Fund-PLUS Class 5.04 -- -- 4.78 11/01/98
Short-Term Bond 3.39 5.06 5.61 6.77 03/02/84
Short-Term U.S. Government 3.23 5.10 -- 4.57 09/30/91
U.S. Treasury Intermediate 1.97 5.13 6.84 6.86 09/29/89
U.S. Treasury Long-Term 2.93 6.42 8.31 8.07 09/29/89
U.S. Treasury Money 4.75 4.79 4.50 5.79 06/28/82
------------------------------- -----------
</TABLE>
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the fund's
total return performance, ranking, or any other measure of the fund's
performance may be compared to any one or combination of the following: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities comparable to those in which the fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the fund or the general economic, business, investment, or
financial environment in which the fund operates; (3) various financial,
economic, and market statistics developed by brokers, dealers, and other
persons may be used to illustrate aspects of the fund's performance; (4) the
effect of tax-deferred compounding on the fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the fund invests may be compared to
relevant indices or surveys in order to evaluate the fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by Investment
Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
financial, and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the fund;
individual securities within the fund's portfolio; and their philosophy
regarding the selection of individual stocks, including why specific stocks
have been added, removed, or excluded from the fund's portfolio.
Other Features and Benefits
The fund is a member of the T. Rowe Price family of funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price and/or Investment Services may be made available.
66
<PAGE>
No-Load Versus Load and 12b-1 Funds
Many mutual funds charge sales fees to investors or use fund assets to
finance distribution activities. These fees are in addition to the normal
advisory fees and expenses charged by all mutual funds. There are several
types of fees charged which vary in magnitude and which may often be used in
combination. A sales charge (or "load") can be charged at the time the fund
is purchased (front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested. Back-end loads are
charged either on the amount originally invested or on the amount redeemed.
12b-1 plans allow for the payment of marketing and sales expenses from fund
assets. These expenses are usually computed daily as a fixed percentage of
assets.
The T. Rowe Price funds, including the Advisor Classes, are considered to be
"no-load" funds. They impose no front-end or back-end sales loads. However,
the Advisor Classes do charge 12b-1 fees. Under applicable National
Association of Securities Dealers Regulation, Inc. ("NASDR") regulations,
mutual funds that have no front-end or deferred sales charges and whose total
asset-based charges for sales-related expenses and/or service fees (as
defined by NASDR) do not exceed 0.25% of average net assets per year may be
referred to as no-load funds.
Redemptions in Kind
The fund has filed a notice of election under Rule 18f-1 of the 1940 Act.
This permits the fund to effect redemptions in kind as set forth in its
prospectus.
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the fund, it would be the responsibility of the
shareholder to dispose of the securities. The shareholder would be at risk
that the value of the securities would decline prior to their sale, that it
would be difficult to sell the securities and that brokerage fees could be
incurred.
Issuance of Fund Shares for Securities
Transactions involving issuance of fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
All Funds except GNMA Fund
CAPITAL STOCK
-------------------------------------------------------------------------------
The fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the 1940 Act and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and might thus
be superior or inferior to the capital stock or to other classes or series in
various characteristics. The Board of Directors may increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any
class or series that the fund has authorized to issue without shareholder
approval.
Except to the extent that the fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class
vote unless and to the extent that such a right might be construed to exist
under Maryland law. The Charter contains no provision entitling the holders
of the present class of capital stock to a vote as a class on any matter.
Accordingly, the preferences,
67
<PAGE>
rights, and other characteristics attaching to any class of shares, including
the present class of capital stock, might be altered or eliminated, or the
class might be combined with another class or classes, by action approved by
the vote of the holders of a majority of all the shares of all classes
entitled to be voted on the proposal, without any additional right to vote as
a class by the holders of the capital stock or of another affected class or
classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the fund, a special meeting of
shareholders of the fund shall be called by the Secretary of the fund on the
written request of shareholders entitled to cast at least 10% of all the
votes of the fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of the fund to the extent required by
Section 16(c) of the 1940 Act.
GNMA Fund
Description of the Fund
For tax and business reasons, the fund was organized in 1985 as a
Massachusetts Business Trust, and is registered with the SEC under the 1940
Act as diversified, open-end investment companies, commonly known as "mutual
fund."
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of a single class. The Declaration of
Trust also provides that the Board of Trustees may issue additional series or
classes of shares. Each share represents an equal proportionate beneficial
interest in the fund. In the event of the liquidation of the fund, each share
is entitled to a pro-rata share of the net assets of the fund.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of trustees (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of 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 1940 Act, holders of record of not less than two-thirds
of the outstanding shares of the fund may remove a trustee by a vote cast in
person or by proxy at a meeting called for that purpose. Except as set forth
above, the trustees shall continue to hold office and may appoint successor
trustees. Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in the election of trustees can, if they choose to
do so, elect all the trustees of the Trust, in which event the holders of the
remaining shares will be unable to elect any person as a trustee. No
amendments may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of redemption and
the privilege of exchange are described in the prospectus. Shares are fully
paid and nonassessable, except as set forth below. The Trust may be
terminated (i) upon the sale of its assets to another diversified, open-end
management investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon liquidation
and distribution of the assets of the Trust, if approved by the vote of the
holders of a majority of the outstanding shares of the Trust. If not so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the fund. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
68
<PAGE>
of the fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the fund or a
Trustee. The Declaration of Trust provides for indemnification from fund
property for all losses and expenses of any shareholder held personally
liable for the obligations of the fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its
obligations, a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the fund, the shareholders of the fund
paying such liability will be entitled to reimbursement from the general
assets of the fund. The Trustees intend to conduct the operations of the fund
in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such fund.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The fund's shares (except for Government Reserve and Reserve Investment
Funds) are registered for sale under the 1933 Act. Registration of the fund's
shares is not required under any state law, but the fund is required to make
certain filings with and pay fees to the states in order to sell its shares
in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is The Chrysler Building,
405 Lexington Avenue, New York, New York 10174, is legal counsel to the fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the funds.
The financial statements of the funds for the year ended May 31, 2000, and
the report of independent accountants are included in each fund's Annual
Report for the year ended May 31, 2000. A copy of each Annual Report
accompanies this Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in each Annual
Report for the year ended May 31, 2000, are incorporated into this Statement
of Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CORPORATE GNMA PRIME
INCOME ---- RESERVE
------ -------
<S> <C> <C> <C>
Financial Highlights 8 6 8
9-1
Statement of Net Assets, May 31, 2000 5 7-9 10-17
Statement of Operations, year ended
May 31, 2000 16 10 18
Statement of Changes in Net Assets, years ended
May 31, 2000 and May 31, 1999 17 11 19
1
8
-
Notes to Financial Statements, May 31, 2000 21 12-14 20-21
Report of Independent Accountants 22 15 22
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
PERSONAL PERSONAL PERSONAL
STRATEGY STRATEGY STRATEGY
BALANCED GROWTH INCOME
-------- ------ ------
<S> <C> <C> <C>
Financial Highlights 2 2 2
3-
Portfolio of Investments, May 31, 2000 30 3-29 3-28
Statement of Assets and Liabilities, May
31, 2000 31 30 29
Statement of Operations, year ended
May 31, 2000 32 31 30
Statement of Changes in Net Assets, years
ended
May 31, 2000 and May 31, 1999 33 32 31
Notes to Financial Statements, May 31,
2000 34-37 33-36 32-35
Report of Independent Accountants 38 37 36
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SHORT-TERM SHORT-TERM U.S.
---------- BOND GOVERNMENT
---- ----------
<S> <C> <C> <C>
Financial Highlights 9 8 8
Statement of Net Assets, May 31,
2000 10-23 9-13 9-13
Statement of Operations, year ended
May 31, 2000 24 14 14
Statement of Changes in Net Assets,
years ended
May 31, 2000 and May 31, 1999 25 15 15
Notes to Financial Statements, May
31, 2000 26-30 16-19 16-19
Report of Independent Accountants 31 20 20
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY U.S. TREASURY U.S. TREASURY
INTERMEDIATE LONG-TERM MONEY
------------ --------- -----
<S> <C> <C> <C>
Financial Highlights 11 12 10
Statement of Net Assets, May 31,
2000 15-16 18-19 13-14
Statement of Operations, year
ended
May 31, 2000 20 20 20
Statement of Changes in Net
Assets, years ended
May 31, 2000 and May 31, 1999 22 23 21
Notes to Financial Statements,
May 31, 2000 24-27 24-27 24-27
Report of Independent
Accountants 28 28 28
</TABLE>
<TABLE>
<CAPTION>
RESERVE GOVERNMENT
INVESTMENT RESERVE
---------- INVESTMENT
----------
<S> <C> <C>
Financial Highlights 5 6
7
-
Statement of Net Assets, May 31, 2000 9 10
Statement of Operations, year ended May 31, 2000 11 11
Statement of Changes in Net Assets, years ended
May 31, 2000 and May 31, 1999 12 13
Notes to Financial Statements, May 31, 2000 14-16 14-16
Report of Independent Accountants 17 17
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
NEW INCOME
----------
<S> <C>
Financial Highlights 10
Portfolio of Investments, May 31, 2000 11-18
Statement of Assets and Liabilities, May 31, 2000 19
Statement of Operations, year ended
May 31, 2000 20
Statement of Changes in Net Assets, years ended
May 31, 2000 and May 31, 1999 21
Notes to Financial Statements, May 31, 2000 22-25
Report of Independent Accountants 26
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD FUND-ADVISOR CLASS
-----------------------------
<S> <C>
Financial Highlights 1
Statement of Net Assets, May 31, 2000 2-15
Statement of Operations, year ended
May 31, 2000 16
Statement of Changes in Net Assets, year ended
May 31, 2000 17
Notes to Financial Statements, May 31, 2000 18-22
Report of Independent Accountants 23
</TABLE>
RATINGS OF COMMERCIAL PAPER
-------------------------------------------------------------------------------
Moody's Investors Service, Inc. The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning rating are the following: valuation of the management of
the issuer; economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of
earnings over a period of 10 years; financial strength of the parent company
and the relationships which exist with the issuer; and recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is
rated P1, P2, or P3.
Standard & Poor's Corporation Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors
determines whether the issuer's commercial paper is rated A1, A2, or A3.
Fitch IBCA, Inc. Fitch 1-Highest grade Commercial paper assigned this rating
is regarded as having the strongest degree of assurance for timely payment.
Fitch 2-Very good grade Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
71
<PAGE>
Government Reserve Investment, Prime Reserve, and Reserve Investment Funds
RATINGS OF CORPORATE DEBT SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally know as high-grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations.
Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of attaining investment standing.
Standard & Poor's Corporation
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, CC, and C are regarded on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and C the highest degree of speculation. While such bonds will likely have
some quality and
72
<PAGE>
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
D-In default.
Fitch IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to slight market fluctuation other than
through changes in the money rate. The prime feature of a "AAA" bond is the
showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase are often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.
73
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is May 1, 2000, revised
to August 31, 2000.
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. Rowe Price Blue Chip Growth Fund-Advisor Class
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE DEVELOPING TECHNOLOGIES FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. Rowe Price Equity Income Fund-Advisor Class
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE GLOBAL TECHNOLOGY FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. Rowe Price Equity Index 500 Fund
T. Rowe Price Extended Equity Market Index Fund
T. Rowe Price Total Equity Market Index Fund
T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. Rowe Price Mid-Cap Growth Fund-Advisor Class
T. ROWE PRICE MID-CAP VALUE FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE REAL ESTATE FUND, INC.
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. Rowe Price Science & Technology Fund-Advisor Class
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. Rowe Price Small-Cap Stock Fund-Advisor Class
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. Rowe Price Small-Cap Value Fund-Advisor Class
T. ROWE PRICE VALUE FUND, INC.
T. Rowe Price Value Fund-Advisor Class
and
INSTITUTIONAL EQUITY FUNDS, INC.
Institutional Large-Cap Value Fund
Institutional Small-Cap Stock Fund
Institutional Mid-Cap Equity Growth Fund
-------------------------------------------------------------------------------
Mailing Address: T. Rowe Price Investment Services, Inc. 100 East Pratt
Street Baltimore, Maryland 21202 1-800-638-5660
C20-043 8/31/00
<PAGE>
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate fund prospectus dated May 1, 2000
(or August 31, 2000, for the T. Rowe Price Global Technology Fund, Inc. and
T. Rowe Price Developing Technologies Fund, Inc.), which may be obtained from
T. Rowe Price Investment Services, Inc. ("Investment Services").
Each fund's (other than Global Technology Fund and Developing Technologies
Fund) financial statements for the year ended December 31, 1999, and the
report of independent accountants are included in each fund's Annual Report
and incorporated by reference into this Statement of Additional Information.
If you would like a prospectus or an annual or semiannual shareholder report
for a fund of which you are not a shareholder, please call 1-800-638-5660. A
prospectus with more complete information, including management fees and
expenses, will be sent to you. Please read it carefully.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <S> <C>
Capital Stock 69 Legal Counsel 71
------------------------------------ --------------------------------------
Code of Ethics 58 Management of the Funds 29
------------------------------------ --------------------------------------
Custodian 57 Net Asset Value Per Share 64
------------------------------------ --------------------------------------
Distributor for the Funds 56 Organization of the Funds 70
------------------------------------ --------------------------------------
Dividends and Distributions 64 Portfolio Management Practices 15
------------------------------------ --------------------------------------
Federal Registration of 71 Portfolio Transactions 58
Shares
------------------------------------ --------------------------------------
Independent Accountants 71 Pricing of Securities 63
------------------------------------ --------------------------------------
Investment Management 50 Principal Holders of 49
Services Securities
------------------------------------ --------------------------------------
Investment Objectives and 2 Ratings of Corporate Debt 74
Policies Securities
------------------------------------ --------------------------------------
Investment Performance 66 Risk Factors 3
------------------------------------ --------------------------------------
Investment Program 6 Services by Outside Parties 55
------------------------------------ --------------------------------------
Investment Restrictions 27 Tax Status 65
------------------------------------ --------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each fund's
investment objectives and policies discussed in each fund's prospectus.
The funds will not substantively change their investment objectives without
obtaining shareholder approval. Unless otherwise specified, the investment
programs and restrictions of the funds are not fundamental policies. Each
fund's operating policies are subject to change by each Board of
Directors/Trustees without shareholder approval. However, shareholders will
be notified of a material change in an operating policy. Each fund's
fundamental policies may not be changed without the approval of at least a
majority of the outstanding shares of the fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the holders of 50%
or more of the shares are represented. References to the following are as
indicated:
Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
T. Rowe Price International, Inc. ("T. Rowe Price
International")
<PAGE>
Throughout this Statement of Additional Information, "the fund" is intended
to refer to each fund listed on the cover page, unless otherwise indicated.
RISK FACTORS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the fund.
Because of its investment policy, the fund may or may not be suitable or
appropriate for all investors. The fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. The fund will normally have substantially all (for the Balanced
Fund 50-70% and for the Capital Appreciation Fund at least 50%) of its assets
in equity securities (e.g., common stocks). This portion of the fund's assets
will be subject to all of the risks of investing in the stock market. There
is risk in every investment. The value of the portfolio securities of the
fund will fluctuate based upon market conditions. Although the fund seeks to
reduce risk by investing in a diversified portfolio, such diversification
does not eliminate all risk. There can, of course, be no assurance that the
fund will achieve its investment objective.
Foreign Securities (All Funds other than Equity Index 500, Extended Equity
Market, and Total Equity Market Funds)
The fund may invest in U.S. dollar-denominated and non-U.S.
dollar-denominated securities of foreign issuers.
Risk Factors of Foreign Investing There are special risks in foreign
investing. Certain of these risks are inherent in any mutual fund while
others relate more to the countries in which the fund will invest.
. Political and Economic Factors Individual foreign economies of some
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
The internal politics of some 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 1994-1995, the Mexican peso plunged in
value setting off a severe crisis in the Mexican economy. Asia is still
coming to terms with its own crisis and recessionary conditions sparked off
by widespread currency weakness in late 1997. In 1998, there was substantial
turmoil in markets throughout the world. In 1999, the democratically elected
government of Pakistan was overthrown by a military coup. The Russian
government also defaulted on all its domestic debt. 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 and hostile relations between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
. Currency Fluctuations The fund invest in securities denominated in various
currencies. Accordingly, a change in the value of any such currency against
the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the fund's assets denominated in that currency. Such changes will
also affect the fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of the fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens) the value of the fund's
securities denominated in that currency would be expected to decline.
<PAGE>
. Investment and Repatriation Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the fund.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by
these or other countries in which the fund 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. In 1998, the
government of Malaysia imposed currency controls which effectively made it
impossible for foreign investors to convert Malaysian ringgits to foreign
currencies.
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on securities exchanges located
in the countries in which the respective principal offices of the issuers of
the various securities are located, if that is the best available market.
Investments in certain markets may be made through American Depository
Receipts ("ADRs") and Global Depository Receipts ("GDRs") traded in the
United States or on foreign exchanges. Foreign securities markets are
generally not as developed or efficient as, and more volatile than, those in
the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and the fund's portfolio securities may be less
liquid and subject to more rapid and erratic price movements than securities
of comparable U.S. companies. Securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Commissions on foreign securities are generally higher
than commissions on United States exchanges, and while there is an increasing
number of overseas securities markets that have adopted a system of
negotiated rates, a number are still subject to an established schedule of
minimum commission rates. There is generally less government supervision and
regulation of foreign securities exchanges, brokers, and listed companies
than in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement." Failed settlements can
result in losses to the fund.
. Investment Funds The fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The fund's investment in these funds
is subject to the provisions of the 1940 Act. If the fund invest in such
investment funds, the fund's shareholders will bear not only their
proportionate share of the expenses of the fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
. Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also is often more difficult to
keep currently informed of corporate actions which affect the prices of
portfolio securities.
. Taxes The dividends and interest payable on certain of the fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the fund's
shareholders.
. Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
. Eastern Europe and Russia Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing
<PAGE>
costs, growing consumer spending, and substantial economic growth. However,
investment in most 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. The collapse of the ruble from its crawling peg
exchange rate against the U.S. dollar has set back the path of reform for
several years. In many of the countries of Eastern Europe and Russia, there
is no stock exchange or formal market for securities. Such countries may also
have government exchange controls, currencies with no recognizable market
value relative to the established currencies of western market economies,
little or no experience in trading in securities, no financial reporting
standards, a lack of a banking and securities infrastructure to handle such
trading, and a legal tradition which does not recognize rights in private
property. In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the country's national
interest. Further, the governments in such countries may require governmental
or quasi-governmental authorities to act as custodian of the fund's assets
invested in such countries, and these authorities may not qualify as a
foreign custodian under the 1940 Act and exemptive relief from such Act may
be required. All of these considerations are among the factors which could
cause significant risks and uncertainties to investment in Eastern Europe and
Russia. The fund will only invest in a company located in, or a government
of, Eastern Europe and Russia, if it believes the potential return justifies
the risk.
. Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may experience sudden and
large adjustments in their currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. In 1999, the Brazilian real lost 30% of its value against the U.S.
dollar. Certain Latin American countries may impose restrictions on the free
conversion of their currency into foreign currencies, including the U.S.
dollar. There is no significant foreign exchange market for many currencies
and it would, as a result, be difficult for the fund to engage in foreign
currency transactions designed to protect the value of the fund's interests
in securities denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
. Japan
The fund's concentration of its investments in Japan means the fund will be
more dependent on the investment considerations discussed above and may be
more volatile than a fund which is broadly diversified geographically. To the
extent any of the other funds also invest in Japan, such investments will be
subject to these same factors. Additional factors relating to Japan include
the following:
Japan has experienced earthquakes and tidal waves of varying degrees of
severity, and the risks of such phenomena, and damage resulting therefrom,
continue to exist. Japan also has one of the world's highest population
densities. A significant percentage of the total population of Japan is
concentrated in the metropolitan areas of Tokyo, Osaka, and Nagoya.
<PAGE>
Economy The Japanese economy languished for much of the last decade. Lack of
effective governmental action in the areas of tax reform to reduce high tax
rates, banking regulation to address enormous amounts of bad debt, and
economic reforms to attempt to stimulate spending are among the factors cited
as possible causes of Japan's economic problems. The yen has had a history of
unpredictable and volatile movements against the dollar; a weakening yen
hurts U.S. investors holding yen-denominated securities. Finally, the
Japanese stock market has experienced wild swings in value and has often been
considered significantly overvalued.
Energy Japan has historically depended on oil for most of its energy
requirements. Almost all of its oil is imported, the majority from the Middle
East. In the past, oil prices have had a major impact on the domestic
economy, but more recently Japan has worked to reduce its dependence on oil
by encouraging energy conservation and use of alternative fuels. In addition,
a restructuring of industry, with emphasis shifting from basic industries to
processing and assembly type industries, has contributed to the reduction of
oil consumption. However, there is no guarantee this favorable trend will
continue.
Foreign Trade Overseas trade is important to Japan's economy. Japan has few
natural resources and must export to pay for its imports of these basic
requirements. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors and
the large trade surpluses ensuing therefrom, Japan has had difficult
relations with its trading partners, particularly the U.S. It is possible
that trade sanctions or other protectionist measures could impact Japan
adversely in both the short term and long term.
INVESTMENT PROGRAM
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Types of Securities
Set forth below is additional information about certain of the investments
described in each fund's prospectus.
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the fund the desired European bond
<PAGE>
exposure while avoiding currency risk, limiting downside market risk, and
lowering transactions costs. Of course, there is no guarantee that the
strategy will be successful, and the fund could lose money if, for example,
interest rates do not move as anticipated or credit problems develop with the
issuer of the Hybrid Instruments.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures, and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counterparty or issuer of the Hybrid Instrument would be an additional risk
factor which the fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the fund. Accordingly, the fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it
is possible that the fund's investment in Hybrid Instruments will account for
more than 10% of the fund's return (positive or negative).
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the fund might obtain a less favorable
price than prevailed when it decided to sell.
<PAGE>
Restricted securities will be priced at fair value as determined in
accordance with procedures prescribed by the fund's Board of
Directors/Trustees. If, through the appreciation of illiquid securities or
the depreciation of liquid securities, the fund should be in a position where
more than 15% of the value of its net assets is invested in illiquid assets,
including restricted securities, the fund will take appropriate steps to
protect liquidity.
Notwithstanding the above, the fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price, under the
supervision of the fund's Board of Directors/Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
fund's restriction of investing no more than 15% of its net assets in
illiquid securities. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this determination, T. Rowe
Price will consider the trading markets for the specific security taking into
account the unregistered nature of a Rule 144A security. In addition, T. Rowe
Price could consider the following: (1) frequency of trades and quotes; (2)
number of dealers and potential purchases; (3) dealer undertakings to make a
market; and (4) the nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer). The liquidity of Rule 144A securities would
be monitored and, if as a result of changed conditions it is determined that
a Rule 144A security is no longer liquid, the fund's holdings of illiquid
securities would be reviewed to determine what, if any, steps are required to
assure that the fund does not invest more than 15% of its net assets in
illiquid securities. Investing in Rule 144A securities could have the effect
of increasing the amount of the fund's assets invested in illiquid securities
if qualified institutional buyers are unwilling to purchase such securities.
Warrants
The fund may acquire warrants. Warrants can be highly volatile and 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 securities at a specific price valid for a specific period of time.
They do not represent ownership of the securities, but only the right to buy
them. Warrants differ from call options in that warrants are issued by the
issuer of the security which may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
Debt Securities
Balanced, Blue Chip Growth, Capital Appreciation, Capital Opportunity,
Dividend Growth, Equity Income, Financial Services, Global Technology, Growth
& Income, Health Sciences, Institutional Large-Cap Value, Institutional
Small-Cap Stock, Media & Telecommunications, Mid-Cap Value, New Era, Real
Estate, Small-Cap Stock, Small-Cap Value, and Value Funds
Debt Obligations Although a majority of the fund's assets are invested in
common stocks, the fund may invest in convertible securities, corporate and
government 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 issuer. 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
<PAGE>
more widely than higher-quality securities. Lower-quality investments entail
a higher risk of default-that is, the nonpayment of interest and principal by
the issuer than higher-quality investments. Such securities are also subject
to special risks, discussed below. Although the fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries, and financial markets, such efforts will not eliminate
all risk. There can, of course, be no assurance that the fund will achieve
its investment objective.
After purchase by the fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the fund.
Neither event will require a sale of such security by the fund. However, T.
Rowe Price will consider such events in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus.
Special Risks of High-Yield Investing The fund may invest in low-quality
bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low- and
lower-medium-quality bonds involves greater investment risk, to the extent
the fund invests in such bonds, achievement of its investment objective will
be more dependent on T. Rowe Price's credit analysis than would be the case
if the fund were investing in higher-quality bonds. High-yield bonds may be
more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high-yield bond prices
because the advent of such events could lessen the ability of highly
leveraged issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high-yield bonds
may be less liquid than the market for higher-grade bonds, which can
adversely affect the ability of a fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
Fixed income securities in which the fund may invest include, but are not
limited to, those described below.
. U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
. Commercial Paper and Commercial Notes Short-term promissory notes issued by
corporations primarily to finance short-term credit needs. Certain notes may
have floating or variable rates and may contain options, exercisable by
either the buyer or the seller, that extend or shorten the maturity of the
note.
. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
<PAGE>
. Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
. Supranational Agencies Securities of certain supranational entities, such as
the International Development Bank.
When-Issued Securities and Forward Commitment Contracts
The price of such securities, which may be expressed in yield terms, is fixed
at the time the commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs within 90 days of
the purchase for When-Issueds, but may be substantially longer for Forwards.
During the period between purchase and settlement, no payment is made by the
fund to the issuer and no interest accrues to the fund. The purchase of these
securities will result in a loss if their value declines prior to the
settlement date. This could occur, for example, if interest rates increase
prior to settlement. The longer the period between purchase and settlement,
the greater the risks are. At the time the fund makes the commitment to
purchase these securities, it will record the transaction and reflect the
value of the security in determining its net asset value. The fund will cover
these securities by maintaining cash, liquid, high-grade debt securities, or
other suitable cover as permitted by the SEC with its custodian bank equal in
value to commitments for them during the time between the purchase and the
settlement. Therefore, the longer this period, the longer the period during
which alternative investment options are not available to the fund (to the
extent of the securities used for cover). Such securities either will mature
or, if necessary, be sold on or before the settlement date.
To the extent the fund remains fully or almost fully invested (in securities
with a remaining maturity of more than one year) at the same time it
purchases these securities, there will be greater fluctuations in the fund's
net asset value than if the fund did not purchase them.
Mortgage-Related Securities
Balanced Fund
Mortgage-related securities in which the fund may invest include, but are not
limited to, those described below.
. Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the fund.
This is in contrast to traditional bonds where principal is normally paid
back at maturity in a lump sum. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. (When
a mortgage in the underlying mortgage pool is prepaid, an unscheduled
principal prepayment is passed through to the fund. This principal is
returned to the fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies.
. U.S. Government Agency Mortgage-Backed Securities These are obligations
issued or guaranteed by the United States government or one of its agencies
or instrumentalities, such as the Government National Mortgage Association
("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie
Mae" or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie Mac" or
"FHLMC"), and the Federal Agricultural Mortgage Corporation ("Farmer Mac" or
"FAMC"). FNMA, FHLMC, and FAMC obligations are not backed by the full faith
and credit of the U.S. government as GNMA certificates are, but they are
supported by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro-rata share of monthly payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees paid to the guarantor of such securities and
the servicer of the underlying mortgage loans. Each of GNMA, FNMA, FHLMC, and
FAMC guarantees timely distributions of interest to certificate
<PAGE>
holders. GNMA and FNMA guarantee timely distributions of scheduled principal.
FHLMC has in the past guaranteed only the ultimate collection of principal of
the underlying mortgage loan; however, FHLMC now issues mortgage-backed
securities (FHLMC Gold PCS) which also guarantee timely payment of monthly
principal reductions.
. Ginnie Mae Certificates Ginnie Mae is a wholly owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of
mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
guaranteed by the Department of Veterans Affairs under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other
eligible mortgage loans. The Housing Act provides that the full faith and
credit of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In order to meet
its obligations under such guaranty, Ginnie Mae is authorized to borrow from
the United States Treasury with no limitations as to amount.
. Fannie Mae Certificates Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. FNMA Certificates represent a pro-rata
interest in a group of mortgage loans purchased by Fannie Mae. FNMA
guarantees the timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith and credit
of the U.S. government.
. Freddie Mac Certificates Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended ("FHLMC Act"). Freddie Mac Certificates represent a pro-rata interest
in a group of mortgage loans ("Freddie Mac Certificates") purchased by
Freddie Mac. Freddie Mac guarantees timely payment of interest and principal
on certain securities it issues and timely payment of interest and eventual
payment of principal on other securities it issues. The obligations of
Freddie Mac are obligations solely of Freddie Mac and are not backed by the
full faith and credit of the U.S. government.
. Farmer Mac Certificates Farmer Mac is a federally chartered instrumentality
of the United States established by Title VIII of the Farm Credit Act of
1971, as amended ("Charter Act"). Farmer Mac was chartered primarily to
attract new capital for financing of agricultural real estate by making a
secondary market in certain qualified agricultural real estate loans. Farmer
Mac provides guarantees of timely payment of principal and interest on
securities representing interests in, or obligations backed by, pools of
mortgages secured by first liens on agricultural real estate ("Farmer Mac
Certificates"). Similar to Fannie Mae and Freddie Mac, Farmer Mac
Certificates are not supported by the full faith and credit of the U.S.
government; rather, Farmer Mac may borrow from the U.S. Treasury to meet its
guaranty obligations.
As discussed above, prepayments on the underlying mortgages and their effect
upon the rate of return of a mortgage-backed security, is the principal
investment risk for a purchaser of such securities, like the fund. Over time,
any pool of mortgages will experience prepayments due to a variety of
factors, including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and (3)
increased amortization by the mortgagee. These factors, in turn, depend upon
general economic factors, such as level of interest rates and economic
growth. Thus, investors normally expect prepayment rates to increase during
periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly,
the life of the mortgage-backed security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment rates, it is not possible to predict
the life of a particular mortgage-backed security, but FHA statistics
indicate that 25- to 30-year single family dwelling mortgages have an average
life of approximately 12 years. The majority of Ginnie Mae Certificates are
backed by mortgages of this type, and, accordingly, the generally accepted
practice treats Ginnie Mae Certificates as 30-year securities which prepay in
full in the 12th year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
<PAGE>
Fixed rate mortgage-backed securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less certain
fees to GNMA, FNMA, and FHLMC for providing the guarantee, and the issuer for
assembling the pool and for passing through monthly payments of interest and
principal.
Payments to holders of mortgage-backed securities consist of the monthly
distributions of interest and principal less the applicable fees. The actual
yield to be earned by a holder of mortgage-backed securities is calculated by
dividing interest payments by the purchase price paid for the mortgage-backed
securities (which may be at a premium or a discount from the face value of
the certificate).
Monthly distributions of interest, as contrasted to semiannual distributions
which are common for other fixed interest investments, have the effect of
compounding and thereby raising the effective annual yield earned on
mortgage-backed securities. Because of the variation in the life of the pools
of mortgages which back various mortgage-backed securities, and because it is
impossible to anticipate the rate of interest at which future principal
payments may be reinvested, the actual yield earned from a portfolio of
mortgage-backed securities will differ significantly from the yield estimated
by using an assumption of a certain life for each mortgage-backed security
included in such a portfolio as described above.
. Collateralized Mortgage Obligations (CMOs) CMOs are bonds that are
collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO deal are divided into groups, and each group of
bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay principal to
the CMO bondholders. The bonds issued under such CMO structure are retired
sequentially as opposed to the pro-rata return of principal found in
traditional pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required to pay the stated interest) is
used to retire the bonds. Under the CMO structure, the repayment of principal
among the different tranches is prioritized in accordance with the terms of
the particular CMO issuance. The "fastest-pay" tranche of bonds, as specified
in the prospectus for the issuance, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the prospectus, receive all of the
principal payments until they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash flows of long
maturity, monthly-pay collateral to formulate securities with short,
intermediate and long final maturities and expected average lives.
In recent years, new types of CMO tranches have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal
and interest received by each tranche from the underlying collateral. Under
certain of these new structures, given classes of CMOs have priority over
others with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the fund invests, the
investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments
on the underlying mortgages serving as collateral and from the structure of
the deal (priority of the individual tranches). An increase or decrease in
prepayment rates (resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs. The prices of
certain CMOs, depending on their structure and the rate of prepayments, can
be volatile. Some CMOs may also not be as liquid as other securities.
. U.S. Government Agency Multiclass Pass-Through Securities Unlike CMOs, U.S.
Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multiclass pass-through securities.
. Multi-Class Residential Mortgage Securities Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi--
<PAGE>
Class Residential Mortgage Securities is not guaranteed by the U.S.
government or any of its agencies. Accordingly, yields on Multi-Class
Residential Mortgage Securities have been historically higher than the yields
on U.S. government mortgage securities. However, the risk of loss due to
default on such instruments is higher since they are not guaranteed by the
U.S. government or its agencies. Additionally, pools of such securities may
be divided into senior or subordinated segments. Although subordinated
mortgage securities may have a higher yield than senior mortgage securities,
the risk of loss of principal is greater because losses on the underlying
mortgage loans must be borne by persons holding subordinated securities
before those holding senior mortgage securities.
. Privately Issued Mortgage-Backed Certificates These are pass-through
certificates issued by non-governmental issuers. Pools of conventional
residential or commercial mortgage loans created by such issuers generally
offer a higher rate of interest than government and government-related pools
because there are no direct or indirect government guarantees of payment.
Timely payment of interest and principal of these pools is, however,
generally supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurance or the
mortgage poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-related security meets the fund's quality standards. The fund may
buy mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers, the
investment manager determines that the securities meet the fund's quality
standards.
. Stripped Mortgage-Backed Securities These instruments are a type of
potentially high-risk derivative. They represent interests in a pool of
mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. IOs and POs are usually structured as tranches of a CMO.
Stripped Mortgage-Backed Securities may be issued by U.S. government agencies
or by private issuers similar to those described above with respect to CMOs
and privately issued mortgage-backed certificates. As interest rates rise and
fall, the value of IOs tends to move in the same direction as interest rates.
The value of the other mortgage-backed securities described herein, like
other debt instruments, will tend to move in the opposite direction compared
to interest rates. Under the Code, POs may generate taxable income from the
current accrual of original issue discount, without a corresponding
distribution of cash to the fund.
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets. In the case of IOs, prepayments affect the amount, but not
the timing, of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of cash flows
received by investors in POs. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to fully recoup
its initial investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a full faith and
credit obligation. Conversely, if the underlying mortgage assets experience
slower than anticipated prepayments of principal, the price on a PO class
will be affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the SEC has advised the fund that it believes the fund should
treat IOs and POs, other than government-issued IOs or POs backed by fixed
rate mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid securities,
to 15% of the fund's net assets. Under the staff's position, the
determination of whether a particular government-issued IO or PO backed by
fixed rate mortgages is liquid may be made on a case by case basis under
guidelines and standards established by the fund's Board of
Directors/Trustees. The fund's Board of Directors/Trustees has delegated to
T. Rowe Price the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of collateral,
including age and prepayment characteristics; rate of interest on coupon
relative to current market rates and the effect of the rate on the potential
for prepayments; complexity of the issue's structure, including the number of
tranches; size of the issue and the number of dealers who make a market in
the IO or PO.
<PAGE>
Asset-Backed Securities
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or
any other affiliated entities and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets, which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
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, the issuing entities are unlikely to have sufficient
assets to satisfy their obligations on the related asset-backed securities.
Real Estate and REIT Risk
Primarily Real Estate Fund (but also any other fund investing in REITs)
Investors in the fund may experience many of the same risks involved with
investing in real estate directly. These risks include: declines in real
estate values, risks related to local or general economic conditions,
particularly lack of demand, overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
heavy cash flow dependency, possible lack of availability of mortgage funds,
obsolescence, losses due to natural disasters, condemnation of properties,
regulatory limitations on rents and fluctuations in rental income, variations
in market rental rates, and possible environmental liabilities. Real Estate
Investment Trusts ("REITs") may own real estate properties (Equity REITs) and
be subject to these risks directly, or may make or purchase mortgages
(Mortgage REITs) and be subject to these risks indirectly through underlying
construction, development, and long-term mortgage loans that may default or
have payment problems.
Equity REITs can be affected by rising interest rates that may cause
investors to demand a high annual yield from future distributions which, in
turn, could decrease the market prices for the REITs. In addition, rising
interest rates also increase the costs of obtaining financing for real estate
projects. Since many real estate projects are dependent upon receiving
financing, this could cause the value of the Equity REITs in which the fund
invests to decline.
Mortgage REITs may hold mortgages that the mortgagors elect to prepay during
periods of declining interest rates which may diminish the yield on such
REITs. In addition, borrowers may not be able to repay mortgages when due
which could have a negative effect on the fund.
Some REITs have relatively small market capitalizations which could increase
their volatility. REITs tend to be dependent upon specialized management
skills and have limited diversification so they are subject to risks inherent
in operating and financing a limited number of properties. In addition, when
the fund invests in REITs, a shareholder will bear his proportionate share of
fund expenses and, indirectly bear similar expenses of the REITs. REITs
depend generally on their ability to generate cash flow to make distributions
to
<PAGE>
shareholders. In addition, both equity and mortgage REITs are subject to the
risks of failing to qualify for tax-free status of income under the Code or
failing to maintain exemption from the 1940 Act.
PORTFOLIO MANAGEMENT PRACTICES
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Lending of Portfolio Securities
Securities loans are made to broker-dealers, institutional investors, or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent, marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit,
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The fund has a right to call each loan and obtain the securities,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation of any important vote. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms deemed
by T. Rowe Price to be of good standing and will not be made unless, in the
judgment of T. Rowe Price, the consideration to be earned from such loans
would justify the risk.
Interfund Borrowing and Lending
The fund is a party to an exemptive order received from the SEC on December
8, 1998, amended on November 23, 1999, that permits it to borrow money from
and/or lend money to other funds in the T. Rowe Price complex ("Price
Funds"). All loans are set at an interest rate between the rate charged on
overnight repurchase agreements and short-term bank loans. All loans are
subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The program is subject to the oversight
and periodic review of the Boards of Directors of the Price Funds.
Repurchase Agreements
The fund may enter into a repurchase agreement through which an investor
(such as the fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by S&P, P1 by Moody's, or the equivalent rating by T. Rowe Price.
At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will
be treated as illiquid securities. The fund will only enter into repurchase
agreements where (1) the underlying securities are of the type (excluding
maturity limitations) which the fund's investment guidelines would allow it
to purchase directly, (2) 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 (3) payment for the underlying security is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the fund
could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying
security during the period while the fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements
Although the fund has no current intention of engaging in reverse repurchase
agreements, the fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a fund is the
<PAGE>
seller of, rather than the investor in, securities, and agrees to repurchase
them at an agreed upon time and price. Use of a reverse repurchase agreement
may be preferable to a regular sale and later repurchase of the securities
because it avoids certain market risks and transaction costs. A reverse
repurchase agreement may be viewed as a type of borrowing by the fund,
subject to Investment Restriction (1). (See "Investment Restrictions.")
Money Market Reserves
It is expected that the fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price. Currently,
two such money market funds are in operation-Reserve Investment Fund ("RIF")
and Government Reserve Investment Fund ("GRF"), each a series of the Reserve
Investment Funds, Inc. Additional series may be created in the future. These
funds were created and operate under an Exemptive Order issued by the SEC
(Investment Company Act Release No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
The GRF invests primarily in a portfolio of U.S. government-backed
securities, primarily U.S. Treasuries, and repurchase agreements thereon.
The RIF and GRF provide a very efficient means of managing the cash reserves
of the fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.
Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
Options
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by the fund. In
writing covered call options, the fund expects to generate additional premium
income which should serve to enhance the fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long
term, are deemed to be attractive investments for the fund.
A call option gives the holder (buyer) the "right to purchase," and the
writer (seller) has the "obligation to sell," a security or currency at a
specified price (the exercise price) at expiration of the option (European
style) or at any time until a certain date (the expiration date) (American
style). So long as the obligation of the writer of a call option continues,
he may be assigned an exercise notice by the broker-dealer through whom such
option was sold, requiring him to deliver the underlying security or currency
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold. To secure his obligation to deliver the underlying
security or currency in the case of a call option, a writer is required to
deposit in escrow the underlying security or currency or other assets in
accordance with the rules of a clearing corporation.
The fund generally will write only covered call options. This means that the
fund will either own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an
exercise price equal to or less than the exercise price of the "covered"
option. From time to time, the fund
<PAGE>
will write a call option that is not covered as indicated above but where the
fund will establish and maintain with its custodian for the term of the
option, an account consisting of cash, U.S. government securities, other
liquid high-grade debt obligations, or other suitable cover as permitted by
the SEC having a value equal to the fluctuating market value of the optioned
securities or currencies. While such an option would be "covered" with
sufficient collateral to satisfy SEC prohibitions on issuing senior
securities, this type of strategy would expose the fund to the risks of
writing uncovered options.
Portfolio securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the fund
generally will not do), but capable of enhancing the fund's total return.
When writing a covered call option, a fund, in return for the premium, gives
up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the
risk of loss should the price of the security or currency decline. Unlike one
who owns securities or currencies not subject to an option, the fund has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer. If a call option which the fund
has written expires, the fund will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call
option is exercised, the fund will realize a gain or loss from the sale of
the underlying security or currency. The fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the fund's
policy which limits the pledging or mortgaging of its assets. If the fund
writes an uncovered option as described above, it will bear the risk of
having to purchase the security subject to the option at a price higher than
the exercise price of the option. As the price of a security could appreciate
substantially, the fund's loss could be significant.
The premium received is the market value of an option. The premium the fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, T. Rowe Price, in
determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the fund for writing covered
call options will be recorded as a liability of the fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
fund is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the fund will be able to
effect such closing transactions at favorable prices. If the fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may
be below, equal to, or above the current market values of the
<PAGE>
underlying securities or currencies at the time the options are written. From
time to time, the fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security or currency from its portfolio. In
such cases, additional costs may be incurred.
The fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the fund.
The fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options
The fund may write American or European style covered put options and
purchase options to close out options previously written by the fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at
the exercise price during the option period (American style) or at the
expiration of the option (European style). So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to make payment to the
exercise price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related risks and
rewards, is substantially identical to that of call options.
The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.)
The fund would generally write covered put options in circumstances where T.
Rowe Price wishes to purchase the underlying security or currency for the
fund's portfolio at a price lower than the current market price of the
security or currency. In such event the fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the fund. In addition, the
fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
The fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The fund may purchase American or European style put options. As the holder
of a put option, the fund has the right to sell the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The fund may
enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The fund may purchase put
<PAGE>
options for defensive purposes in order to protect against an anticipated
decline in the value of its securities or currencies. An example of such use
of put options is provided next.
The fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The fund may also purchase put options at a time when the fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the fund when purchasing
a put option will be recorded as an asset of the fund. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed (close of New York Stock Exchange), or, in the absence of such sale,
the latest bid price. This asset will be terminated upon expiration of the
option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
Purchasing Call Options
The fund may purchase American or European style call options. As the holder
of a call option, the fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase call options
for the purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The fund may also purchase call
options in order to acquire the underlying securities or currencies. Examples
of such uses of call options are provided next.
Call options may be purchased by the fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option
to expire, incurring a loss only to the extent of the premium paid for the
option.
The fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
<PAGE>
Dealer (Over-the-Counter) Options
The fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the fund would look to a clearing
corporation to exercise exchange-traded options, if the fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the fund as well as loss
of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the fund writes
a dealer option, it generally will be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the fund originally wrote the option. While the fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the fund, there can be no assurance that the fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the fund may be unable to
liquidate a dealer option. With respect to options written by the fund, the
inability to enter into a closing transaction may result in material losses
to the fund. For example, since the fund must maintain a secured position
with respect to any call option on a security it writes, the fund may not
sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair a fund's ability to
sell portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The fund may treat the cover used for written Over-the-Counter ("OTC")
options as liquid if the dealer agrees that the fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Equity Index 500, Extended Equity Market Index, and Total Equity Market Index
Funds
Options
Options are a type of potentially high-risk derivative.
The only option activity the funds currently may engage in is the purchase of
S&P 500 call options for the Equity Index 500 Fund, or the purchases of call
options on any indices that may be consistent with the investment programs
for the Extended Equity Market Index and Total Equity Market Index Funds.
Such activity is subject to the same risks described above under "Purchasing
Call Options." However, the funds reserve the right to engage in other
options activity.
All Funds
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The fund may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
The New Era Fund may also enter into futures contracts on commodities related
to the types of companies in which it invests, such as oil and gold futures.
The Equity Index 500, Extended Equity Market Index, and Total Equity Market
Index Funds may only enter into stock index futures which are appropriate for
their investment programs to provide an efficient means of maintaining
liquidity while being invested in the market, to facilitate trading, or to
reduce transaction costs. They will not use futures for hedging purposes.
Otherwise the
<PAGE>
nature of such futures and the regulatory limitations and risks to which they
are subject are the same as those described below.
Stock index futures contracts may be used to provide a hedge for a portion of
the fund's portfolio, as a cash management tool, or as an efficient way for
T. Rowe Price to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the fund's portfolio successfully, the fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the fund. In this regard, the
fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Although
techniques other than the sale and purchase of futures contracts could be
used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the fund's objectives in these
areas.
Regulatory Limitations
If the fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors/Trustees without a shareholder vote and does not limit
the percentage of the fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a fund's
assets to cover or identified accounts could impede portfolio management or
the fund's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the fund would comply with such new
restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
units of a stock index) for a specified price, date, time, and place
designated at the time the contract is made. Brokerage fees are incurred when
a futures contract is bought or sold and margin deposits must be maintained.
Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the fund purchases or sells a security, no price would be paid or
received by the fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the fund's open positions
in futures contracts, the fund would be required to deposit with its
custodian in a segregated
<PAGE>
account in the name of the futures broker an amount of cash, or liquid assets
known as "initial margin." The margin required for a particular futures
contract is set by the exchange on which the contract is traded, and may be
significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to market."
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the fund
realizes a gain; if it is more, the fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the fund
realizes a gain; if it is less, the fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
fund is not able to enter into an offsetting transaction, the fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the S&P's 500 Stock Index is made up of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. The S&P 500
Index assigns relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of those common
stocks. In the case of futures contracts on the S&P 500 Index, the contracts
are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $37,500 (250 units x $150). The stock index
futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash occurs. Over the life
of the contract, the gain or loss realized by the fund will equal the
difference between the purchase (or sale) price of the contract and the price
at which the contract is terminated. For example, if the fund enters into a
futures contract to buy 250 units of the S&P 500 Index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $154 on that
future date, the fund will gain $1,000 (250 units x gain of $4). If the fund
enters into a futures contract to sell 250 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$152 on that future date, the fund will lose $500 (250 units x loss of $2).
Special Risks of Transactions in Futures Contracts
. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
<PAGE>
Margin deposits required on futures trading are low. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit, if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
. Liquidity The fund may elect to close some or all of its futures positions
at any time prior to their expiration. The fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The fund may close its positions by taking opposite positions which would
operate to terminate the fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the fund, and the fund would realize
a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the fund's underlying
instruments sought to be hedged.
Successful use of futures contracts by the fund for hedging purposes is also
subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the fund's portfolio might decline. If this
were to occur, the fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, T. Rowe Price believes that over time
the value of the fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that, if
the fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
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
<PAGE>
certain market distortions. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close futures
contracts through offsetting transactions, which could distort the normal
relationship between the underlying instruments and futures markets. Second,
the margin requirements in the futures market are less onerous than margin
requirements in the securities markets and, as a result, the futures market
might attract more speculators than the securities markets do. Increased
participation by speculators in the futures market might also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market and also because of imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures contracts,
even a correct forecast of general market trends by T. Rowe Price might not
result in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the fund and other T. Rowe Price funds. Such aggregated orders would be
allocated among the funds and the other T. Rowe Price funds in a fair and
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. In addition, where the fund seeks to
close out an option position by writing or buying an offsetting option
covering the same index, underlying instrument or contract and having the
same exercise price and expiration date, its ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions, or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (6) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers'
orders.
<PAGE>
Additional Futures and Options Contracts
Although the fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time the fund's order is placed and the time it is liquidated,
offset or exercised.
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The fund's use of such contracts would include, but not be limited
to, the following:
First, when the fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the fund 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
<PAGE>
value of those securities between the date the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. Under normal circumstances,
consideration of the prospect for currency parties will be incorporated into
the longer-term investment decisions made with regard to overall
diversification strategies. However, T. Rowe Price believes that it is
important to have the flexibility to enter into such forward contracts when
it determines that the best interest of the fund will be served.
The fund may enter into forward contacts for any other purpose consistent
with the fund's investment objective and program. However, the fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the fund's holdings of liquid, high-grade debt securities, currency
available for cover of the forward contract(s), or other suitable cover as
permitted by the SEC. In determining the amount to be delivered under a
contract, the fund may net offsetting positions.
At the maturity of a forward contract, the fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the fund retains the portfolio security and engages in an offsetting
transaction, the fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and there are costs
associated with currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to
the fund at one rate, while offering a lesser rate of exchange should the
fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts
Options, futures, and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar-denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
<PAGE>
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.
In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures, or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the fund.
INVESTMENT RESTRICTIONS
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Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
fund's Board of Directors/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the fund. Calculation of the
fund's total assets for compliance with any of the following fundamental or
operating policies or any other investment restrictions set forth in the
fund's prospectus or Statement of Additional Information will not include
cash collateral held in connection with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the fund may not:
(1) Borrowing Borrow money except that the fund may (i) borrow for
non-leveraging, temporary, or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
of the fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The fund may borrow from banks, other
Price Funds, or other persons to the extent permitted by applicable law;
(2) Commodities Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;
(3) (a)
Industry Concentration (All Funds except Health Sciences, Financial
Services, and Real Estate Funds) Purchase the securities of any issuer
if, as a result, more than 25% of the value of the fund's total assets
would be invested in the securities of issuers having their principal
business activities in the same industry;
(b)
Industry Concentration (Health Sciences, Financial Services, and Real
Estate Funds) Purchase the securities of any issuer if, as a result, more
than 25% of the value of the fund's total assets would be invested in the
securities of issuers having their principal business activities in the
same industry; provided, however, that (i) the Health Sciences Fund will
invest more than 25% of its total assets in the health sciences industry
as defined in the fund's prospectus; (ii) the Financial Services Fund
will invest more than 25% of its total assets in the financial services
industry as defined in the fund's prospectus; (iii) the Real Estate Fund
will invest more than 25% of its total assets in the real estate industry
as defined in the fund's prospectus.
<PAGE>
(4) Loans Make loans, although the fund may (i) lend portfolio securities and
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly distributed or privately placed
debt securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of its total assets,
more than 5% of the value of the fund's total assets would be invested in
the securities of a single issuer, except securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of the fund's total
assets, more than 10% of the outstanding voting securities of any issuer
would be held by the fund (other than obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities);
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act; or
(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the fund may be deemed to be an underwriter within the
meaning of the 1933 Act 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 restriction (2), the fund does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state, or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.
For purposes of investment restriction (4), the fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.
Operating Policies
As a matter of operating policy, the fund may not:
(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the fund's net asset value;
(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% of its net assets would be invested in such securities;
<PAGE>
(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; or (ii)
securities of the Reserve Investment or Government Reserve Investment
Funds;
(6) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging, or hypothecating may not exceed
33/1//\\/3/\\% of the fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the fund would be invested in such
programs;
(9) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(10) Short Sales Effect short sales of securities; or
(11) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the fund would be invested in warrants.
For Blue Chip Growth, Capital Opportunity, Developing Technologies,
Diversified Small-Cap Growth, Financial Services, Global Technology, Health
Sciences, Media & Telecommunications, Mid-Cap Value, Real Estate, and Value
Funds:
Notwithstanding anything in the above fundamental and operating restrictions
to the contrary, the fund may invest all of its assets in a single investment
company or a series thereof in connection with a "master-feeder" arrangement.
Such an investment would be made where the fund (a "Feeder"), and one or more
other funds with the same investment objective and program as the fund,
sought to accomplish its investment objective and program by investing all of
its assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as the
fund. The fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
MANAGEMENT OF THE FUNDS
-------------------------------------------------------------------------------
The officers and directors/trustees of the fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the fund's
directors/trustees who are considered "interested persons" of T. Rowe Price
as defined under Section 2(a)(19) of the 1940 Act are noted with an asterisk
(*). These directors/trustees are referred to as inside directors by virtue
of their officership, directorship, and/or employment with T. Rowe Price.
All Funds
Independent Directors/Trustees/(a)/
DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm; formerly (5/89-6/95) Principal,
Overseas Partners, Inc., a financial investment firm; formerly (6/65-3/89)
Director and Vice President, Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc., Baltimore,
Maryland; Address: P.O.Box 491, Chilmark, Massachusetts 02535
<PAGE>
DAVID K. FAGIN, 4/9/38, Director, Western Exploration and Development, Ltd.
(7/97 to present); Director (5/92 to present); Director, Dayton Mining
Corporation (6/98 to present); Nye Corporation (Chairman and President) (6/88
to present); Nescor Corporation (6/94 to present); Director of Canyon
Resources, Corp.; formerly: Chairman (5/92 to 12/97) and Chief Executive
Officer (5/92 to 5/96) of Golden Star Resources Ltd.; formerly: President,
Chief Operating Officer, and Director, Homestake Mining Company (5/86 to
7/91); Address: 1700 Lincoln Street, Suite 4710, Denver, Colorado 80203
HANNE M. MERRIMAN, 11/16/41, Retail Business Consultant; Director, Ann Taylor
Stores Corporation, Central Illinois Public Service Company, Ameren Corp.,
Finlay Enterprises, Inc., The Rouse Company, State Farm Mutual Automobile
Insurance Company and USAirways Group, Inc.; Address: 3201 New Mexico Avenue,
N.W., Suite 350, Washington, D.C. 20016
HUBERT D. VOS, 8/2/33, Owner/President, Stonington Capital Corporation, a
private investment company; Address: 1114 State Street, Suite 247, P.O. Box
90409, Santa Barbara, California 93190-0409
PAUL M. WYTHES, 6/23/33, Founding Partner of Sutter Hill Ventures, a venture
capital limited partnership, providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation and InterVentional Technologies Inc.; Address: 755 Page Mill
Road, Suite A200, Palo Alto, California 94304-1005
(a) Unless otherwise indicated, the Independent Directors/Trustees have been
at their respective companies for at least five years.
Officers
HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, T. Rowe Price
International and T. Rowe Price Retirement Plan Services, Inc.; Director and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price
Trust Company
PATRICIA B. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
JOSEPH A. CARRIER, 12/30/60, Treasurer-Vice President, T. Rowe Price and T.
Rowe Price Investment Services, Inc.
DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
J. JEFFREY LANG, 1/10/62, Assistant Vice President-Assistant Vice President,
T. Rowe Price; Vice President, T. Rowe Price Trust Company
INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price
Balanced Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President-Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director and Vice President-Director, T. Rowe
Price International; Vice Chairman of the Board, Chief Investment Officer,
and Managing Director, T. Rowe Price; Vice President and Director, T. Rowe
Price Trust Company; Chartered Financial Analyst
RICHARD T. WHITNEY, 5/7/58, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price International and T. Rowe Price Trust Company;
Chartered Financial Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
<PAGE>
ANDREW M. BROOKS, 2/16/56, Vice President-Vice President, T. Rowe Price
RAYMOND A. MILLS, PHD, 12/3/60, Vice President-Assistant Vice President, T.
Rowe Price; formerly Principal Systems Engineer at TASC, Inc.
EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
DONALD J. PETERS, 7/3/59, Vice President-Vice President
MARK J. VASELKIV, 7/22/58, Vice President-Managing Director and Vice
President, T. Rowe Price
Blue Chip Growth Fund
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
LARRY J. PUGLIA, 8/25/60, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
BRIAN W.H. BERGHUIS, 12/12/58, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
STEPHANIE C. CLANCY, 12/19/64, Vice President-Vice President, T. Rowe Price
ROBERT N. GENSLER, 10/18/57, Vice President-Vice President, T. Rowe Price
ERIC M. GERSTER, 3/23/71, Vice President-Employee, T. Rowe Price; formerly
Associate with J.P. Morgan
JILL L. HAUSER, 6/23/58, Vice President-Vice President, T. Rowe Price
STEPHEN C. JANSEN, 12/12/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Investment Analyst at Schroder & Co.
KRIS H. JENNER, M.D., 2/5/62, Vice President-Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
ROBERT W. SHARPS, 6/10/71, Vice President-Assistant Vice President, T. Rowe
Price; formerly Senior Consultant at KPMG Peat Marwick; Chartered Financial
Analyst
ROBERT W. SMITH, 4/11/61, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International
WILLIAM J. STROMBERG, 3/10/60, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
Capital Appreciation Fund
* JAMES A.C. KENNEDY, 8/17/53, Trustee-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Trustee and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
<PAGE>
* M. DAVID TESTA, 4/22/44, Trustee and Vice President-Director, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
RICHARD P. HOWARD, 9/16/46, President-Vice President, T. Rowe Price;
Chartered Financial Analyst
ARTHUR B. CECIL III, 9/15/42, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, 12/19/64, Vice President-Vice President, T. Rowe Price
CHARLES A. MORRIS, 1/3/63, Vice President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
CHARLES M. OBER, 4/20/50, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, Vice President-Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
DAVID J. WALLACK, 7/2/60, Vice President-Vice President, T. Rowe Price
Capital Opportunity Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
WILLIAM J. STROMBERG, 3/10/60, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
ROBYN M. BRENZA, 6/18/74, Vice President-Employee, T. Rowe Price; formerly
Intern with Allegheny Financial Group
DAVID C. MEYER, 4/14/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Trader for the Teacher Retirement System of Texas
JOHN F. WAKEMAN, 11/25/62, Vice President-Vice President, T. Rowe Price
RICHARD T. WHITNEY, 5/7/58, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International and T. Rowe Price Trust Company;
Chartered Financial Analyst
Developing Technologies Fund
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES A. MORRIS, 1/3/63, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
MICHAEL F. SOLA, 7/21/69, Vice President-Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst
<PAGE>
Diversified Small-Cap Growth Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director and Vice President-Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
RICHARD T. WHITNEY, 5/7/58, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price International and T. Rowe Price Trust Company;
Chartered Financial Analyst
PAUL J. WOJCIK, 11/28/70, Executive Vice President-Assistant Vice President,
T. Rowe Price; formerly Senior Programmer/Analyst at Fidelity Investments;
Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President-Vice President, T. Rowe Price;
formerly Financial Analyst at Rausher Pierce Refsnes; Chartered Financial
Analyst
KRISTEN F. CULP, 9/28/62, Vice President-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
DONALD J. PETERS, 7/3/59, Vice President-Vice President, T. Rowe Price
Dividend Growth Fund
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
WILLIAM J. STROMBERG, 3/10/60, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
THOMAS J. HUBER, 9/23/66, Executive Vice President-Vice President, T. Rowe
Price; formerly Corporate Banking Officer with NationsBank; Chartered
Financial Analyst
ARTHUR B. CECIL III, 9/15/42, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, 12/19/64, Vice President-Vice President, T. Rowe Price
GIRI DEVULAPALLY, 11/18/67, Vice President-Employee, T. Rowe Price; formerly
Senior Consultant with Anderson Consulting
MICHAEL W. HOLTON, 9/25/68, Vice President-Vice President, T. Rowe Price;
formerly Research Analyst at Bowles, Hollowell, Conner and Company; Chartered
Financial Analyst
STEPHEN C. JANSEN, 12/12/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Investment Analyst at Schroder & Co.
DAVID M. LEE, 11/13/62, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst; formerly Marketing Representative at IBM
DONALD J. PETERS, 7/3/59, Vice President-Vice President, T. Rowe Price
<PAGE>
LARRY J. PUGLIA, 8/25/60, Vice President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
DAVID J. WALLACK, 7/2/60, Vice President-Vice President, T. Rowe Price
Equity Income Fund
* JAMES A.C. KENNEDY, 8/17/53, Trustee-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Trustee and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Trustee-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, President-Director and Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
ANDREW M. BROOKS, 2/16/56, Vice President-Vice President, T. Rowe Price
ARTHUR B. CECIL III, 9/15/42, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
GIRI DEVULAPALLY, 11/18/67, Vice President-Employee, T. Rowe Price; formerly
Senior Consultant with Anderson Consulting
RICHARD P. HOWARD, 9/16/46, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
JOHN D. LINEHAN, 1/21/65, Vice President-Employee, T. Rowe Price; formerly
Vice President at E.T. Petroleum and Delaney Petroleum
WILLIAM J. STROMBERG, 3/10/60, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
Financial Services Fund
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
LARRY J. PUGLIA, 8/25/60, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
ANNA M. DOPKIN, 9/5/67, Executive Vice President-Assistant Vice President, T.
Rowe Price; formerly Analyst at Goldman Sachs; Chartered Financial Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
SUSAN J. KLEIN, 4/18/50, Vice President-Employee, T. Rowe Price
ROBERT W. SHARPS, 6/10/71, Vice President-Assistant Vice President, T. Rowe
Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
Analyst
<PAGE>
WILLIAM J. STROMBERG, 3/10/60, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
Global Technology Fund
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES A. MORRIS, 1/3/63, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
Growth & Income Fund
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
STEPHEN W. BOESEL, 12/28/44, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
ROBERT W. SHARPS, 6/10/71, Executive Vice President-Assistant Vice President,
T. Rowe Price; formerly Senior Consultant with KPMG Peat Marwick; Chartered
Financial Analyst
ARTHUR B. CECIL III, 9/15/42, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
GIRI DEVULAPALLY, 11/18/67, Vice President-Employee, T. Rowe Price; formerly
Senior Consultant with Anderson Consulting
MICHAEL W. HOLTON, 9/25/68, Vice President-Vice President, T. Rowe Price;
formerly Research Analyst at Bowles, Hollowell, Conner and Company; Chartered
Financial Analyst
STEPHEN C. JANSEN, 12/12/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Investment Analyst at Schroder & Co.
DAVID C. MEYER, 4/14/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Trader for the Teacher Retirement System of Texas
ROBERT W. SMITH, 4/11/61, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International
R. CANDLER YOUNG, 9/28/71, Vice President-Employee, T. Rowe Price; formerly
Equity Research Analyst at Donaldson, Lufkin & Jenrette
Growth Stock Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President-Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan
<PAGE>
Services, Inc., and T. Rowe Price Services, Inc.; Chairman of the Board,
President, and Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe
Price International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
ROBERT W. SMITH, 4/11/61, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price International
BRIAN W.H. BERGHUIS, 12/12/58, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
ANNA M. DOPKIN, 9/5/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Analyst at Goldman Sachs; Chartered Financial Analyst
ROBERT N. GENSLER, 10/18/57, Vice President-Vice President, T. Rowe Price
ERIC M. GERSTER, 3/23/71, Vice President-Employee, T. Rowe Price; formerly
Associate with J.P. Morgan
JILL L. HAUSER, 6/23/58, Vice President-Vice President, T. Rowe Price
STEPHEN C. JANSEN, 12/12/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Investment Analyst at Schroder & Co.
KRIS H. JENNER, M.D., 2/5/62, Vice President-Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
CHARLES A. MORRIS, 1/3/63, Vice President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
THOMAS O. MURTHA, 7/29/53, Vice President-Vice President, T. Rowe Price and
T. Rowe Price International
D. JAMES PREY III, 11/26/59, Vice President-Vice President, T. Rowe Price
LARRY J. PUGLIA, 8/25/60, Vice President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
CAROL G. BARTHA, 1/4/42, Assistant Vice President-Employee, T. Rowe Price
Health Sciences Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director and President-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
KRIS H. JENNER, M.D., 2/5/62, Executive Vice President-Vice President, T.
Rowe Price; formerly with the Laboratory of Biological Cancer, The Brigham &
Women's Hospital, Harvard Medical School
CHRISTOPHER R. LEONARD, 1/11/73, Vice President-Employee, T. Rowe Price;
formerly Research Associate with Morgan Stanley Dean Witter
CHARLES G. PEPIN, 4/23/66, Vice President-Vice President, T. Rowe Price
D. JAMES PREY III, 11/26/59, Vice President-Vice President, T. Rowe Price
DARRELL M. RILEY, 2/18/58, Vice President-Vice President, T. Rowe Price
<PAGE>
CHRISTINA T. WILLIAMS, 12/14/71, Vice President-Employee, T. Rowe Price;
formerly Health Care Investment Banking Associate with S.G. Cowen Securities
Corporation
Index Trust
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
RICHARD T. WHITNEY, 5/7/58, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price International and T. Rowe Price Trust Company;
Chartered Financial Analyst
KRISTEN F. CULP, 9/28/62, Executive Vice President-Vice President, T. Rowe
Price and T. Rowe Price Trust Company
STEPHANIE C. CLANCY, 12/19/64, Vice President-Vice President, T. Rowe Price
WENDY R. DIFFENBAUGH, 10/2/53, Vice President-Assistant Vice President, T.
Rowe Price
RAYMOND A. MILLS, PHD, 12/3/60, Vice President-Assistant Vice President, T.
Rowe Price; formerly Principal Systems Engineer at TASC, Inc.
M. CHRISTINE MUNOZ, 12/2/62, Vice President-Assistant Vice President, T. Rowe
Price
Institutional Equity Funds
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President-Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Chairman of the Board-Vice Chairman of the Board
and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and
T. Rowe Price Services, Inc.; Chairman of the Board, President, and Trust
Officer, T. Rowe Price Trust Company; Director, T. Rowe Price International
and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director and President-Director, T. Rowe Price
International; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
BRIAN W.H. BERGHUIS, 12/12/58, Executive Vice President-Managing Director, T.
Rowe Price; Chartered Financial Analyst
GREGORY A. MCCRICKARD, 10/19/58, Executive Vice President-Managing Director,
T. Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered
Financial Analyst
BRIAN C. ROGERS, 6/27/55, Executive Vice President-Director and Managing
Director, T. Rowe Price; Vice President, T. Rowe Price Trust Company;
Chartered Financial Analyst
PRESTON G. ATHEY, 7/17/49, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President-Vice President, T. Rowe Price;
formerly Financial Analyst at Rausher Pierce Refsnes; Chartered Financial
Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
<PAGE>
KARA M. CHESEBY, 10/9/63, Vice President-Vice President, T. Rowe Price;
formerly Vice President at Legg Mason Wood Walker; Chartered Financial
Analysis
STEPHANIE C. CLANCY, 12/19/64, Vice President-Vice President, T. Rowe Price
ANNA M. DOPKIN, 9/5/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Analyst at Goldman Sachs; Chartered Financial Analyst
HUGH M. EVANS III, 5/17/66, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. HACKETT, 8/5/59, Vice President-Vice President, T. Rowe Price
ROBERT N. GENSLER, 10/18/57, Vice President-Vice President, T. Rowe Price
MICHAEL W. HOLTON, 9/25/68, Vice President-Vice President, T. Rowe Price;
formerly Research Analyst at Bowles, Hollowell, Conner and Company; Chartered
Financial Analyst
RICHARD P. HOWARD, 9/16/46, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
THOMAS J. HUBER, 9/23/66, Vice President-Vice President, T. Rowe Price;
formerly Corporate Banking Officer with NationsBank; Chartered Financial
Analyst
KRIS H. JENNER, M.D., 2/5/62, Vice President-Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
ROBERT J. MARCOTTE, 3/6/62, Vice President-Vice President, T. Rowe Price
JOSEPH M. MILANO, 9/14/72, Vice President-Assistant Vice President, T. Rowe
Price; formerly Research Assistant with Brookings Institution
CHARLES G. PEPIN, 4/23/66, Vice President-Vice President, T. Rowe Price
ROBERT W. SHARPS, 6/10/71, Vice President-Assistant Vice President, T. Rowe
Price; formerly Senior Consultant at KPMG Peat Marwick; Chartered Financial
Analyst
MICHAEL F. SOLA, 7/21/69, Vice President-Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst
JOHN F. WAKEMAN, 11/25/62, Vice President-Vice President, T. Rowe Price
DAVID J. WALLACK, 7/2/60, Vice President-Vice President, T. Rowe Price
RICHARD T. WHITNEY, 5/7/58, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International and T. Rowe Price Trust Company;
Chartered Financial Analyst
Media & Telecommunications Fund
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
ROBERT N. GENSLER, 10/18/57, President-Vice President, T. Rowe Price
ARCHANA BASI, 3/11/73, Vice President-Assistant Vice President, T. Rowe
Price; formerly Analyst with Andersen Consulting
GIRI DEVULAPALLY, 11/18/67, Vice President-Employee, T. Rowe Price; formerly
Senior Consultant with Anderson Consulting
<PAGE>
STEPHEN C. JANSEN, 12/12/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Investment Analyst at Schroder & Co.
TERRAL M. JORDAN, 8/13/45, Vice President-Vice President, T. Rowe Price
D. JAMES PREY III, 11/26/59, Vice President-Vice President, T. Rowe Price
ROBERT W. SMITH, 4/11/61, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International
Mid-Cap Growth Fund
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
JOHN H. LAPORTE, JR., 7/26/45, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
BRIAN W.H. BERGHUIS, 12/12/58, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, 11/25/62, Executive Vice President-Vice President, T. Rowe
Price
MARC L. BAYLIN, 11/17/67, Vice President-Vice President, T. Rowe Price;
formerly Financial Analyst at Rausher Pierce Refsnes; Chartered Financial
Analyst
ANNA M. DOPKIN, 9/5/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Analyst at Goldman Sachs; Chartered Financial Analyst
ROBERT N. GENSLER, 10/18/57, Vice President-Vice President, T. Rowe Price
ERIC M. GERSTER, 3/23/71, Vice President-Employee, T. Rowe Price; formerly
Associate with J.P. Morgan
KRIS H. JENNER, M.D., 2/5/62, Vice President-Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
ROBERT J. MARCOTTE, 3/6/62, Vice President-Vice President, T. Rowe Price
JOSEPH M. MILANO, 9/14/72, Vice President-Assistant Vice President, T. Rowe
Price; formerly Research Assistant with Brookings Institution
MICHAEL F. SOLA, 7/21/69, Vice President-Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst
R. CANDLER YOUNG, 9/28/71, Vice President-Employee, T. Rowe Price; formerly
Equity Research Analyst at Donaldson, Lufkin & Jenrette
Mid-Cap Value Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President-Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
<PAGE>
GREGORY A. MCCRICKARD, 10/19/58, President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
PRESTON G. ATHEY, 7/17/49, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
KARA M. CHESEBY, 10/9/63, Vice President-Vice President, T. Rowe Price;
formerly Vice President at Legg Mason Wood Walker; Chartered Financial
Analysis
GIRI DEVULAPALLY, 11/18/67, Vice President-Employee, T. Rowe Price; formerly
Senior Consultant with Anderson Consulting
HUGH M. EVANS III, 5/17/66, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. HACKETT, 8/5/59, Vice President-Vice President, T. Rowe Price
JOSEPH M. MILANO, 9/14/72, Vice President-Assistant Vice President, T. Rowe
Price; formerly Research Assistant with Brookings Institution
DAVID J. WALLACK, 7/2/60, Vice President-Vice President, T. Rowe Price
New America Growth Fund
* JOHN H. LAPORTE, JR., 7/26/45, Trustee and President-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Trustee and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Trustee-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Executive Vice President-Vice President, T. Rowe
Price; formerly Financial Analyst at Rausher Pierce Refsnes; Chartered
Financial Analyst
BRIAN W.H. BERGHUIS, 12/12/58, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
GIRI DEVULAPALLY, 11/18/67, Vice President-Employee, T. Rowe Price; formerly
Senior Consultant with Anderson Consulting
ROBERT N. GENSLER, 10/18/57, Vice President-Vice President, T. Rowe Price
ERIC M. GERSTER, 3/23/71, Vice President-Employee, T. Rowe Price; formerly
Associate with J.P. Morgan
MARK R. SCHLARBAUM, 12/23/69, Vice President-Vice President, T. Rowe Price
ROBERT W. SMITH, 4/11/61, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International
R. CANDLER YOUNG, 9/28/71, Vice President-Employee, T. Rowe Price; formerly
Equity Research Analyst at Donaldson, Lufkin & Jenrette
New Era Fund
JAMES A.C. KENNEDY, 8/17/53, Director and Vice President-Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan
<PAGE>
Services, Inc., and T. Rowe Price Services, Inc.; Chairman of the Board,
President, and Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe
Price International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES M. OBER, 4/20/50, President-Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID J. WALLACK, 7/2/60, Executive Vice President-Vice President, T. Rowe
Price
HUGH M. EVANS III, 5/17/66, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
RICHARD P. HOWARD, 9/16/46, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
DAVID M. LEE, 11/13/62, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst; formerly Marketing Representative at IBM
JOHN D. LINEHAN, 1/21/65, Vice President-Employee, T. Rowe Price; formerly
Vice President at E.T. Petroleum and Delaney Petroleum; Associate at Bankers
Trust
DAVID C. MEYER, 4/14/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Trader for the Teacher Retirement System of Texas
GEORGE A. ROCHE, 7/6/41, Vice President-President, Director, Chairman of the
Board, and Managing Director, T. Rowe Price; Director, T. Rowe Price
International and T. Rowe Price Retirement Plan Services, Inc.
New Horizons Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director and President-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
MARC L. BAYLIN, 11/17/67, Vice President-Vice President, T. Rowe Price;
formerly Financial Analyst at Rausher Pierce Refsnes; Chartered Financial
Analyst
BRIAN W.H. BERGHUIS, 12/12/58, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
ANNA M. DOPKIN, 9/5/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Analyst at Goldman Sachs; Chartered Financial Analyst
ROBERT N. GENSLER, 10/18/57, Vice President-Vice President, T. Rowe Price
ERIC M. GERSTER, 3/23/71, Vice President-Employee, T. Rowe Price; formerly
Associate with J.P. Morgan
JILL L. HAUSER, 6/23/58, Vice President-Vice President, T. Rowe Price
KRIS H. JENNER, M.D., 2/5/62, Vice President-Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
ETHAN MCAFEE, 8/3/76, Vice President-Employee, T. Rowe Price; formerly
Financial Management Program Intern with General Electric
JOSEPH M. MILANO, 9/14/72, Vice President-Assistant Vice President, T. Rowe
Price; formerly Research Assistant with Brookings Institution
<PAGE>
CHARLES A. MORRIS, 1/3/63, Vice President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
CHARLES G. PEPIN, 4/23/66, Vice President-Vice President, T. Rowe Price
PHILIP W. RUEDI, 7/2/71, Vice President-Employee, T. Rowe Price; formerly
Investment Banking Analyst with John Nuveen and Co.
MARK R. SCHLARBAUM, 12/23/69, Vice President-Vice President, T. Rowe Price
MICHAEL F. SOLA, 7/21/69, Vice President-Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst
JOHN F. WAKEMAN, 11/25/62, Vice President-Vice President, T. Rowe Price
CHRISTINA T. WILLIAMS, 12/14/71, Vice President-Employee, T. Rowe Price;
formerly Health Care Investment Banking Associate with S.G. Cowen Securities
Corporation
FRANCIES W. HAWKS, 2/2/44, Assistant Vice President-Assistant Vice President,
T. Rowe Price
Real Estate Fund
* JAMES A.C. KENNEDY, 8/17/53, Director and Vice President-Director and
Managing Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
DAVID M. LEE, 11/13/62, President-Vice President, T. Rowe Price; Chartered
Financial Analyst; formerly Marketing Representative at IBM
STEPHEN W. BOESEL, 12/28/44, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
ANNA M. DOPKIN, 9/5/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Analyst at Goldman Sachs; Chartered Financial Analyst
DAVID C. MEYER, 4/14/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Trader for the Teacher Retirement System of Texas
CHARLES M. OBER, 4/20/50, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, Vice President-Director and Managing Director, T.
Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
WILLIAM J. STROMBERG, 3/10/60, Vice President-Managing Director, T. Rowe
Price; Chartered Financial Analyst
Science & Technology Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
<PAGE>
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES A. MORRIS, 1/3/63, President-Managing Director, T. Rowe Price;
Chartered Financial Analyst
MICHAEL F. SOLA, 7/21/69, Executive Vice President-Vice President, T. Rowe
Price; formerly Systems Analyst/Programmer at SRA Corporation; Chartered
Financial Analyst
GIRI DEVULAPALLY, 11/18/67, Vice President-Employee, T. Rowe Price; formerly
Senior Consultant with Anderson Consulting
ROBERT N. GENSLER, 10/18/57, Vice President-Vice President, T. Rowe Price
ERIC M. GERSTER, 3/23/71, Vice President-Employee, T. Rowe Price; formerly
Associate with J.P. Morgan
JILL L. HAUSER, 6/23/58, Vice President-Vice President, T. Rowe Price
STEPHEN C. JANSEN, 12/12/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Investment Analyst at Schroder & Co.
TERRAL M. JORDAN, 8/13/45, Vice President-Vice President, T. Rowe Price
ETHAN MCAFEE, 8/3/76, Vice President-Employee, T. Rowe Price; formerly
Financial Management Program Intern with General Electric
DAVID C. MEYER, 4/14/67, Vice President-Assistant Vice President, T. Rowe
Price; formerly Trader for the Teacher Retirement System of Texas
D. JAMES PREY III, 11/26/59, Vice President-Vice President, T. Rowe Price
Small-Cap Stock Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
GREGORY A. MCCRICKARD, 10/19/58, President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
PRESTON G. ATHEY, 7/17/49, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
HUGH M. EVANS III, 5/17/66, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. HACKETT, 8/5/59, Vice President-Vice President, T. Rowe Price
KRIS H. JENNER, M.D., 2/5/62, Vice President-Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School
JAMES A.C. KENNEDY, 8/17/53, Vice President-Director and Managing Director,
T. Rowe Price; Chartered Financial Analyst
JOSEPH M. MILANO, 9/14/72, Vice President-Assistant Vice President, T. Rowe
Price; formerly Research Assistant with Brookings Institution
CHARLES G. PEPIN, 4/23/66, Vice President-Vice President, T. Rowe Price
<PAGE>
MICHAEL F. SOLA, 7/21/69, Vice President-Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst
RICHARD T. WHITNEY, 5/7/58, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price International and T. Rowe Price Trust Company;
Chartered Financial Analyst
Small-Cap Value Fund
* JOHN H. LAPORTE, JR., 7/26/45, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
PRESTON G. ATHEY, 7/17/49, President-Managing Director, T. Rowe Price; Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst
HUGH M. EVANS III, 5/17/66, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. HACKETT, 8/5/59, Vice President-Vice President, T. Rowe Price
SUSAN J. KLEIN, 4/18/50, Vice President-Employee, T. Rowe Price
GREGORY A. MCCRICKARD, 10/19/58, Vice President-Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
JOSEPH M. MILANO, 9/14/72, Vice President-Assistant Vice President, T. Rowe
Price; formerly Research Assistant with Brookings Institution
DAVID J. WALLACK, 7/2/60, Vice President-Vice President, T. Rowe Price
FRANCIES W. HAWKS, 2/2/44, Assistant Vice President-Assistant Vice President,
T. Rowe Price
Value Fund
* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
Price Investment Services, Inc., T. Rowe Price Retirement Plan Services,
Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, President, and
Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price
International and General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Director, T. Rowe Price International;
Vice Chairman of the Board, Chief Investment Officer, and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, 6/27/55, President-Director and Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
Analyst
STEPHEN W. BOESEL, 12/28/44, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
KARA M. CHESEBY, 10/9/63, Vice President-Vice President, T. Rowe Price;
formerly Vice President at Legg Mason Wood Walker; Chartered Financial
Analysis
STEPHANIE C. CLANCY, 12/19/64, Vice President-Vice President, T. Rowe Price
<PAGE>
DAVID R. GIROUX, 6/8/75, Vice President-Employee, T. Rowe Price; formerly
Commercial Credit Analyst with Hillsdale National Bank
MICHAEL W. HOLTON, 9/25/68, Vice President-Vice President, T. Rowe Price;
formerly Research Analyst at Bowles, Hollowell, Conner and Company; Chartered
Financial Analyst
RICHARD P. HOWARD, 9/16/46, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
DAVID J. WALLACK, 7/2/60, Vice President-Vice President, T. Rowe Price
Compensation Table
The funds do not pay pension or retirement benefits to their independent
officers or directors/trustees. Also, any director/trustee of a fund who is
an officer or employee of T. Rowe Price or T. Rowe Price International does
not receive any remuneration from the fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Total Compensation from Fund and
Position Fund(a) Fund Complex Paid to Directors/
-------------------------------- -------------------------------------------- Trustees(b)
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------
<C> <S> <S>
Balanced Fund
Donald W. Dick, Jr., Director $1,535 $82,000
David K. Fagin, Director 1,990 65,000
Hanne M. Merriman, Director 1,990 65,000
Hubert D. Vos, Director 1,990 66,000
Paul M. Wythes, Director 1,535 80,000
------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund
Donald W. Dick, Jr., Director $2,512 $82,000
David K. Fagin, Director 3,733 65,000
Hanne M. Merriman, Director 3,733 65,000
Hubert D. Vos, Director 3,733 66,000
Paul M. Wythes, Director 2,512 80,000
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund
Donald W. Dick, Jr., Director $1,264 $82,000
David K. Fagin, Director 1,507 65,000
Hanne M. Merriman, Director 1,507 65,000
Hubert D. Vos, Director 1,507 66,000
Paul M. Wythes, Director 1,264 80,000
------------------------------------------------------------------------------------------------------------------------------------
Capital Opportunity Fund
Donald W. Dick, Jr., Director $1,028 $82,000
David K. Fagin, Director 1,083 65,000
Hanne M. Merriman, Director 1,083 65,000
Hubert D. Vos, Director 1,083 66,000
Paul M. Wythes, Director 1,028 80,000
------------------------------------------------------------------------------------------------------------------------------------
Developing Technologies Fund(c)
Donald W. Dick, Jr., Director $426 $80,000
David K. Fagin, Director 346 65,000
Hanne M. Merriman, Director 346 65,000
Hubert D. Vos, Director 346 65,000
Paul M. Wythes, Director 426 80,000
------------------------------------------------------------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund
Donald W. Dick, Jr., Director $1,013 $82,000
David K. Fagin, Director 1,056 65,000
Hanne M. Merriman, Director 1,056 65,000
Hubert D. Vos, Director 1,056 66,000
Paul M. Wythes, Director 1,013 80,000
------------------------------------------------------------------------------------------------------------------------------------
Dividend Growth Fund
Donald W. Dick, Jr., Director $1,357 $82,000
David K. Fagin, Director 1,670 65,000
Hanne M. Merriman, Director 1,670 65,000
Hubert D. Vos, Director 1,670 66,000
Paul M. Wythes, Director 1,357 80,000
------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund
Donald W. Dick, Jr., Trustee $4,784 $82,000
David K. Fagin, Trustee 7,788 65,000
Hanne M. Merriman, Trustee 7,788 65,000
Hubert D. Vos, Trustee 7,788 66,000
Paul M. Wythes, Trustee 4,784 80,000
------------------------------------------------------------------------------------------------------------------------------------
Equity Index 500 Fund
Donald W. Dick, Jr., Director $1,808 $82,000
David K. Fagin, Director 3,371 65,000
Hanne M. Merriman, Director 3,371 65,000
Hubert D. Vos, Director 3,371 66,000
Paul M. Wythes, Director 1,807 80,000
------------------------------------------------------------------------------------------------------------------------------------
Extended Equity Market Index Fund
Donald W. Dick, Jr., Director $1,007 $82,000
David K. Fagin, Director 1,043 65,000
Hanne M. Merriman, Director 1,043 65,000
Hubert D. Vos, Director 1,043 66,000
Paul M. Wythes, Director 1,007 80,000
------------------------------------------------------------------------------------------------------------------------------------
Financial Services Fund
Donald W. Dick, Jr., Director -- $82,000
David K. Fagin, Director $1,087 65,000
Hanne M. Merriman, Director 1,087 65,000
Hubert D. Vos, Director 1,087 66,000
Paul M. Wythes, Director -- 80,000
------------------------------------------------------------------------------------------------------------------------------------
Global Technology Fund(c)
Donald W. Dick, Jr., Director $426 $80,000
David K. Fagin, Director 346 65,000
Hanne M. Merriman, Director 346 65,000
Hubert D. Vos, Director 346 65,000
Paul M. Wythes, Director 426 80,000
------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund
Donald W. Dick, Jr., Director $2,021 $82,000
David K. Fagin, Director 2,861 65,000
Hanne M. Merriman, Director 2,861 65,000
Hubert D. Vos, Director 2,861 66,000
Paul M. Wythes, Director 2,021 80,000
------------------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund
Donald W. Dick, Jr., Director $2,435 $82,000
David K. Fagin, Director 3,563 65,000
Hanne M. Merriman, Director 3,563 65,000
Hubert D. Vos, Director 3,563 66,000
Paul M. Wythes, Director 2,435 80,000
------------------------------------------------------------------------------------------------------------------------------------
Health Sciences Fund
Donald W. Dick, Jr., Director $1,076 $82,000
David K. Fagin, Director 1,171 65,000
Hanne M. Merriman, Director 1,171 65,000
Hubert D. Vos, Director 1,171 66,000
Paul M. Wythes, Director 1,076 80,000
------------------------------------------------------------------------------------------------------------------------------------
Institutional Mid-Cap Equity Growth Fund
Donald W. Dick, Jr., Director $1,053 $82,000
David K. Fagin, Director 1,128 65,000
Hanne M. Merriman, Director 1,128 65,000
Hubert D. Vos, Director 1,128 66,000
Paul M. Wythes, Director 1,053 80,000
------------------------------------------------------------------------------------------------------------------------------------
Media & Telecommunications Fund
Donald W. Dick, Jr., Director $1,045 $82,000
David K. Fagin, Director 1,044 65,000
Hanne M. Merriman, Director 1,044 65,000
Hubert D. Vos, Director 1,044 66,000
Paul M. Wythes, Director 1,045 80,000
------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund
Donald W. Dick, Jr., Director $2,106 $82,000
David K. Fagin, Director 1,098 65,000
Hanne M. Merriman, Director 1,098 65,000
Hubert D. Vos, Director 1,098 66,000
Paul M. Wythes, Director 2,106 80,000
------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Value Fund
Donald W. Dick, Jr., Director $1,053 $82,000
David K. Fagin, Director 1,130 65,000
Hanne M. Merriman, Director 1,130 65,000
Hubert D. Vos, Director 1,130 66,000
Paul M. Wythes, Director 1,053 80,000
------------------------------------------------------------------------------------------------------------------------------------
New America Growth Fund
Donald W. Dick, Jr., Trustee $1,565 $82,000
David K. Fagin, Trustee 2,048 65,000
Hanne M. Merriman, Trustee 2,048 65,000
Hubert D. Vos, Trustee 2,046 66,000
Paul M. Wythes, Trustee 1,565 80,000
------------------------------------------------------------------------------------------------------------------------------------
New Era Fund
Donald W. Dick, Jr., Director $1,299 $82,000
David K. Fagin, Director 1,566 65,000
Hanne M. Merriman, Director 1,566 65,000
Hubert D. Vos, Director 1,566 66,000
Paul M. Wythes, Director 1,299 80,000
------------------------------------------------------------------------------------------------------------------------------------
New Horizons Fund
Donald W. Dick, Jr., Director $2,375 $82,000
David K. Fagin, Director 3,487 65,000
Hanne M. Merriman, Director 3,487 65,000
Hubert D. Vos, Director 3,487 66,000
Paul M. Wythes, Director 2,375 80,000
------------------------------------------------------------------------------------------------------------------------------------
Real Estate Fund
Donald W. Dick, Jr., Director $1,008 $82,000
David K. Fagin, Director 1,040 65,000
Hanne M. Merriman, Director 1,040 65,000
Hubert D. Vos, Director 1,040 66,000
Paul M. Wythes, Director 1,008 80,000
------------------------------------------------------------------------------------------------------------------------------------
Science & Technology Fund
Donald W. Dick, Jr., Director $2,826 $82,000
David K. Fagin, Director 4,288 65,000
Hanne M. Merriman, Director 4,288 65,000
Hubert D. Vos, Director 4,288 66,000
Paul M. Wythes, Director 2,826 80,000
------------------------------------------------------------------------------------------------------------------------------------
Small-Cap Stock Fund
Donald W. Dick, Jr., Director $1,357 $82,000
David K. Fagin, Director 1,673 65,000
Hanne M. Merriman, Director 1,673 65,000
Hubert D. Vos, Director 1,673 66,000
Paul M. Wythes, Director 1,357 80,000
------------------------------------------------------------------------------------------------------------------------------------
Small-Cap Value Fund
Donald W. Dick, Jr., Director $1,392 $82,000
David K. Fagin, Director 1,740 65,000
Hanne M. Merriman, Director 1,740 65,000
Hubert D. Vos, Director 1,740 66,000
Paul M. Wythes, Director 1,392 80,000
------------------------------------------------------------------------------------------------------------------------------------
Total Equity Market Index Fund
Donald W. Dick, Jr., Director $1,029 $82,000
David K. Fagin, Director 1,086 65,000
Hanne M. Merriman, Director 1,086 65,000
Hubert D. Vos, Director 1,086 66,000
Paul M. Wythes, Director 1,029 80,000
------------------------------------------------------------------------------------------------------------------------------------
Value Fund
Donald W. Dick, Jr., Director $1,235 $82,000
David K. Fagin, Director 1,454 65,000
Hanne M. Merriman, Director 1,454 65,000
Hubert D. Vos, Director 1,454 66,000
Paul M. Wythes, Director 1,235 80,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
(a) Amounts in this column are based on accrued compensation for calendar
year 1999.
(b) Amounts in this column are based on compensation received from January
1, 1999, to December 31, 1999. The T. Rowe Price complex included 88 funds
as of December 31, 1999.
(c) Expenses estimated for the period September 30, 2000 to December 31,
2000.
All Funds
The fund's Executive Committee, consisting of the fund's interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the funds in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors/trustees of the
fund, as a group, owned less than 1% of the outstanding shares of the fund.
As of January 31, 2000, the following shareholders beneficially owned more
than 5% of the outstanding shares of the fund:
Institutional Mid-Cap Equity Growth Fund: Atlantic Trust Company NA, Nominee
Account, 100 Federal Street, 37th Floor, Boston, Massachusetts 02110-1802;
St. Joe Co. Salaried Pension Plan, 1650 Prudential Drive, Ste. 400,
Jacksonville, Florida 32207-8166; Pell Rudman Trust Co. NA, Nominee Acct.,
Attn.: Mutual Funds, 100 Federal St., 37th Fl., Boston, Massachusetts
02110-1802; Stichting Pensioenfonds, Van de Koninklijke Nedlloyd, P.O. Box
1982, 3000 BZ Rotterdam, The Netherlands; CIBC World Markets Agt. for CIBC,
Mellon Trust Co. Tr., Nexfor Master Investment Trust Funds, 161 Bay St., P.O.
Box 500, Toronto, Ontario Canada M5J2S8;
New America Growth Fund: Wilmington Trust Co. TR, FBO Continental Airlines
Inc., DCP Plan A/C #49277-0, c/o Mutual Funds, P.O. Box 8971, Wilmington,
Delaware 19899-8971;
New Horizons Fund: Allfirst Trust Co. NA Cust. FBO City of New York Deferred
Compensation Plan, c/o Great-West Recordkeeper, 8515 E. Orchard Rd., Ste.
2T2, Englewood, Colorado 80111-5037;
Small-Cap Stock Fund: Norwest Bank Co. NA TR, FBO State of Minn. Def. Comp.
Plan, Minn. State Def. Comp. Plan Trust, c/o Great West Life Recordkeeper,
8515 E. Orchard Rd., Attn.: 2T2, Englewood, Colorado 80111-5037;
<PAGE>
Blue Chip Growth, Growth & Income, Growth Stock, Mid-Cap Value, New Era, and
New Horizons Funds: Pirateline & Co., T. Rowe Price Associates, Attn.: Fund
Accounting Dept., 100 East Pratt Street, Baltimore, Maryland 21202-1009;
Capital Appreciation, Mid-Cap Growth, New Era, Science & Technology,
Small-Cap Stock, and Value Funds: Charles Schwab & Co. Inc., Reinvest.
Account, Attn.: Mutual Funds Dept., 101 Montgomery St., San Francisco,
California 94104-4122;
Growth & Income and Science & Technology Funds: Manulife Financial USA, 200
Bloor St. East 7E Floor, Toronto, Ontario Canada M4WIE5, Attn.: Rosie Chuck,
SRS Accounting.
Developing Technologies and Global Technology Funds
As of August 31, 2000, the fund's manager owned of record 100% of the issued
and outstanding capital shares of Developing Technologies and Global
Technology Funds, respectively, all of which were paid for, and issued to the
manager in connection with the organization of the funds. It is expected that
the manager will own, beneficially and of record, less than 25% of each
fund's outstanding capital shares in the near future. As a result, although
the manager may now control each fund, it is not expected that it will
continue to control the funds for a significant period of time.
As of August 31, 2000, no person other than the manager owned of record 5% or
more of either fund's outstanding capital shares.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, T. Rowe Price provides the fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the fund in accordance with
the fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services, T.
Rowe Price provide the fund with certain corporate administrative services,
including: maintaining the fund's corporate existence and corporate records;
registering and qualifying fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the fund; maintaining
liaison with the agents employed by the fund such as the fund's custodian and
transfer agent; assisting the fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors/trustees, and committee members of the fund without cost to the
fund.
The Management Agreement also provides that T. Rowe Price, its
directors/trustees, officers, employees, and certain other persons performing
specific functions for the fund will only be liable to the fund for losses
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
All Funds except Equity Index 500, Extended Equity Market Index, Total Equity
Market Index, and Institutional Mid-Cap Equity Growth Funds
Management Fee
The fund pays T. Rowe Price a fee ("Fee") which consists of two components: a
Group Management Fee ("Group Fee") and an Individual Fund Fee ("Fund Fee").
The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is calculated as described next.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group Fee
accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee
Accrual for any particular day is computed by multiplying the Price Funds'
group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Price Fund's net assets for that day to the sum
of the aggregate net assets of the Price Funds for that day. The Daily Price
Funds' Group Fee Accrual for any particular day is calculated by
<PAGE>
multiplying the fraction of one (1) over the number of calendar days in the
year by the annualized Daily Price Funds' Group Fee Accrual for that day as
determined in accordance with the following schedule:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
------------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
------------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Next $40 billion
------------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion 0.295% Thereafter
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
For the purpose of calculating the Group Fee, the Price Funds include all the
mutual funds distributed by Investment Services, (excluding the T. Rowe Price
Spectrum Funds, and any institutional, index, or private label mutual funds).
For the purpose of calculating the Daily Price Funds' Group Fee Accrual for
any particular day, the net assets of each Price Fund are determined in
accordance with the funds' prospectus as of the close of business on the
previous business day on which the fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee
accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate and multiplying this product by the net assets of the fund for that day,
as determined in accordance with the fund's prospectus as of the close of
business on the previous business day on which the fund was open for
business. The individual fund fees of each fund are listed in the following
chart:
<TABLE>
<CAPTION>
<S> <C>
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%
Capital Opportunity Fund 0.35%
Developing Technologies Fund 0.60%
Diversified Small-Cap Growth Fund 0.35%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
Financial Services Fund 0.35%
Global Technology Fund 0.45%
Growth & Income Fund 0.25%
Growth Stock Fund 0.25%
Health Sciences Fund 0.35%
Media & Telecommunications Fund 0.35%
Mid-Cap Growth Fund 0.35%
Mid-Cap Value Fund 0.35%
New America Growth Fund 0.35%
New Era Fund 0.25%
New Horizons Fund 0.35%
Real Estate Fund 0.30%
Small-Cap Stock Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
Value Fund 0.35%
</TABLE>
<PAGE>
The following chart sets forth the total management fees, if any, paid to T.
Rowe Price by each fund, during the last three years:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Balanced $ 9,154,000 $ 6,809,000 $ 5,317,000
Blue Chip Growth 34,536,000 19,869,000 8,706,000
Capital Appreciation 5,793,000 3,939,000 3,861,000
Capital Opportunity 763,000 991,000 899,000
Diversified Small-Cap Growth 292,000 325,000 81,000
Dividend Growth 6,522,000 5,482,000 2,659,000
Equity Income 75,676,000 77,394,000 60,406,000
Equity Index 500 8,301,000 4,169,000 2,516,000
Extended Equity Market Index* 131,000 50,000 (a)
Financial Services 1,266,000 1,582,000 636,000
Growth & Income 20,605,000 20,258,000 17,390,000
Growth Stock 29,222,000 25,573,000 22,078,000
Health Sciences 2,038,000 1,926,000 1,811,000
Institutional Mid-Cap Equity Growth 1,238,000 633,000 117,000
Media & Telecommunications 3,144,000 1,301,000 1,783,000
Mid-Cap Growth 27,412,000 16,692,000 8,533,000
Mid-Cap Value 1,427,000 1,596,000 728,000
New America Growth 13,511,000 12,703,000 10,541,000
New Era 6,131,000 7,211,000 9,144,000
New Horizons 33,020,000 33,743,000 31,439,000
Real Estate (b) (b) (b)
Science & Technology 47,361,000 24,865,000 24,246,000
Small-Cap Stock 10,276,000 7,791,000 4,405,000
Small-Cap Value 9,213,000 13,021,000 11,594,000
Total Equity Market Index* 512,000 111,000 (a)
Value 5,699,000 5,176,000 2,597,000
-----------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
(b) Due to each fund's expense limitation in effect at that time, no
management fees were paid by the funds to T. Rowe Price.
* All-inclusive fee including Investment Management Fees and
Administrative Expenses.
The Management Agreement between the fund and T. Rowe Price provides that the
fund will bear all expenses of its operations not specifically assumed by T.
Rowe Price.
The following chart sets forth expense ratio limitations and the periods for
which they are effective. For each, T. Rowe Price has agreed to bear any fund
expenses which would cause the fund's ratio of expenses to average net assets
to exceed the indicated percentage limitations. The expenses borne by T. Rowe
Price are subject to reimbursement by the fund through the indicated
reimbursement date, provided no reimbursement will be made if it would result
in the fund's expense ratio exceeding its applicable limitation.
<PAGE>
<TABLE>
<CAPTION>
Expense Reimbursement
Fund Limitation Period ------- -------------
---- ----------------- Ratio Date
------------------------------------------------ ----- ----
Limitation
----------
-------------------------------
<S> <S> <C> <S>
Blue Chip Growth March 31, 2000 -
Fund-Advisor Class December 31, 2001 1.05% December 31, 2003
Developing September 1, 2000 -
Technologies December 31, 2002 1.50% December 31, 2004
Diversified Small-Cap January 1, 1999 -
Growth(a) December 31, 2000 1.25% December 31, 2002
Equity Income March 31,
Fund-Advisor Class 2000-December 31, 2001 1.00% December 31, 2003
January 1, 2000 -
Equity Index 500(b) December 31, 2000 0.35% December 31, 2001
September 30, 1996 -
Financial Services December 31, 1998 1.25% December 31, 2000
September 30, 2000 -
Global Technology December 31, 2002 1.50% December 31, 2004
Institutional March 31, 2000 -
Large-Cap Value December 31, 2001 0.65% December 31, 2003
Institutional March 31, 2000 -
Small-Cap Stock December 31, 2001 0.75% December 31, 2003
Mid-Cap Growth March 31, 2000 -
Fund-Advisor Class December 31, 2001 1.10% December 31, 2003
January 1, 2000 -
Real Estate(c) December 31, 2001 1.00% December 31, 2003
Science & Technology March 31, 2000 -
Fund-Advisor Class December 31, 2001 1.15% December 31, 2003
Small-Cap Stock March 31, 2000 -
Fund-Advisor Class December 31, 2001 1.20% December 31, 2003
Small-Cap Value March 31, 2000 -
Fund-Advisor Class December 31, 2001 1.15% December 31, 2003
Value Fund-Advisor March 31, 2000 - 1.10% December 31, 2003
Class December 31, 2001
-------------------------------------------------------------------------------
</TABLE>
(a) The Diversified Small-Cap Growth Fund previously operated under a
1.25% limitation that expired December 31, 1998. The reimbursement
period for this limitation extends through December 31, 2000.
(b) The Equity Index 500 Fund previously operated under a 0.40% limitation
that expired December 31, 1999. The reimbursement period for this
limitation extends through December 31, 2001.
(c) The Real Estate Fund previously operated under a 1.00% limitation that
expired December 31, 1999. The reimbursement period for this limitation
extends through December 31, 2001.
Each of the above-referenced fund's Management Agreement also provides that
one or more additional expense limitations periods (of the same or different
time periods) may be implemented after the expiration of the current expense
limitation, and that with respect to any such additional limitation period,
the fund may reimburse T. Rowe Price, provided the reimbursement does not
result in the fund's aggregate expenses exceeding the additional expense
limitation.
Pursuant to the Diversified Small-Cap Growth Fund's current expense
limitation, $114,000 of management fees were not accrued for the year ended
December 31, 1999. Additionally, $240,000 of unaccrued management fees
related to a previous limitation are subject to reimbursement through
December 31, 2000.
Pursuant to the Equity Index 500 Fund's current expense limitation, $317,000
of management fees were not accrued by the fund for the year ended December
31, 1999. Additionally, $955,000 of unaccrued management fees remain subject
to reimbursement through December 31, 2001.
Pursuant to the Institutional Mid-Cap Equity Growth Fund's previous expense
limitation, $32,000 of unaccrued management fees were repaid by the fund
during the year ended December 31, 1999.
Pursuant to the Real Estate Fund's current expense limitation, $164,000 of
management fees were not accrued by the fund for the year ended December 31,
1999, and $38,000 of other expenses were borne by the Manager. Additionally,
$286,000 of unaccrued fees and expenses remain subject to reimbursement
through December 31, 2001.
<PAGE>
Management Fee
Equity Index 500 Fund
The fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.20% of the average daily net asset value of the fund.
Extended Equity Market Index and Total Equity Market Index Funds
Each fund pays T. Rowe Price an annual all-inclusive fee in monthly
installments of 0.40% of the average daily net assets of the fund.
Institutional Large-Cap Value Fund
The fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.55% of the average daily net asset value of the fund.
Institutional Small-Cap Stock Fund
The fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.65% of the average daily net asset value of the fund.
Institutional Mid-Cap Equity Growth Fund
The fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.60% of the average daily net asset value of the fund.
Blue Chip Growth, Equity Income, Growth & Income, Growth Stock, Mid-Cap
Value, New Era, and New Horizons Funds
T. Rowe Price Spectrum Fund, Inc.
The funds listed above are a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum
Fund"), T. Rowe Price, and various other T. Rowe Price funds which, along
with such fund, are funds in which Spectrum Fund invests (collectively all
such funds "Underlying Price Funds").
Each 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.
Management Related Services
As noted above, the Management Agreement spells out the expenses to be paid
by the fund. In addition to the Management Fee, the fund pays for the
following: shareholder service expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing prospectuses and reports sent to
shareholders; registration fees and expenses; proxy and annual meeting
expenses (if any); and director/trustee fees and expenses.
T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
acts as the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services. Services for certain types of
retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly owned subsidiary. The address for each is 100 East Pratt
St., Baltimore, MD 21202. Additionally, T. Rowe Price, under a separate
agreement with the funds, provides accounting services to the funds.
The funds paid the expenses shown in the following table for the fiscal year
ended December 31, 1999, to T. Rowe Price and its affiliates.
<PAGE>
<TABLE>
<CAPTION>
Transfer Agent and Retirement Accounting
Fund Shareholder Services Subaccounting Services
---- -------------------- Services --------
--------
<S> <C> <C> <C>
Balanced $ 664,000 $ 4,236,000 $ 99,000
Blue Chip Growth 4,966,000 7,221,000 64,000
Capital Appreciation 714,000 1,065,000 89,000
Capital Opportunity 269,000 32,000 64,000
Developing Technologies 0(a) 0(a) 0(a)
Diversified Small-Cap Growth 216,000 -- 64,000
Dividend Growth 1,702,000 347,000 69,000
Equity Income 6,998,000 11,740,000 89,000
Equity Index 500 2,907,000 3,922,000 67,000
Extended Equity Market Index -- -- --
Financial Services 444,000 84,000 64,000
Global Technology 0(a) 0(a) 0(a)
Growth & Income 2,535,000 2,564,000 89,000
Growth Stock 2,814,000 3,927,000 109,000
Health Sciences 779,000 68,000 64,000
Institutional Mid-Cap Equity
Growth 9,000 -- 64,000
Media & Telecommunications 692,000 48,000 64,000
Mid-Cap Growth 2,723,000 2,758,000 64,000
Mid-Cap Value 486,000 35,000 64,000
New America Growth 1,325,000 2,938,000 74,000
New Era 980,000 209,000 76,000
New Horizons 3,623,000 5,129,000 100,000
Real Estate 104,000 2,000 64,000
Science & Technology 5,664,000 4,266,000 74,000
Small-Cap Stock 1,239,000 254,000 89,000
Small-Cap Value 1,113,000 1,479,000 64,000
Total Equity Market Index -- -- --
Value 1,062,000 376,000 64,000
-------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
SERVICES BY OUTSIDE PARTIES
-------------------------------------------------------------------------------
The shares of some fund shareholders are held in omnibus accounts maintained
by various third parties, including retirement plan sponsors, insurance
companies, banks and broker-dealers. The fund has adopted an administrative
fee payment ("AFP") program that authorizes the fund to make payments to
these third parties. The payments are made for transfer agent, recordkeeping
and other administrative services provided by, or on behalf of, the third
parties with respect to such shareholders and the omnibus accounts. Under the
AFP program, the funds paid the amounts set forth below to various third
parties in 1999.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Balanced Fund $ 26,898.00
Blue Chip Growth Fund 597,491.00
Capital Appreciation Fund 5,964.00
Capital Opportunity Fund 546.00
Dividend Growth Fund 17,615.00
Equity Income Fund 1,354,079.00
Equity Index 500 Fund 70,763.00
Financial Services Fund 2,113.00
Growth & Income Fund 605,404.00
Growth Stock Fund 139,865.00
Health Sciences Fund 2,266.00
Mid-Cap Growth Fund 653,596.00
Mid-Cap Value Fund 513.00
New America Growth Fund 150,059.00
New Era Fund 22,334.00
New Horizons Fund 645,172.00
Science & Technology Fund 692,991.00
Small-Cap Stock Fund 200,984.00
Small-Cap Value Fund 106,534.00
Value Fund 9,085.00
</TABLE>
Each Advisor Class has adopted an Advisor Class administrative fee payment
program ("Advisor Class AFP") under which various intermediaries, including
intermediaries receiving 12b-1 payments, may receive payments from the
Advisor Class in addition to 12b-1 fees for providing various recordkeeping
and transfer agent type services to the Advisor classes and/or shareholders
thereof. These services include: mailings of fund prospectuses, reports,
notices, proxies, and other materials to shareholders; transmission of net
purchase and redemption orders; maintenance of separate records for
shareholders reflecting purchases, redemptions, and share balances; mailing
of shareholder confirmations and periodic statements; and telephone services
in connection with the above.
All Funds
DISTRIBUTOR FOR THE FUNDS
-------------------------------------------------------------------------------
Investment Services, a Maryland corporation formed in 1980 as a wholly owned
subsidiary of T. Rowe Price, serves as the fund's distributor. Investment
Services is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. The offering of the fund's shares is continuous.
Investment Services is located at the same address as the fund and T. Rowe
Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
fund will pay all fees and expenses in connection with: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling shares, except for those fees and expenses specifically
assumed by the fund. Investment Services' expenses are paid by T. Rowe Price.
<PAGE>
Investment Services acts as the agent of the fund in connection with the sale
of its shares in the various states in which Investment Services is qualified
as a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for fund shares at net asset value. No sales charges are paid
by investors or the fund.
Blue Chip Growth, Equity Income, Mid-Cap Growth, Science & Technology,
Small-Cap Stock, Small-Cap Value, Value Advisor Classes
Distribution and Shareholder Services Plan
The fund Directors/Trustees adopted a Plan pursuant to Rule 12b-1 on February
9, 2000 with respect to each Advisor Class. Each Plan provides that the
Advisor Class may compensate Investment Services or such other persons as the
fund or Investment Services designates, to finance any or all of the
distribution, shareholder servicing, maintenance of shareholder accounts,
and/or other administrative services with respect to Advisor Class shares. It
is expected that most, if not all, payments under the Plan will be made
(either directly, or indirectly through Investment Services) to brokers,
dealers, banks, insurance companies, and intermediaries other than Investment
Services. Under the Plan, each Advisor Class pays a fee at the annual rate of
up to 0.25% of that class's average daily net assets. Normally, the full
amount of the fee is paid to the intermediary on shares sold through that
intermediary. However, a lesser amount may be paid based on the level of
services provided. Intermediaries may use the payments for, among other
purposes, compensating employees engaged in sales and/or shareholder
servicing of the Advisor Class, as well as for a wide variety of other
purposes associated with supporting, distributing, and servicing the Advisor
Class shares. The amount of fees paid by an Advisor Class during any year may
be more or less than the cost of distribution and other services provided to
the Advisor Class and its investors. NASD rules limit the amount of annual
distribution and service fees that may be paid by a mutual fund and impose a
ceiling on the cumulative distribution fees paid. The Plan complies with
these rules.
The Plan requires that Investment Services provide, or cause to be provided,
to the fund Directors/Trustees for their review a quarterly written report
identifying the amounts expended by each Advisor Class and the purposes for
which such expenditures were made.
Prior to approving the Plan, the fund considered various factors relating to
the implementation of the Plan and determined that there is a reasonable
likelihood that the Plan will benefit each fund, its Advisor Class and the
Advisor Class's shareholders. The fund Directors/Trustees noted that to the
extent the Plan allows a fund to sell Advisor Class shares in markets to
which it would not otherwise have access, the Plan may result in additional
sales of fund shares. This may enable a fund to achieve economies of scale
that could reduce expenses. In addition, certain ongoing shareholder services
may be provided more effectively by intermediaries with which shareholders
have an existing relationship.
The Plan continues until March 31, 2001. The Plan is renewable thereafter
from year to year with respect to each fund, so long as its continuance is
approved at least annually (1) by the vote of a majority of the fund
Directors/Trustees and (2) by a vote of the majority of the Rule 12b-1
Directors/Trustees, cast in person at a meeting called for the purpose of
voting on such approval. The Plan may not be amended to increase materially
the amount of fees paid by any Advisor Class thereunder unless such amendment
is approved by a majority vote of the outstanding shares of such Advisor
Class and by the fund Directors/Trustees in the manner prescribed by Rule
12b-1 under the 1940 Act. The Plan is terminable with respect to an Advisor
Class at any time by a vote of a majority of the Rule 12b-1
Directors/Trustees or by a majority vote of the outstanding shares in the
Advisor Class.
All Funds
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the fund's U.S.
securities and cash, but it does not participate in the fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
<PAGE>
The fund (other than Equity Index 500, Extended Equity Market Index, and
Total Equity Market Index Funds) has entered into a Custodian Agreement with
The Chase Manhattan Bank, N.A., London, pursuant to which portfolio
securities which are purchased outside the United States are maintained in
the custody of various foreign branches of The Chase Manhattan Bank and such
other custodians, including foreign banks and foreign securities depositories
as are approved in accordance with regulations under the 1940 Act. The
address for The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman
Street, London, EC2P 2HD, England.
CODE OF ETHICS
-------------------------------------------------------------------------------
The fund, its investment adviser (T. Rowe Price), and its principal
underwriter (T. Rowe Price Investment Services), have a written Code of
Ethics which requires all Access Persons to obtain prior clearance before
engaging in personal securities transactions. In addition, all Access Persons
must report their personal securities transactions within 10 days of their
execution. Access Persons will not be permitted to effect transactions in a
security: if there are pending client orders in the security; the security
has been purchased or sold by a client within seven calendar days; the
security is being considered for purchase for a client; a change has occurred
in T. Rowe Price's rating of the security within seven calendar days prior to
the date of the proposed transaction; or the security is subject to internal
trading restrictions. In addition, Access Persons are prohibited from
profiting from short-term trading (e.g., purchases and sales involving the
same security within 60 days). Any person becoming an Access Person must file
a statement of personal securities holdings within 10 days of this date. All
Access Persons are required to file an annual statement with respect to their
personal securities holdings. Any material violation of the Code of Ethics is
reported to the Board of the fund. The Board also reviews the administration
of the Code of Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
How Brokers and Dealers Are Selected
Equity Securities
In purchasing and selling equity securities, it is T. Rowe Price's policy to
obtain quality execution at the most favorable prices through responsible
brokers and dealers and 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. 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, their expertise in
particular markets 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
<PAGE>
market-makers reflect the spread between the bid and asked prices. Securities
may also be purchased from underwriters at prices which include underwriting
fees.
With respect to equity and fixed income securities, T. Rowe Price may effect
principal transactions on behalf of the fund with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts, or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in fixed price offerings.
How Evaluations Are Made of the Overall Reasonableness of Brokerage Commissions
Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates; (b) rates which
other institutional investors are paying, based on available public
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business
done with a particular firm over a period of time; and (g) the extent to
which the broker or dealer has capital at risk in the transaction.
Descriptions of Research Services Received From Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts, and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians,
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently
provided by brokers and dealers. T. Rowe Price pays cash for certain research
services received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash. While receipt
of research services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could be materially
increased if it attempted to generate such additional information through its
own staff. To the extent that research services of value are provided by
brokers or dealers, T. Rowe Price may be relieved of expenses which it might
otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in return for
products or services other than brokerage or research services. In accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934,
T. Rowe Price may from time to time receive services and products which serve
both research and non-research functions. In such event, T. Rowe Price makes
a good faith determination of the anticipated research and non-research use
of the product or service and allocates brokerage only with respect to the
research component.
Commissions to Brokers Who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would
have charged for effecting the same transaction, if the adviser determines in
good faith
<PAGE>
that the commission paid is reasonable in relation to the value of the
brokerage and research services provided. The determination may be viewed in
terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the
total brokerage and research services provided by each particular broker. T.
Rowe Price may receive research, as defined in Section 28(e), in connection
with selling concessions and designations in fixed price offerings in which
the funds participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of business
to any broker or dealer over any specific time period. Historically, the
majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion
of its discretionary client brokerage business where special needs do not
exist, or where the business may be allocated among several brokers or
dealers which are able to meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations but
can, and often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above. In no case
is a broker or dealer excluded from receiving business from T. Rowe Price
because it has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the fund.
From time to time, orders for clients may be placed through a computerized
transaction network.
The fund does not allocate business to any broker-dealer on the basis of its
sales of the fund's shares. However, this does not mean that broker-dealers
who purchase fund shares for their clients will not receive business from the
fund.
Some of T. Rowe Price's other clients have investment objectives and programs
similar to those of the fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for 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
<PAGE>
such purchases, 10% or more of the outstanding common stock of such company
would be held by its clients in the aggregate.
At the present time, T. Rowe Price does not recapture commissions or
underwriting discounts or selling group concessions in connection with
taxable securities acquired in underwritten offerings. T. Rowe Price does,
however, attempt to negotiate elimination of all or a portion of the selling
group concession or underwriting discount when purchasing tax-exempt
municipal securities on behalf of its clients in underwritten offerings.
Trade Allocation Policies
T. Rowe Price has developed written trade allocation guidelines for its
Equity, Municipal, and Taxable Fixed Income Trading Desks. Generally, when
the amount of securities available in a public offering or the secondary
market is insufficient to satisfy the volume or price requirements for the
participating client portfolios, the guidelines require a pro-rata allocation
based upon the amounts initially requested by each portfolio manager. In
allocating trades made on combined basis, the Trading Desks seek to achieve
the same net unit price of the securities for each participating client.
Because a pro-rata allocation may not always adequately accommodate all facts
and circumstances, the guidelines provide for exceptions to allocate trades
on an adjusted, pro-rata basis. Examples of where adjustments may be made
include: (i) reallocations to recognize the efforts of a portfolio manager in
negotiating a transaction or a private placement; (ii) reallocations to
eliminate deminimis positions; (iii) priority for accounts with specialized
investment policies and objectives; and (iv) reallocations in light of a
participating portfolio's characteristics (e.g., industry or issuer
concentration, duration, and credit exposure).
Other
For the years 1999, 1998, and 1997, the total brokerage commissions paid by
each fund, including the discounts received by securities dealers in
connection with underwritings, and the percentage of these commissions paid
to firms which provided research, statistical, or other services to T. Rowe
Price in connection with the management of each fund, or, in some cases, to
each fund, was as shown below.
<TABLE>
<CAPTION>
1999 1998 1997
Fund Commissions % Commissions % Commissions %
---- ----------- - ----------- - ----------- -
<S> <C> <C> <C> <C> <C> <C>
Balanced $ 720,000 10.6% $1,050,595 4.6% $ 1,276,793 9.7%
Blue Chip Growth 7,088,000 45.8 5,418,392 43.0 2,567,926 54.2
Capital Appreciation 1,142,000 38.4 1,630,383 45.7 1,734,274 35.4
Capital Opportunity 298,000 28.9 355,413 32.6 506,307 43.4
Diversified Small-Cap
Growth 75,000 1.5 94,322 0.5 107,676 0
Dividend Growth 1,420,000 57.5 1,936,978 59.4 1,620,702 42.3
Equity Income 9,653,000 45.3 6,883,655 35.2 8,137,149 59.3
Equity Index 500 378,000 0 258,633 0.5 150,827 0.0
Extended Equity Market
Index 27,000 0.4 27,382 0.2 (a) (a)
Financial Services 507,000 20.1 756,976 2.0 839,766 3.2
Growth & Income 2,428,000 35.8 2,272,536 28.4 2,971,378 29.1
Growth Stock 8,923,000 42.5 8,459,575 42.0 5,523,460 53.9
Health Sciences 593,000 33.1 333,803 54.8 1,040,908 31.2
Institutional Mid-Cap
Equity Growth 654,000 34.7 255,381 29.4 140,756 21.9
Media &
Telecommunications 2,041,000 12.9 740,649 9.1 357,871 26.8
Mid-Cap Growth 12,136,000 35.1 5,757,447 34.8 4,686,813 32.3
Mid-Cap Value 303,000 37.1 391,302 46.7 364,072 36.4
New America Growth 4,556,000 17.1 4,150,396 14.2 3,220,413 26.6
New Era 2,122,000 52.3 1,871,968 57.9 3,029,701 43.0
New Horizons 12,816,000 4.2 8,448,650 5.0 10,028,310 10.3
Real Estate 59,000 37.4 162,606 13.8 35,421 0.8
Science & Technology 9,172,000 33.9 4,348,665 31.3 4,421,394 33.3
Small-Cap Stock 2,851,000 26.6 1,829,514 20.7 1,742,106 8.3
Small-Cap Value 998,000 46.1 1,488,300 32.1 2,503,146 19.1
Total Equity Market
Index 45,000 0 28,271 0.2 (a) (a)
Value 1,847,000 52.0 1,876,931 75.7 1,200,103 66.0
------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Prior to commencement of operations.
On December 31, 1999, the Balanced Fund held common stock of Goldman Sachs
with a value of $2,355,000 and common stock of Morgan Stanley with a value of
$9,964,000. The fund also held a bonds of Morgan Stanley, Lehman Brothers and
Paine Webber, with values of $3,853,000, $5,278,000, and $3,650,000,
respectively. In 1998, J.P. Morgan, Lehman Brothers, and GMAC were among the
fund's regular brokers or dealers as defined in Rule 10b-1 under the 1940
Act. In 1997, J.P. Morgan, Lehman Brothers Holding, and GMAC were among the
fund's regular brokers or dealers as defined in Rule 10b-1 under the 1940
Act.
On December 31, 1999, the Blue Chip Growth Fund held common stock of Goldman
Sachs, Bank America, and Morgan Stanley, with values of $11,425,000,
$23,588,000, and $57,957,000, respectively. In 1998 and 1997, Chase Manhattan
and Morgan Stanley were among the fund's regular brokers or dealers as
defined in Rule 10b-1 under the 1940 Act.
On December 31, 1999, the Equity Income Fund held common stock of J.P.
Morgan, with a value of $126,625,000. In 1998 and 1997, Bankers Trust, Chase
Manhattan, J.P. Morgan, and Morgan Stanley (MTN) were among the fund's
regular brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1999, the Equity Index 500 Fund held common stock of Lehman
Brothers, with a value of $4,130,000. In 1998 and 1997, Bankers Trust;
Citicorp; Chase Manhattan, J.P. Morgan; and Merrill Lynch were among the
fund's regular brokers or dealers as defined in Rule 10b-1 under the 1940
Act.
On December 31, 1999, the Financial Services Fund held common stock of
Goldman Sachs, with a value of $2,261,000. In 1998 and 1997, Chase Manhattan;
First Chicago NBD, Morgan Stanley; and Nations Bank Montgomery were among the
fund's regular brokers or dealers as defined in Rule 10b-1 under the 1940
Act.
On December 31, 1999, the Growth and Income Fund held common stock of Bear
Stearns, with a value of $22,156,000. In 1998 and 1997, Chase Manhattan; and
Citicorp were among the fund's regular brokers or dealers as defined in Rule
10b-1 under the 1940 Act.
On December 31, 1999, the Growth Stock Fund held common stock of Mellon Bank
valued at $19,703,000. In 1997, Mellon Bank was among the fund's regular
brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
On December 31, 1999, the Growth & Income and Small-Cap Value Funds held
Morgan Stanley Group MTN, both valued at $10,010,000, respectively. In 1997,
The Morgan Stanley Group was among the funds' regular brokers or dealers as
defined in Rule 10b-1 under the 1940 Act.
On December 31, 1999, the Total Market Index Fund held common stock in the
following companies: Goldman Sachs - $151,000, Lehman Brothers - $119,000,
and Donaldson, Lufkin and Jenrette - $73,000.
On December 31, 1999, the Extended Equity Market Index Fund held common stock
of Donaldson, Lufkin & Jenrette, valued at $68,000.
<PAGE>
On December 31, 1999, the Personal Strategy Balanced Portfolio held common
stock in the following companies: Goldman Sachs - $19,000 and Morgan Stanley
- $114,000. The fund also held a bond of Paine Webber, with a value of
$730,000.
On December 31,1999, the Equity Income Portfolio held common stock of Goldman
Sachs and Morgan stanley, with values of $565,000 and $47,000, respectively.
On December 31, 1999, the Value Fund held common stock of Bank of America,
with a value of $7,528,000.
On December 31, 1999, the Capital Opportunity Fund held common stock of Bank
of America and Morgan Stanley, with values of $703,000 and $879,000,
respectively.
On December 31, 1999, the Diversified Small-Cap Growth Fund held common stock
of Investment Technology, with a value of $144,000.
The portfolio turnover rate for each fund for the years ended 1999, 1998, and
1997, was as follows:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Balanced 20.7% 12.5% 15.5%
Blue Chip Growth 41.3 34.5 23.7
Capital Appreciation 28.3 52.6 48.3
Capital Opportunity 133.1 73.8 85.0
Diversified Small-Cap Growth 49.4 39.8 13.4
Dividend Growth 37.8 37.3 39.1
Equity Income 21.8 22.6 23.9
Equity Index 500 5.2 4.7 0.7
Extended Equity Market Index 23.4 26.3 (a)
Financial Services 37.1 46.8 46.0
Growth & Income 20.3 20.5 15.7
Growth Stock 55.8 54.8 40.9
Health Sciences 81.9 85.7 104.4
Institutional Mid-Cap Equity Growth 55.4 52.8 41.0
Media & Telecommunications 57.6 48.9 38.6
Mid-Cap Growth 53.3 46.7 42.6
Mid-Cap Value 26.8 32.0 16.0
New America Growth 39.7 45.6 43.2
New Era 32.5 23.1 27.5
New Horizons 44.7 41.2 45.2
Real Estate 26.9 56.8 8.4
Science & Technology 128.0 108.9 133.9
Small-Cap Stock 42.3 25.9 22.9
Small-Cap Value 7.3 17.3 14.6
Total Equity Market Index 3.2 1.9 (a)
Value 67.8 72.1 67.2
-------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
All Funds
PRICING OF SECURITIES
-------------------------------------------------------------------------------
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price at the time the valuations are made. A
security that is listed or traded on more than one exchange is valued at the
<PAGE>
quotation on the exchange determined to be the primary market for such
security. Listed securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the mean of the
latest bid and asked prices. Other equity securities are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors/Trustees, or by persons delegated by the Board, best to reflect
fair value.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their amortized cost in local
currency which, when combined with accrued interest, approximates fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation. In the absence of a last
sale price, purchased and written options are valued at the mean of the
latest bid and asked prices, respectively.
For the purposes of determining the fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value, are stated at fair
value as determined in good faith by or under the supervision of the officers
of the fund, as authorized by the Board of Directors/Trustees.
All Funds
NET ASSET VALUE PER SHARE
-------------------------------------------------------------------------------
The purchase and redemption price of the fund's shares is equal to the fund's
net asset value per share or share price. The fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the fund is normally
calculated as of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the fund may by order permit such
a suspension for the protection of the fund's shareholders; provided that
applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c),
or (d) exist.
DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, the fund's capital gain distributions, final
quarterly dividend (Balanced, Dividend Growth, Equity Income, Equity Index
500, Growth & Income, Mid-Cap Value, and Real Estate Funds) and annual
dividend (other funds), if any, will be reinvested on the reinvestment date
using the NAV per share of that date. The reinvestment date normally precedes
the payment date by one day, although the exact timing is subject to change
and can be as great as 10 days.
<PAGE>
TAX STATUS
-------------------------------------------------------------------------------
The fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.
A portion of the dividends paid by certain funds may be eligible for the
dividends-received deduction applicable to corporate shareholders. Long-term
capital gain distributions paid from these funds are never eligible for the
dividend received deduction. For tax purposes, it does not make any
difference whether dividends and capital gain distributions are paid in cash
or in additional shares. Each fund must declare dividends by December 31 of
each year equal to at least 98% of ordinary income (as of December 31) and
capital gains (as of October 31) in order to avoid a federal excise tax and
distribute within 12 months 100% of ordinary income and capital gains as of
December 31 to avoid a federal income tax.
At the time of your purchase, the fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held
by the fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, the fund is permitted to carry
forward its net realized capital losses, if any, for eight years and realize
net capital gains up to the amount of such losses without being required to
pay taxes on, or distribute, such gains.
If, in any taxable year, the fund should not qualify as a regulated
investment company under the code: (i) the fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
fund's distributions to the extent made out of the fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
To the extent the fund invests in foreign securities, the following would
apply:
Passive Foreign Investment Companies
The fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. Such trusts have been the
only or primary way to invest in certain countries. In addition to bearing
their proportionate share of the trust's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses
of such trusts. Capital gains on the sale of such holdings are considered
ordinary income regardless of how long the fund held 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.
To avoid such tax and interest, the fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; deductions for losses are allowable only to the extent
of any gains resulting from these deemed sales for prior taxable years. Such
gains and losses will be treated as ordinary income. The fund will be
required to distribute any resulting income even though it has not sold the
security and received cash to pay such distributions.
<PAGE>
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the ordinary income dividend paid by the fund will be
increased. If the result is a loss, the income dividend paid by the fund will
be decreased, or to the extent such dividend has already been paid, it may be
classified as a return of capital. Adjustments to reflect these gains and
losses will be made at the end of the fund's taxable year.
All Funds
INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------
Total Return Performance
The fund's calculation of total return performance includes the reinvestment
of all capital gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a shareholder in the
fund. Total return is calculated as the percentage change between the
beginning value of a static account in the fund and the ending value of that
account measured by the then current net asset value, including all shares
acquired through reinvestment of income and capital gain dividends. The
results shown are historical and should not be considered indicative of the
future performance of the fund. Each average annual compound rate of return
is derived from the cumulative performance of the fund over the time period
specified. The annual compound rate of return for the fund over any other
period of time will vary from the average.
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
Fund ----- ------ ------- ------- ---------
---- Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/99 12/31/99 12/31/99 12/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
Balanced 10.26% 117.66% 240.36% 43,539.29% 12/31/39
Blue Chip Growth 20.00 247.43 -- 300.39 06/30/93
Capital Appreciation 7.07 88.43 197.04 401.54 06/30/86
Capital Opportunity 11.50 153.49 -- 164.39 11/30/94
Diversified Small-Cap
Growth 27.69 -- -- 41.67 06/30/97
Dividend Growth -2.82 141.45 -- 194.54 12/30/92
Equity Income 3.82 134.55 275.25 686.44 10/31/85
Equity Index 500 20.64 246.02 -- 431.35 03/30/90
Extended Equity Market
Index 33.72 -- -- 50.16 01/30/98
Financial Services 1.70 -- -- 81.96 09/30/96
Growth & Income 3.78 131.90 252.56 808.57 12/21/82
Growth Stock 22.15 213.96 396.79 33,386.42 04/05/50
Health Sciences 7.97 -- -- 99.99 12/29/95
Institutional Mid-Cap
Equity Growth 25.10 -- -- 108.83 07/31/96
Media &
Telecommunications(a) 93.09 387.28 -- 370.41 10/13/93
Mid-Cap Growth 23.78 214.43 -- 395.76 06/30/92
Mid-Cap Value 3.52 -- -- 55.16 06/28/96
New America Growth 12.76 178.79 373.36 853.11 09/30/85
New Era 21.22 81.89 135.77 2,081.78 01/20/69
New Horizons 32.52 181.18 423.74 10,299.39 06/03/60
Real Estate -1.23 -- -- -9.33 10/31/97
Science & Technology 100.99 417.01 1,295.89 1,692.80 09/30/87
Small-Cap Stock 14.66 131.04 243.75 33,308.39 06/01/56
Small-Cap Value 1.19 82.51 219.36 262.71 06/30/88
Total Equity Market
Index 23.25 -- -- 51.84 01/30/98
Value 9.16 170.92 -- 179.33 09/30/94
-------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Figures based on performance as a closed-end investment company traded
on the New York Stock Exchange.
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
Fund ----- ------ ------- ------- ---------
---- Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/99 12/31/99 12/31/99 12/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
Balanced 10.26% 16.83% 13.03% 10.66% 12/31/39
Blue Chip Growth 20.00 28.28 -- 23.78 06/30/93
Capital Appreciation 7.07 13.51 11.50 12.68 06/30/86
Capital Opportunity 11.50 20.45 -- 21.07 11/30/94
Diversified Small-Cap
Growth 27.69 -- -- 14.93 06/30/97
Dividend Growth -2.82 19.28 -- 16.68 12/30/92
Equity Income 3.82 18.59 14.14 15.67 10/31/85
Equity Index 500 20.64 28.18 -- 18.67 03/30/90
Extended Equity Market
Index 33.72 -- -- 23.61 01/30/98
Financial Services 1.70 -- -- 20.21 09/30/96
Growth & Income 3.78 18.32 13.43 13.84 12/21/82
Growth Stock 22.15 25.71 17.39 12.40 04/05/50
Health Sciences 7.97 -- -- 18.89 12/29/95
Institutional Mid-Cap
Equity Growth 25.10 -- -- 24.04 07/31/96
Media &
Telecommunications(a) 93.09 37.26 -- 28.29 10/13/93
Mid-Cap Growth 23.78 25.75 -- 23.79 06/30/92
Mid-Cap Value 3.52 -- -- 13.33 06/28/96
New America Growth 12.76 22.76 16.82 17.14 09/30/85
New Era 21.22 12.71 8.96 10.47 01/20/69
New Horizons 32.52 22.97 18.01 12.45 06/03/60
Real Estate -1.23 -- -- -4.42 10/31/97
Science & Technology 100.99 38.90 30.16 26.57 09/30/87
Small-Cap Stock 14.66 18.23 13.14 14.26 06/01/56
Small-Cap Value 1.19 12.79 12.31 11.85 06/30/88
Total Equity Market Index 23.25 -- -- 24.33 01/30/98
Value 9.16 22.06 -- 21.61 09/30/94
-------------------------------------------------------------------------------
</TABLE>
(a) Figures based on performance as a closed-end investment company traded
on the New York Stock Exchange.
<PAGE>
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the fund's
total return performance, ranking, or any other measure of the fund's
performance may be compared to any one or combination of the following: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities comparable to those in which the fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the fund or the general economic, business, investment, or
financial environment in which the fund operates; (3) various financial,
economic, and market statistics developed by brokers, dealers, and other
persons may be used to illustrate aspects of the fund's performance; (4) the
effect of tax-deferred compounding on the fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the fund invests may be compared to
relevant indices or surveys in order to evaluate the fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by Investment
Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
financial, and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the fund;
individual securities within the fund's portfolio; and their philosophy
regarding the selection of individual stocks, including why specific stocks
have been added, removed, or excluded from the fund's portfolio.
Other Features and Benefits
The fund is a member of the T. Rowe Price family of funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price and/or Investment Services may be made available.
No-Load Versus Load and 12b-1 Funds
Many mutual funds charge sales fees to investors or use fund assets to
finance distribution activities. These fees are in addition to the normal
advisory fees and expenses charged by all mutual funds. There are several
types of fees charged which vary in magnitude and which may often be used in
combination. A sales charge (or "load") can be charged at the time the fund
is purchased (front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested. Back-end loads or
"redemption fees" are charged either on the amount originally invested or on
the amount redeemed. 12b-1 plans allow for the payment of marketing and sales
expenses from fund assets. These expenses are usually computed daily as a
fixed percentage of assets.
The T. Rowe Price funds, including the Advisor Classes, are considered to be
"no-load" funds. They impose no front-end or back-end sales loads. However,
the Advisor Classes do charge 12b-1 fees. Under applicable National
Association of Securities Dealers Regulation, Inc. ("NASDR") regulations,
mutual funds that have no front-end or deferred sales charges and whose total
asset-based charges for sales-related expenses and/or service fees (as
defined by NASDR) do not exceed 0.25% of average net assets per year may be
referred to as no-load funds.
Redemptions in Kind
The fund has filed a notice of election under Rule 18f-1 of the 1940 Act.
This permits the fund to effect redemptions in kind as set forth in its
prospectus.
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the fund, it would be the responsibility of the
shareholder to dispose of the securities. The shareholder would be at risk
that the value of the securities would decline prior to their sale, that it
would be difficult to sell the securities and that brokerage fees could be
incurred.
<PAGE>
Issuance of Fund Shares for Securities
Transactions involving issuance of fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
Balanced Fund
On August 31, 1992, the T. Rowe Price Balanced Fund acquired substantially
all of the assets of the Axe-Houghton Fund B, a series of Axe-Houghton Funds,
Inc. As a result of this acquisition, the SEC requires that the historical
performance information of the Balanced Fund be based on the performance of
Fund B. Therefore, all performance information of the Balanced Fund prior to
September 1, 1992, reflects the performance of Fund B and investment managers
other than T. Rowe Price. Performance information after August 31, 1992,
reflects the combined assets of the Balanced Fund and Fund B.
Media & Telecommunications Fund
On July 28, 1997, the fund converted its status from a closed-end fund to an
open-end mutual fund. Prior to the conversion the fund was known as New Age
Media Fund, Inc.
Small-Cap Stock Fund
Effective May 1, 1997, the fund's name was changed from the T. Rowe Price OTC
Fund to the T. Rowe Price Small-Cap Stock Fund.
Equity Index 500 Fund
Effective January 30, 1998, the fund's name was changed from T. Rowe Price
Equity Index Fund to the T. Rowe Price Equity Index 500 Fund.
All Funds except Capital Appreciation, Equity Income and New America Growth
Funds
CAPITAL STOCK
-------------------------------------------------------------------------------
The fund's Charter authorizes the Board of Directors/Trustees to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the 1940 Act and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and might thus
be superior or inferior to the capital stock or to other classes or series in
various characteristics. The Board of Directors/Trustees may increase or
decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that the fund has authorized to issue without
shareholder approval.
Except to the extent that the fund's Board of Directors/Trustees might
provide by resolution that holders of shares of a particular class are
entitled to vote as a class on specified matters presented for a vote of the
holders of all shares entitled to vote on such matters, there would be no
right of class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no provision
entitling the holders of the present class of capital stock to a vote as a
class on any matter. Accordingly, the preferences, rights, and other
characteristics attaching to any class of shares, including the present class
of capital stock, might be altered or eliminated, or the class might be
combined with another class or classes, by action approved by the vote of the
holders of a majority of all the shares of all classes entitled to be voted
on the proposal, without any additional right to vote as a class by the
holders of the capital stock or of another affected class or classes.
<PAGE>
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors/trustees (to the extent hereinafter provided) and on
other matters submitted to the vote of shareholders. There will normally be
no meetings of shareholders for the purpose of electing directors/trustees
unless and until such time as less than a majority of the directors/trustees
holding office have been elected by shareholders, at which time the
directors/trustees then in office will call a shareholders' meeting for the
election of directors/trustees. Except as set forth above, the
directors/trustees shall continue to hold office and may appoint successor
directors/trustees. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors/trustees can,
if they choose to do so, elect all the directors/trustees of the fund, in
which event the holders of the remaining shares will be unable to elect any
person as a director/trustee. As set forth in the By-Laws of the fund, a
special meeting of shareholders of the fund shall be called by the Secretary
of the fund on the written request of shareholders entitled to cast at least
10% of all the votes of the fund entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the fund the reasonably
estimated costs of preparing and mailing the notice of the meeting. The fund,
however, will otherwise assist the shareholders seeking to hold the special
meeting in communicating to the other shareholders of the fund to the extent
required by Section 16(c) of the 1940 Act.
Capital Appreciation, Equity Income, and New America Growth Funds
ORGANIZATION OF THE FUNDS
-------------------------------------------------------------------------------
For tax and business reasons, the funds were organized as Massachusetts
Business Trusts, and are registered with the SEC under the 1940 Act as
diversified, open-end investment companies, commonly known as "mutual fund."
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of a single class. The Declaration of
Trust also provides that the Board of Trustees may issue additional series or
classes of shares. Each share represents an equal proportionate beneficial
interest in the fund. In the event of the liquidation of the fund, each share
is entitled to a pro-rata share of the net assets of the fund.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of trustees (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of 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 1940 Act, holders of record of not less than two-thirds
of the outstanding shares of the fund may remove a trustee by a vote cast in
person or by proxy at a meeting called for that purpose. Except as set forth
above, the trustees shall continue to hold office and may appoint successor
trustees. Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in the election of trustees can, if they choose to
do so, elect all the trustees of the Trust, in which event the holders of the
remaining shares will be unable to elect any person as a trustee. No
amendments may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of redemption and
the privilege of exchange are described in the prospectus. Shares are fully
paid and nonassessable, except as set forth below. The Trust may be
terminated (i) upon the sale of its assets to another diversified, open-end
management investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon liquidation
and distribution of the assets of the Trust, if approved by the vote of the
holders of a majority of the outstanding shares of the Trust. If not so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the fund. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the fund or a
Trustee. The Declaration of Trust provides for indemnification from fund
property for all losses and expenses of any shareholder held personally
liable for the obligations of the
<PAGE>
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 the fund paying such liability will be entitled to
reimbursement from the general assets of the fund. The Trustees intend to
conduct the operations of the fund in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of such
fund.
All Funds
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The fund's shares are registered for sale under the 1933 Act. Registration of
the fund's shares is not required under any state law, but the fund is
required to make certain filings with and pay fees to the states in order to
sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is The Chrysler Building,
405 Lexington Avenue, New York, New York 10174, is legal counsel to the fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the funds.
The financial statements of the funds for the year ended December 31, 1999,
and the report of independent accountants are included in each fund's Annual
Report for the year ended December 31, 1999. A copy of each Annual Report
accompanies this Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in each Annual
Report for the year ended December 31, 1999, are incorporated into this
Statement of Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CAPITAL EQUITY NEW AMERICA NEW ERA
APPRECIATION INDEX 500 GROWTH -------
------------ --------- ------
<S> <C> <C> <C> <C>
Financial Highlights 12 2 11 9
Statement of Net Assets,
December 31, 1999 13-19 3-21 12-16 10-14
Statement of Operations, year
ended
December 31, 1999 20 22 17 15
Statement of Changes in Net
Assets, years ended
December 31, 1999 and December
31, 1998 21 23 18 16
Notes to Financial Statements,
December 31, 1999 22-25 24-27 19-21 17-19
Report of Independent
Accountants 26 28 22 20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIVIDEND GROWTH FINANCIAL CAPITAL
GROWTH STOCK SERVICES OPPORTUNITY
------ ----- -------- -----------
<S> <C> <C> <C> <C>
Financial Highlights 10 10 11 9
Statement of Net Assets, December
31, 1999 11-17 11-17 12-14 10-22
Statement of Operations, year ended
December 31, 1999 18 18 15 23
Statement of Changes in Net Assets,
years ended
December 31, 1999 and December 31,
1998 19 19 16 24
Notes to Financial Statements,
December 31, 1999 20-22 20-23 17-19 25-28
Report of Independent Accountants 23 24 20 29
</TABLE>
<TABLE>
<CAPTION>
VALUE MID-CAP REAL MID-CAP EQUITY
----- VALUE ESTATE GROWTH
----- ------ ------
<S> <C> <C> <C> <C>
Financial Highlights 8 10 8 6
Statement of Net Assets, December
31, 1999 9-15 11-17 9-11 7-9
Statement of Operations, year ended
December 31, 1999 16 18 12 10
Statement of Changes in Net Assets,
years ended
December 31, 1999 and December 31,
1998 17 19 13 11
Notes to Financial Statements,
December 31, 1999 18-20 20-22 14-16 12-13
Report of Independent Accountants 21 23 17 14
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED BLUE CHIP GROWTH & HEALTH
SMALL-CAP GROWTH INCOME SCIENCES
GROWTH ------ ------ --------
------
<S> <C> <C> <C> <C>
Financial Highlights 8 13 8 10
Statement of Net Assets,
December 31, 1999 9-20 14-20 9-15 11-13
Statement of Operations, year
ended
December 31, 1999 21 21 16 14
Statement of Changes in Net
Assets, years ended
December 31, 1999 and December
31, 1998 22 22 17 15
Notes to Financial Statements,
December 31, 1999 23-26 23-25 18-21 16-18
Report of Independent
Accountants 27 26 22 19
</TABLE>
<TABLE>
<CAPTION>
BALANCED NEW EQUITY MID-CAP
-------- HORIZONS NCOME GROWTH
-------- ----- ------
<S> <C> <C> <C> <C>
Financial Highlights 9 11 9 11
Portfolio of Investments, December
31, 1999 10-37 12-22 10-16 12-17
Statement of Assets and Liabilities,
December 31, 1999 38 23 17 18
Statement of Operations, year ended
December 31, 1999 39 24 18 19
Statement of Changes in Net Assets,
years ended
December 31, 1999 and December 31,
1998 40 25 19 20
Notes to Financial Statements,
December 31, 1999 41-44 26-28 20-23 21-23
Report of Independent Accountants 45 29 24 24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SMALL-CAP MEDIA & SCIENCE &
STOCK TELECOMMU- TECHNOLOGY
----- NICATIONS ----------
---------
<S> <C> <C> <C>
Financial Highlights 10 8 11
Portfolio of Investments, December 31,
1999 11-21 9-11 12-14
Statement of Assets and Liabilities,
December 31, 1999 22 12 15
Statement of Operations, year ended
December 31, 1999 23 13 16
Statement of Changes in Net Assets, years
ended
December 31, 1999 and December 31, 1998 24 14 17
Notes to Financial Statements, December
31, 1999 25-27 15-17 18-20
Report of Independent Accountants 28 18 21
</TABLE>
<TABLE>
<CAPTION>
SMALL-CAP
VALUE
-----
<S> <C>
Financial Highlights 8
Portfolio of Investments, December 31, 1999 9-18
Statement of Assets and Liabilities, December 31, 1999 19
Statement of Operations, year ended December 31, 1999 20
Statement of Changes in Net Assets, years ended
December 31, 1999 and December 31, 1998 21
Notes to Financial Statements, December 31, 1999 22-24
Report of Independent Accountants 25
</TABLE>
<TABLE>
<CAPTION>
EXTENDED EQUITY
MARKET INDEX
------------
<S> <C>
Financial Highlights 2
Statement of Net Assets, year ended December 31, 1999 3-58
Statement of Operations, year ended December 31, 1999 59
Statement of Changes in Net Assets, years ended
December 31, 1999 and January 30, 1998 (commencement
of operations) to December 31, 1998 60
Notes to Financial Statements, December 31, 1999 61-63
Report of Independent Accountants 64
</TABLE>
<TABLE>
<CAPTION>
TOTAL EQUITY
MARKET INDEX
------------
<S> <C>
Financial Highlights 2
Statement of Net Assets, December 31, 1999 3-48
Statement of Operations, December 31, 1999 49
Statement of Changes in Net Assets, years ended
December 31, 1999 and January 30, 1998
(commencement of operations) to December 31, 1998 50
Notes to Financial Statements, December 31, 1999 51-53
Report of Independent Accountants 54
</TABLE>
<PAGE>
RATINGS OF CORPORATE DEBT SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally know as high-grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations.
Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of attaining investment standing.
Standard & Poor's Corporation
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, CC, and C are regarded on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and C the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
<PAGE>
Fitch IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to slight market fluctuation other than
through changes in the money rate. The prime feature of a "AAA" bond is the
showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase are often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.
<PAGE>
T. ROWE PRICE GLOBAL TECHNOLOGY FUND
AUGUST 22, 2000
STATEMENT OF ASSETS AND LIABILITIES
Assets
Cash $100,000
Receivable from manager 47,700
----------
Total assets 147,700
=========
Liabilities
Accrued expenses 47,700
----------
NET ASSETS $100,000
========
OFFERING AND REDEMPTION PRICE $ 10.00
- --------
Net Assets Consist of:
Paid-in-capital applicable to 10,000 shares of $0.0001
par value capital stock outstanding; 1,000,000,000
shares authorized $100,000
========
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. ROWE PRICE GLOBAL TECHNOLOGY FUND
July 18, 2000 (inception) Through August 22, 2000
STATEMENT OF OPERATIONS
Expenses
Organization and initial registration $ 47,700
Reimbursed by manager (47,700)
--------
Net investment income --
---------- ---
INCREASE (DECREASE) IN NET ASSETS
FROM START-UP OPERATIONS $ --
- --------- ----
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. ROWE PRICE GLOBAL TECHNOLOGY FUND
August 22, 2000
NOTES TO FINANCIAL STATEMENTS
T. Rowe Price Global Technology Fund, Inc. (the fund) was organized on July
18, 2000, as a Maryland corporation and is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
Through August 22, 2000, the fund has had no operations other than those
matters related to organization and registration as an investment company,
the registration of shares for sale under the Securities Act of 1933, and the
sale of 10,000 shares of the fund at $10.00 per share on August 21, 2000, to
T. Rowe Price Associates, Inc. via share exchange from a T. Rowe Price money
market mutual fund. The exchange was settled in the ordinary course of
business on August 22, 2000, with the transfer of $100,000 cash. The fund has
entered into an investment management agreement with T. Rowe Price
Associates, Inc. (the manager) which is described in the Statement of
Additional Information under the heading Investment Management Services.
Through August 22, 2000, the fund incurred organization and initial
registration expenses in the amount of $47,700. Under the terms of the
investment management agreement, the manager is required to bear all expenses
of the fund through December 31, 2002, which would otherwise cause the fund's
ratio of total expenses to average net assets (expense ratio) to exceed its
expense limitation of 1.50%. Through December 31, 2004, the fund is required
to reimburse the manager for these expenses, provided that average net assets
have grown or expenses have declined sufficiently to allow reimbursement
without causing the fund's expense ratio to exceed its expense limitation.
<PAGE>
Report of Independent Accountants
To the Board of Director and Shareholder of
T. Rowe Price Global Technology Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of T. Rowe Price Global Technology Fund, Inc. (the "Fund")
at August 22, 2000 and the results of its operations from July 18, 2000
(inception) through August 22, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
August 23, 2000
<PAGE>
T. ROWE PRICE DEVELOPING TECHNOLOGIES FUND
AUGUST 22, 2000
STATEMENT OF ASSETS AND LIABILITIES
Assets
Cash $100,000
Receivable from manager 48,275
----------
Total assets 148,275
=========
Liabilities
Accrued expenses 48,275
----------
NET ASSETS $100,000
========
OFFERING AND REDEMPTION PRICE $ 10.00
- --------
Net Assets Consist of:
Paid-in-capital applicable to 10,000 shares of $0.0001
par value capital stock outstanding; 1,000,000,000
shares authorized $100,000
========
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. ROWE PRICE DEVELOPING TECHNOLOGIES FUND
July 18, 2000 (inception) Through August 22, 2000
STATEMENT OF OPERATIONS
Expenses
Organization and initial registration $ 48,275
Reimbursed by manager (48,275)
--------
Net investment income --
---------- ---
INCREASE (DECREASE) IN NET ASSETS
FROM START-UP OPERATIONS $ --
- --------- ---
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. ROWE PRICE DEVELOPING TECHNOLOGIES FUND
August 22, 2000
NOTES TO FINANCIAL STATEMENTS
T. Rowe Price Developing Technologies Fund, Inc. (the fund) was organized on
July 18, 2000, as a Maryland corporation and is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. Through August 22, 2000, the fund has had no operations
other than those matters related to organization and registration as an
investment company, the registration of shares for sale under the Securities
Act of 1933, and the sale of 10,000 shares of the fund at $10.00 per share on
August 21, 2000, to T. Rowe Price Associates, Inc. via share exchange from a
T. Rowe Price money market mutual fund. The exchange was settled in the
ordinary course of business on August 22, 2000, with the transfer of $100,000
cash. The fund has entered into an investment management agreement with T.
Rowe Price Associates, Inc. (the manager) which is described in the Statement
of Additional Information under the heading Investment Management Services.
Through August 22, 2000, the fund incurred organization and initial
registration expenses in the amount of $48,275. Under the terms of the
investment management agreement, the manager is required to bear all expenses
of the fund through December 31, 2002, which would otherwise cause the fund's
ratio of total expenses to average net assets (expense ratio) to exceed its
expense limitation of 1.50%. Through December 31, 2004, the fund is required
to reimburse the manager for these expenses, provided that average net assets
have grown or expenses have declined sufficiently to allow reimbursement
without causing the fund's expense ratio to exceed its expense limitation.
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholder of
T. Rowe Price Developing Technologies Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of T. Rowe Price Developing Technologies Fund, Inc. (the
"Fund") at August 22, 2000 and the results of its operations from July 18,
2000 (inception) through August 22, 2000, in conformity with accounting
principles generally accepted in the United States. These financial
statements are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
August 23, 2000
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is March 1, 2000,
revised to March 31, 2000, and July 12, 2000.
T. ROWE PRICE INTERNATIONAL FUNDS, INC.
T. Rowe Price International Stock Fund
T. Rowe Price International Stock Fund-Advisor Class
T. Rowe Price International Discovery Fund
T. Rowe Price International Growth & Income Fund
T. Rowe Price European Stock Fund
T. Rowe Price Japan Fund
T. Rowe Price New Asia Fund
T. Rowe Price Latin America Fund
T. Rowe Price Emerging Markets Stock Fund
T. Rowe Price Global Stock Fund
T. Rowe Price Emerging Europe & Mediterranean Fund
and
INSTITUTIONAL INTERNATIONAL FUNDS, INC.
Foreign Equity Fund
-------------------------------------------------------------------------------
Mailing Address: T. Rowe Price Investment Services, Inc. 100 East Pratt
Street Baltimore, Maryland 21202 1-800-638-5660
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate fund prospectus dated March 1, 2000
(or March 31, 2000, for the T. Rowe Price International Stock Fund-Advisor
Class and July 12, 2000, for the T. Rowe Price Emerging Europe &
Mediterranean Fund), which may be obtained from T. Rowe Price Investment
Services, Inc. ("Investment Services").
Each fund's financial statements (other than Emerging Europe & Mediterranean
Fund) for the year ended October 31, 1999, and the report of independent
accountants are included in each fund's Annual Report and incorporated by
reference into this Statement of Additional Information.
If you would like a prospectus or an annual or semiannual shareholder report
for a fund of which you are not a shareholder, please call 1-800-638-5660. A
prospectus with more complete information, including management fees and
expenses, will be sent to you. Please read it carefully.
C01-043 3/1/00
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <S> <C> <S> <S>
Capital Stock 43 Investment Restrictions 20
-------------------------------------- ------------------------------------
Code of Ethics 32 Legal Counsel 44
-------------------------------------- ------------------------------------
Custodian 31 Management of the Funds 22
-------------------------------------- ------------------------------------
Distributor for the Funds 30 Net Asset Value Per Share 38
-------------------------------------- ------------------------------------
Dividends and Distributions 39 Portfolio Management 8
Practices
-------------------------------------- ------------------------------------
Federal Registration of Shares 44 Portfolio Transactions 32
-------------------------------------- ------------------------------------
Independent Accountants 44 Pricing of Securities 38
-------------------------------------- ------------------------------------
Investment Management Services 26 Principal Holders of 26
Securities
-------------------------------------- ------------------------------------
Investment Objectives and 2 Risk Factors 2
Policies
-------------------------------------- ------------------------------------
Investment Performance 41 Services by Outside Parties 30
-------------------------------------- ------------------------------------
Investment Program 6 Tax Status 39
-------------------------------------- ------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each fund's
investment objectives and policies discussed in each fund's prospectus.
The funds will not make a material change in their investment objectives
without obtaining shareholder approval. Unless otherwise specified, the
investment programs and restrictions of the funds are not fundamental
policies. Each fund's operating policies are subject to change by each Board
of Directors without shareholder approval. However, shareholders will be
notified of a material change in an operating policy. Each fund's fundamental
policies may not be changed without the approval of at least a majority of
the outstanding shares of the fund or, if it is less, 67% of the shares
represented at a meeting of shareholders at which the holders of 50% or more
of the shares are represented. References to the following are as indicated:
Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
Rowe Price-Fleming International, Inc. ("Price-Fleming")
Throughout this Statement of Additional Information, "the fund" is intended
to refer to each fund listed on the cover page, unless otherwise indicated.
RISK FACTORS
-------------------------------------------------------------------------------
All Funds
The fund's investment manager, Price-Fleming, one of America's largest
managers of no-load international mutual fund assets, regularly analyzes a
broad range of international equity and fixed income markets in order to
assess the degree or risk and level of return that can be expected from each
market. Of course, there can be
<PAGE>
no assurance that Price-Fleming's forecasts of expected return will be
reflected in the actual returns achieved by the funds.
Each fund's share price will fluctuate with market, economic and foreign
exchange 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 foreign exchange markets. The funds are subject to risks unique to
international investing. See discussion under "Risk Factors of Foreign
Investing" below. Further, there is no assurance that the favorable trends
discussed below will continue, and the funds cannot guarantee they will
achieve their objectives.
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 fund will invest.
Many of the risks are more pronounced for investments in developing or
emerging market countries, such as many of the countries of Asia, Latin
America, Eastern Europe, Russia, Africa, and the Middle East. Although there
is no universally accepted definition, a developing country is generally
considered to be a country which is in the initial stages of its
industrialization cycle with a per capita gross national product of less than
$8,000.
. Political and Economic Factors Individual foreign economies of certain
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
The internal politics of certain foreign countries are not as stable as in
the United States. For example, in 1991, the existing government in Thailand
was overthrown in a military coup. In 1994-1995, the Mexican peso plunged in
value setting off a severe crisis in the Mexican economy. Asia is still
coming to terms with its own crisis and recessionary conditions sparked off
by widespread currency weakness in late 1997. In 1998, there was substantial
turmoil in markets throughout the world. In 1999, the democratically elected
government of Pakistan was over thrown by a military coup. The Russian
government also defaulted on all its domestic debt. 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 and hostile relations between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
. Currency Fluctuations The fund invests in securities denominated in various
currencies. Accordingly, a change in the value of any such currency against
the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the fund's assets denominated in that currency. Such changes will
also affect the fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of the fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens) the value of the fund's
securities denominated in that currency would be expected to decline.
. Investment and Repatriation Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the fund.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by
these or other countries in which the fund invests. 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. In 1998, the
government of Malaysia imposed currency
<PAGE>
controls which effectively made it impossible for foreign investors to
convert Malaysian ringgits to foreign currencies.
. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on securities exchanges located
in the countries in which the respective principal offices of the issuers of
the various securities are located, if that is the best available market.
Investments in certain markets may be made through American Depository
Receipts ("ADRs") and Global Depository Receipts ("GDRs") traded in the
United States or on foreign exchanges. Foreign securities markets are
generally not as developed or efficient as, and more volatile than, those in
the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and the fund's portfolio securities may be less
liquid and subject to more rapid and erratic price movements than securities
of comparable U.S. companies. Securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Commissions on foreign securities are generally higher
than commissions on United States exchanges, and while there is an increasing
number of overseas securities markets that have adopted a system of
negotiated rates, a number are still subject to an established schedule of
minimum commission rates. There is generally less government supervision and
regulation of foreign securities exchanges, brokers, and listed companies
than in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of payment, which
increase the likelihood of a "failed settlement." Failed settlements can
result in losses to the fund.
. Investment Funds The fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The fund's investment in these funds
is subject to the provisions of the 1940 Act. If the fund invests in such
investment funds, the fund's shareholders will bear not only their
proportionate share of the expenses of the fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
. Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also is often more difficult to
keep currently informed of corporate actions which affect the prices of
portfolio securities.
. Taxes The dividends and interest payable on certain of the fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the fund's
shareholders.
. Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
. Small Companies Small companies may have less experienced management and
fewer management resources than larger firms. A smaller company may have
greater difficulty obtaining access to capital markets, and may pay more for
the capital it obtains. In addition, smaller companies are more likely to be
involved in fewer market segments, making them more vulnerable to any
downturn in a given segment. Some of these factors may also apply, to a
lesser extent, to medium size companies.
. 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 most 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. The collapse of the ruble from its crawling peg
exchange rate against the U.S. dollar has set back the path of reform for
<PAGE>
several years. In many of the countries of Eastern Europe and Russia, there
is no stock exchange or formal market for securities. Such countries may also
have government exchange controls, currencies with no recognizable market
value relative to the established currencies of western market economies,
little or no experience in trading in securities, no financial reporting
standards, a lack of a banking and securities infrastructure to handle such
trading, and a legal tradition which does not recognize rights in private
property. In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the country's national
interest. Further, the governments in such countries may require governmental
or quasi-governmental authorities to act as custodian of the fund's assets
invested in such countries, and these authorities may not qualify as a
foreign custodian under the 1940 Act and exemptive relief from such Act may
be required. All of these considerations are among the factors which could
cause significant risks and uncertainties to investment in Eastern Europe and
Russia. The fund will only invest in a company located in, or a government
of, Eastern Europe and Russia, if it believes the potential return justifies
the risk.
. Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may experience sudden and
large adjustments in their currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. In 1999, the Brazalian real lost 30% of its value against the U.S.
dollar. Certain Latin American countries may impose restrictions on the free
conversion of their currency into foreign currencies, including the U.S.
dollar. There is no significant foreign exchange market for many currencies
and it would, as a result, be difficult for the fund to engage in foreign
currency transactions designed to protect the value of the fund's interests
in securities denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
. Japan
The Japan Fund's concentration of its investments in Japan means the fund
will be more dependent on the investment considerations discussed above and
may be more volatile than a fund which is broadly diversified geographically.
To the extent any of the other funds also invest in Japan, such investments
will be subject to these same factors. Additional factors relating to Japan
include the following:
Japan has experienced earthquakes and tidal waves of varying degrees of
severity, and the risks of such phenomena, and damage resulting therefrom,
continue to exist. Japan also has one of the world's highest population
densities. A significant percentage of the total population of Japan is
concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya.
Economy The Japanese economy languished for much of the last decade. Lack of
effective governmental action in the areas of tax reform to reduce high tax
rates, banking regulation to address enormous amounts of bad debt, and
economic reforms to attempt to stimulate spending are among the factors cited
as possible causes of Japan's economic problems. The yen has had a history of
unpredictable and volatile movements against the
<PAGE>
dollar; a weakening yen hurts U.S. investors holding yen denominated
securities. Finally, the Japanese stock market has experienced wild swings in
value and has often been considered significantly overvalued.
Energy Japan has historically depended on oil for most of its energy
requirements. Almost all of its oil is imported, the majority from the Middle
East. In the past, oil prices have had a major impact on the domestic
economy, but more recently Japan has worked to reduce its dependence on oil
by encouraging energy conservation and use of alternative fuels. In addition,
a restructuring of industry, with emphasis shifting from basic industries to
processing and assembly type industries, has contributed to the reduction of
oil consumption. However, there is no guarantee this favorable trend will
continue.
Foreign Trade Overseas trade is important to Japan's economy. Japan has few
natural resources and must export to pay for its imports of these basic
requirements. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors and
the large trade surpluses ensuing therefrom, Japan has had difficult
relations with its trading partners, particularly the U.S. It is possible
that trade sanctions or other protectionist measures could impact Japan
adversely in both the short- and long-term.
. Asia (ex-Japan)
Political Instability The political history of certain Asian countries has
been characterized by political uncertainty, intervention by the military in
civilian and economic spheres, and political corruption. Such developments,
if they continue to occur, could reverse favorable trends toward market and
economic reform, privatization, and removal of trade barriers and result in
significant disruption in securities markets.
Foreign Currency Certain Asian countries may have managed currencies which
are maintained at artificial levels to the U.S. dollar rather than at levels
determined by the market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in 1997 the Thai baht lost
46.75% of its value against the U.S. dollar. Certain Asian countries also may
restrict the free conversion of their currency into foreign currencies,
including the U.S. dollar. There is no significant foreign exchange market
for certain currencies and it would, as a result, be difficult for the fund
to engage in foreign currency transactions designed to protect the value of
the fund's interests in securities denominated in such currencies.
Debt A number of Asian companies are highly dependent on foreign loans for
their operation. In 1997, several Asian countries were forced to negotiate
loans from the International Monetary Fund ("IMF") and others that impose
strict repayment term schedules and require significant economic and
financial restructuring.
INVESTMENT PROGRAM
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Types of Securities
Set forth below is additional information about certain of the investments
described in each fund's prospectus.
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms
<PAGE>
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of course, there is no guarantee that the strategy will be successful,
and the fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid
Instruments.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures, and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counterparty or issuer of the Hybrid Instrument would be an additional risk
factor which the fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally
<PAGE>
regulates the trading of commodity futures by U.S. persons, the SEC, which
regulates the offer and sale of securities by and to U.S. persons, or any
other governmental regulatory authority.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in accordance with procedures prescribed
by the fund's Board of Directors. If, through the appreciation of illiquid
securities or the depreciation of liquid securities, the fund should be in a
position where more than 15% of the value of its net assets is invested in
illiquid assets, including restricted securities, the fund will take
appropriate steps to protect liquidity.
Notwithstanding the above, the fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Price-Fleming, under the
supervision of the fund's Board of Directors, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
fund's restriction of investing no more than 15% of its net assets in
illiquid securities. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this determination,
Price-Fleming will consider the trading markets for the specific security
taking into account the unregistered nature of a Rule 144A security. In
addition, Price-Fleming could consider the following: (1) frequency of trades
and quotes; (2) number of dealers and potential purchases; (3) dealer
undertakings to make a market; and (4) the nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored and, if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid,
the fund's holdings of illiquid securities would be reviewed to determine
what, if any, steps are required to assure that the fund does not invest more
than 15% of its net assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
Warrants
The fund may acquire warrants. Warrants can be highly volatile and 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 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.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.
PORTFOLIO MANAGEMENT PRACTICES
-------------------------------------------------------------------------------
All Funds except Foreign Equity Fund
Lending of Portfolio Securities
Securities loans are made to broker-dealers, institutional investors, or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent, marked to market on a daily basis. The collateral
received will consist of cash, U.S. government
<PAGE>
securities, letters of credit, or such other collateral as may be permitted
under its investment program. While the securities are being lent, the fund
will continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The fund has a right to call each loan
and obtain the securities, within such period of time which coincides with
the normal settlement period for purchases and sales of such securities in
the respective markets. The fund will not have the right to vote on
securities while they are being lent, but it will call a loan in anticipation
of any important vote. The 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 Price-Fleming to be of good standing and will
not be made unless, in the judgment of Price-Fleming, the consideration to be
earned from such loans would justify the risk.
All Funds
Interfund Borrowing and Lending
The fund is a party to an exemptive order received from the SEC on December
8, 1998, amended on November 23, 1999, that permits it to borrow money from
and/or lend money to other funds in the T. Rowe Price complex ("Price
Funds"). All loans are set at an interest rate between the rate charged on
overnight repurchase agreements and short-term bank loans. All loans are
subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The program is subject to the oversight
and periodic review of the Boards of Directors of the Price Funds.
Repurchase Agreements
The fund may enter into a repurchase agreement through which an investor
(such as the fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by S&P, P1 by Moody's, or the equivalent rating by T. Rowe Price.
At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will
be treated as illiquid securities. The fund will only enter into repurchase
agreements where (1) the underlying securities are of the type (excluding
maturity limitations) which the fund's investment guidelines would allow it
to purchase directly, (2) 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 (3) payment for the underlying security is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the fund
could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying
security during the period while the fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
Money Market Reserves
It is expected that the fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price and
Price-Fleming. Currently, two such money market funds are in
operation-Reserve Investment Fund ("RIF") and Government Reserve Investment
Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. Additional
series may be created in the future. These funds were created and operate
under an Exemptive Order issued by the SEC (Investment Company Act Release
No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
The GRF invests primarily in a portfolio of U.S. government-backed
securities, primarily U.S. Treasuries, and repurchase agreements thereon.
<PAGE>
The RIF and GRF provide a very efficient means of managing the cash reserves
of the fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.
Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.
Options
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by the fund. In
writing covered call options, the fund expects to generate additional premium
income which should serve to enhance the fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in 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 the fund.
A call option gives the holder (buyer) the "right to purchase", and the
writer (seller) has the "obligation to sell", a security or currency at a
specified price (the exercise price) at expiration of the option (European
style) or at any time until a certain date (the expiration date) (American
style). So long as the obligation of the writer of a call option continues,
he may be assigned an exercise notice by the broker-dealer through whom such
option was sold, requiring him to deliver the underlying security or currency
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold. To secure his obligation to deliver the underlying
security or currency in the case of a call option, a writer is required to
deposit in escrow the underlying security or currency or other assets in
accordance with the rules of a clearing corporation.
The fund generally will write only covered call options. This means that the
fund will either own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an
exercise price equal to or less than the exercise price of the "covered"
option. From time to time, the fund will write a call option that is not
covered as indicated above but where the fund will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as permitted by the SEC having a value equal to the
fluctuating market value of the optioned securities or currencies. While such
an option would be "covered" with sufficient collateral to satisfy SEC
prohibitions on issuing senior securities, this type of strategy would expose
the fund to the risks of writing uncovered options.
Portfolio securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the fund
generally will not do), but capable of enhancing the fund's total return.
When writing a covered call option, a fund, in return for the premium, gives
up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the
risk of loss should the price of the security or currency decline. Unlike one
who owns securities or currencies not subject to an option, the fund has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer. If a call option which the fund
has written expires, the fund will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call
option is exercised, the fund will realize a gain or loss from the sale of
the underlying security or currency. The fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the fund's
policy which limits the pledging
<PAGE>
or mortgaging of its assets. If the fund writes an uncovered option as
described above, it will bear the risk of having to purchase the security
subject to the option at a price higher than the exercise price of the
option. As the price of a security could appreciate substantially, the fund's
loss could be significant.
The premium received is the market value of an option. The premium the fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, 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 the fund for writing covered
call options will be recorded as a liability of the fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
fund is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the fund will be able to
effect such closing transactions at favorable prices. If the fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may
be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the fund may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the fund.
The fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options
The fund may write American or European style covered put options and
purchase options to close out options previously written by the fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at
the exercise price during the option period (American style) or at the
expiration of the option (European style). So long as the obligation of
<PAGE>
the writer continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to make
payment to the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call
options.
The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.)
The fund would generally write covered put options in circumstances where
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 the fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the fund. In addition, the
fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
The fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The fund may purchase American or European style put options. As the holder
of a put option, the fund has the right to sell the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The fund may
enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided next.
The fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The fund may also purchase put options at a time when the fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security
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or currency must decline sufficiently below the exercise price to cover the
premium and transaction costs, unless the put option is sold in a closing
sale transaction.
The fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the fund when purchasing
a put option will be recorded as an asset of the fund. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed (close of New York Stock Exchange), or, in the absence of such sale,
the latest bid price. This asset will be terminated upon expiration of the
option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
Purchasing Call Options
The fund may purchase American or European style call options. As the holder
of a call option, the fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase call options
for the purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The fund may also purchase call
options in order to acquire the underlying securities or currencies. Examples
of such uses of call options are provided next.
Call options may be purchased by the fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option
to expire, incurring a loss only to the extent of the premium paid for the
option.
The fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the fund would look to a clearing
corporation to exercise exchange-traded options, if the fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the fund as well as loss
of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the fund writes
a dealer option, it generally will be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the fund originally wrote the option. While the fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the fund, there can be no assurance that the fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the fund may be unable to
liquidate a dealer option. With respect to options written by the fund, the
inability to enter into a closing transaction may result in material losses
to the fund. For example, since the
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fund must maintain a secured position with respect to any call option on a
security it writes, the fund may not sell the assets which it has segregated
to secure the position while it is obligated under the option. This
requirement may impair a fund's ability to sell portfolio securities or
currencies at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The fund may treat the cover used for written Over-the-Counter ("OTC")
options as liquid if the dealer agrees that the fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The funds may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts") for hedging,
yield or return enhancement, and risk management purposes.
Stock index futures contracts may be used to provide a hedge for a portion of
the fund's portfolio, as a cash management tool, or as an efficient way for
Price-Fleming to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the fund's portfolio successfully, the fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the fund. In this regard, the
fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Although
techniques other than the sale and purchase of futures contracts could be
used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the fund's objectives in these
areas.
Regulatory Limitations
If the fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors without a shareholder vote and does not limit the
percentage of the fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding
<PAGE>
option or future is open, unless they are replaced with similar assets. As a
result, the commitment of a large portion of a fund's assets to cover or
identified accounts could impede portfolio management or the fund's ability
to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the fund would comply with such new
restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
units of a stock index) for a specified price, date, time, and place
designated at the time the contract is made. Brokerage fees are incurred when
a futures contract is bought or sold and margin deposits must be maintained.
Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the fund purchases or sells a security, no price would be paid or
received by the fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the fund's open positions
in futures contracts, the fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, or liquid assets known as "initial margin." The margin required for
a particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to market."
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the fund
realizes a gain; if it is more, the fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the fund
realizes a gain; if it is less, the fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
fund is not able to enter into an offsetting transaction, the fund will
continue to be required to maintain the margin deposits on the futures
contract.
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 (as adjusted by a
multiplier) 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 political and economic events.
<PAGE>
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Margin deposits required on futures trading are low. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit, if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
. Liquidity The fund may elect to close some or all of its futures positions
at any time prior to their expiration. The fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The fund may close its positions by taking opposite positions which would
operate to terminate the fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the fund, and the fund would realize
a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. 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 fund for hedging purposes is also
subject to Price-Fleming's ability to correctly predict movements in the
direction of the market. It is possible that, when the fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the fund's portfolio might decline. If this
were to occur, the fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, Price-Fleming believes that over time
the value of the fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that, if
the fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the
<PAGE>
fund would lose part or all of the benefit of increased value of those
underlying instruments that it has hedged, because it would have offsetting
losses in its futures positions. In addition, in such situations, if the fund
had insufficient cash, it might have to sell underlying instruments to meet
daily variation margin requirements. Such sales of underlying instruments
might be, but would not necessarily be, at increased prices (which would
reflect the rising market). The fund might have to sell underlying
instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by Price-Fleming might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the fund and other T. Rowe Price funds. Such aggregated orders would be
allocated among the funds and the other T. Rowe Price funds in a fair and
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. In addition, where the fund seeks to
close out an option position by writing or buying an offsetting option
covering the same index, underlying instrument or contract and having the
same exercise price and expiration date, its ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions, or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of
<PAGE>
an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (6) one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers'
orders.
Additional Futures and Options Contracts
Although the fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time the fund's order is placed and the time it is liquidated,
offset or exercised.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The fund's use of such contracts would include, but not be limited
to, the following:
First, when the fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when Price-Fleming believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the fund may hedge all or part of its
<PAGE>
foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy
for other currencies. In such a case, the fund may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the
value of the securities denominated in such currency. The use of this basket
hedging technique may be more efficient and economical than entering into
separate forward contracts for each currency held in the fund. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency
parties will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. However, Price-Fleming
believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the fund will
be served.
The fund may enter into forward contacts for any other purpose consistent
with the fund's investment objective and program. However, the fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the fund's holdings of liquid, high-grade debt securities, currency
available for cover of the forward contract(s), or other suitable cover as
permitted by the SEC. In determining the amount to be delivered under a
contract, the fund may net offsetting positions.
At the maturity of a forward contract, the fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the fund retains the portfolio security and engages in an offsetting
transaction, the fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by 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 the fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and there are costs
associated with currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to
the fund at one rate, while offering a lesser rate of exchange should the
fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts
The fund may enter into certain options, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will
be treated as Section 1256 contracts or straddles.
<PAGE>
Transactions that are considered Section 1256 contracts will be considered to
have been closed at the end of the fund's fiscal year and any gains or losses
will be recognized for tax purposes at that time. Such gains or losses from
the normal closing or settlement of such transactions will be characterized
as 60% long-term capital gain (taxable at a maximum rate of 20%) or loss and
40% short-term capital gain or loss regardless of the holding period of the
instrument (ordinary income or loss for foreign exchange contracts). The fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures, and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar-denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.
In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures, or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the fund.
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
fund's Board of Directors without shareholder approval. Any investment
restriction which involves a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets
of, or borrowings by, the fund. Calculation of the fund's total assets for
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the fund's prospectus or Statement
of Additional Information will not include cash collateral held in connection
with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the fund may not:
(1) Borrowing Borrow money except that the fund may (i) borrow for
non-leveraging, temporary, or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
of the fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The fund may borrow from banks, other
Price Funds, or other persons to the extent permitted by applicable law;
<PAGE>
(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 the fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry;
All Funds except Foreign Equity Fund
(4) Loans Make loans, although the fund may (i) lend portfolio securities and
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly distributed or privately placed
debt securities and purchase debt;
Loans (Foreign Equity Fund) Make loans, although the fund may (i)
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly distributed or privately placed
debt securities and purchase debt;
All Funds except Latin America Fund, Emerging Europe & Mediterranean Fund
(5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of its total assets,
more than 5% of the value of the fund's total assets would be invested in
the securities of a single issuer, except securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of a 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);
All Funds
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act; or
(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the fund may be deemed to be an underwriter within the
meaning of the 1933 Act 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 restriction (2), the fund does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state, or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.
<PAGE>
For purposes of investment restriction (4), the fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.
Operating Policies
As a matter of operating policy, the fund may not:
(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the fund's net asset value;
(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% of its net assets would be invested in such securities;
(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; or (ii)
securities of the Reserve Investment or Government Reserve Investment
Funds;
(6) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging, or hypothecating may not exceed
33/1//\\/3/\\% of the fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the fund would be invested in such
programs;
(9) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(10) Short Sales Effect short sales of securities; or
(11) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the fund would be invested in warrants.
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. Each 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.
MANAGEMENT OF THE FUNDS
-------------------------------------------------------------------------------
The officers and directors of the fund are listed below. Unless otherwise
noted, the address of each is 100 East Pratt Street, Baltimore, Maryland
21202. Except as indicated, each has been an employee of T. Rowe Price for
more than five years. In the list below, the fund's directors who are
considered "interested persons" of T. Rowe Price as defined under Section
2(a)(19) of the 1940 Act are noted with an asterisk (*). These directors are
referred to as inside directors by virtue of their officership, directorship,
and/or employment with T. Rowe Price.
<PAGE>
<PAGE>
GEORGE A. MURNAGHAN, 5/1/56, Vice President-Managing Director, T. Rowe Price;
Executive Vice President, Price-Fleming; Vice President, T. Rowe Price Trust
Company and T. Rowe Price Investment Services, Inc.
GONZALO PANGARO, 11/27/68, Vice President-Vice President, Price-Fleming
/a/ ROBERT A. REVEL-CHION, 3/9/65, Vice President-Vice President,
Price-Fleming; formerly (1994-1997) portfolio manager, Jardine Fleming (Hong
Kong), and (1987-1993) Assistant Investment Manager, Nestle Rewntree Pension
Trust
JAMES S. RIEPE, 6/25/43, Vice President-Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and
T. Rowe Price Services, Inc.; Chairman of the Board, President, and Trust
Officer, T. Rowe Price Trust Company; Director, Price-Fleming and General Re
Corporation
/a/ CHRISTOPHER ROTHERY, 5/26/63, Vice President-Vice President, Price-Fleming
/b/ R. TODD RUPPERT, 5/7/56, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
Services, Inc.
JAMES B.M. SEDDON, 6/17/64, Vice President-Vice President, Price-Fleming
ROBERT W. SMITH, 4/11/61, Vice President-Managing Director, T. Rowe Price;
Vice President, Price-Fleming
/a/ BENEDICT R.F. THOMAS, 8/27/64, Vice President-Vice President,
Price-Fleming; Chartered Financial Analyst
/a/ JUSTIN THOMSON, 1/14/68, Vice President-Vice President, Price-Fleming;
(1998 to present) Small Cap Co-Ordinator, Price-Fleming; formerly (1991-1998)
Portfolio Manager; G. T. Capital/Invesco
WILLIAM F. WENDLER II, 3/14/62, Vice President-Vice President, T. Rowe Price,
Price-Fleming, and T. Rowe Price Investment Services, Inc.
/a/ RICHARD T. WHITNEY, 5/7/58, Vice President-Managing Director, T. Rowe
Price; Vice President, Price-Fleming and T. Rowe Price Trust Company;
Chartered Financial Analyst
EDWARD A. WIESE, 4/12/59, Vice President-Vice President, T. Rowe Price and T.
Rowe Price Trust Company; Chartered Financial Analyst
PATRICIA B. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
JOSEPH A. CARRIER, 12/30/60, Treasurer-Vice President, T. Rowe Price and T.
Rowe Price Investment Services, Inc.
DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
/a/ ANN B. CRANMER, 3/23/47, Assistant Vice President-Vice President,
Price-Fleming
ROGER L. FIERY III, 2/10/59, Assistant Vice President-Vice President,
Price-Fleming and T. Rowe Price
/a/ LEAH P. HOLMES, 2/11/44, Assistant Vice President-Vice President,
Price-Fleming; Assistant Vice President, T. Rowe Price
INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price
(a) Messrs. Askew and Warren are Executive Vice Presidents of the
International Funds only. Messrs. Alderson, Campbell, Revel-Chion,
Conelius, Dydasco, Edwards, Macdonald, Rothery, Seddon, Thomas, Thomson,
and Whitney are Vice Presidents of the International Funds only. Mmes.
Cranmer and Holmes are Assistant Vice Presidents of the International
Funds only.
(b) Messrs. Ruppert and Warren are Vice Presidents of Institutional
International Funds.
<PAGE>
Compensation Table
The funds do not pay pension or retirement benefits to their independent
officers or directors. Also, any director of a fund who is an officer or
employee of T. Rowe Price or Price-Fleming does not receive any remuneration
from the fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Total Compensation from Fund and
Position Fund(a) Fund Complex Paid to Directors(b)
-------------------------------------- -------------------------------------------- ---------------------------------
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
International Stock Fund
Anthony W. Deering, Director $5,286 $81,000
Donald W. Dick, Director 4,749 81,000
Paul M. Wythes, Director 4,749 80,000
--------------------------------------------------------------------------------------------------------------------------
International Discovery Fund
Anthony W. Deering, Director $1,760 $81,000
Donald W. Dick, Director 1,782 81,000
Paul M. Wythes, Director 1,782 80,000
--------------------------------------------------------------------------------------------------------------------------
International Growth & Income Fund
$
Anthony W. Deering, Director 1,398 $81,000
Donald W. Dick, Director 1,390 81,000
Paul M. Wythes, Director 1,390 80,000
--------------------------------------------------------------------------------------------------------------------------
European Stock Fund
Anthony W. Deering, Director $2,194 $81,000
Donald W. Dick, Director 2,161 81,000
Paul M. Wythes, Director 2,161 80,000
--------------------------------------------------------------------------------------------------------------------------
Japan Fund
Anthony W. Deering, Director $1,798 $81,000
Donald W. Dick, Director 1,776 81,000
Paul M. Wythes, Director 1,776 80,000
--------------------------------------------------------------------------------------------------------------------------
New Asia Fund
Anthony W. Deering, Director $1,943 $81,000
Donald W. Dick, Director 1,945 81,000
Paul M. Wythes, Director 1,945 80,000
--------------------------------------------------------------------------------------------------------------------------
Latin America Fund
$
Anthony W. Deering, Director 1,747 $81,000
Donald W. Dick, Director 1,776 81,000
Paul M. Wythes, Director 1,776 80,000
--------------------------------------------------------------------------------------------------------------------------
Emerging Markets Stock Fund
Anthony W. Deering, Director $1,704 $81,000
Donald W. Dick, Director 1,740 81,000
Paul M. Wythes, Director 1,740 80,000
--------------------------------------------------------------------------------------------------------------------------
Global Stock Fund
Anthony W. Deering, Director $1,740 $81,000
Donald W. Dick, Director 1,730 81,000
Paul M. Wythes, Director 1,730 80,000
--------------------------------------------------------------------------------------------------------------------------
Foreign Equity Fund
Anthony W. Deering, Director $2,851 $81,000
Donald W. Dick, Director 2,707 81,000
Paul M. Wythes, Director 2,707 80,000
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Amounts in this column are based on accrued compensation from November
1, 1998 to October 31, 1999.
(b) Amounts in this column are based on compensation received from January
1, 1999 to December 31, 1999. The T. Rowe Price complex included 88 funds
as of December 31, 1999.
All Funds
The fund's Executive Committee, consisting of the fund's interested
directors, has been authorized by its respective Board of Directors to
exercise all powers of the Board to manage the funds in the intervals between
meetings of the Board, except the powers prohibited by statute from being
delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors of the fund, as
a group, owned less than 1% of the outstanding shares of the fund.
As of January 29, 2000, the following shareholders beneficially owned more
than 5% of the outstanding shares of the fund:
International Stock, New Asia, Japan and European Stock Funds, respectively:
Charles Schwab & Co. Inc., Reinvestment Account, Attn.: Mutual Fund Dept.,
101 West Montgomery Street, San Francisco, California 94104-4122.
International Stock: Pirateline & Co., T. Rowe Price Associates, Attn.: Fund
Accounting Dept., 100 East Pratt Street, Baltimore, Maryland 21201-1009.
Japan Fund: National-Financial Services for the Exclusive Benefit of our
Customers, 200 Liberty, One Financial Center, 4th Floor, New York, New York
10281-1003.
Foreign Equity Fund: PACO, c/o Mutual Funds Unit #38615, P.O. Box 3577, Los
Angeles, California 90051-1577.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, Price-Fleming provides the fund with
discretionary investment services. Specifically, Price-Fleming is responsible
for supervising and directing the investments of the fund in accordance with
the fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. Price-Fleming is
also responsible for effecting all security transactions on behalf of the
fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services,
Price-Fleming provides the fund with certain corporate administrative
services, including: maintaining the fund's corporate existence and corporate
records; registering and qualifying fund shares under federal laws;
monitoring the financial, accounting, and administrative functions of the
fund; maintaining liaison with the agents employed by the fund such as the
fund's custodian and transfer agent; assisting the fund in the coordination
of such agents' activities; and
<PAGE>
permitting Price-Fleming's employees to serve as officers, directors, and
committee members of the fund without cost to the fund.
The Management Agreement also provides that Price-Fleming, its directors,
officers, employees, and certain other persons performing specific functions
for the fund will only be liable to the fund for losses resulting from
willful misfeasance, bad faith, gross negligence, or reckless disregard of
duty.
Under the Management Agreement, Price-Fleming is permitted to utilize the
services or facilities of others to provide it or the funds 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 funds.
Certain administrative support is provided by T. Rowe Price, which receives
from Price-Fleming a fee of 0.15% of the market value of all assets in equity
accounts, 0.15% of the market value of all assets in active fixed income
accounts, and 0.035% of the market value of all assets in passive fixed
income accounts under Price-Fleming's management. Price-Fleming has entered
into research agreements with Fleming Investment Management Limited (FIM) and
Jardine Fleming International Holdings Limited (JFIH). For services under the
research agreements, FIM and JFIH each receive a fee of 0.075% of the market
value of all assets in equity accounts under Price-Fleming's management. FIM
and JFIH each receive a fee of 0.075% of the market value of all assets in
active fixed income accounts and 0.0175% of such market value in passive
fixed income accounts under Price-Fleming's management. In addition to the
research provided under these agreements, Price-Fleming has access to the
publicly available research materials produced by FIM and JFIH. FIM is a
wholly owned subsidiary of Flemings. JFIH is a wholly owned subsidiary of
Jardine Fleming.
On April 11, 2000, T. Rowe Price entered into an agreement with Flemings and
certain of its subsidiaries (collectively "Fleming Companies") to purchase
the Fleming Companies' 50% interest in Price-Fleming. As a result of the
purchase, T. Rowe Price will own all of Price-Fleming and have the right to
elect all of its directors. The transaction is subject to the approval of
several regulatory bodies outside the United States but, barring any
unexpected developments, should be finalized no later than December 31, 2000.
Because the transaction may be deemed to be a change in control of
Price-Fleming that would result in the termination of the investment
management agreements between Price-Fleming and the funds, we intend to seek
the approval of the boards of directors and shareholders of the funds of new
investment management agreements with Price-Fleming. It is anticipated that
any new investment management agreement would be identical in all material
respects to the existing agreements with Price-Fleming. We expect to hold
shareholder meetings to vote on the new agreements in the second half of this
year. Research agreements between Price-Fleming and the Fleming Companies
also will cease at the time the transaction becomes final. At that time, the
parties may enter into a transition agreement under which research and other
services will be provided to Price-Fleming by the Fleming Companies.
All Funds except Foreign Equity Fund
Management Fee
The fund pays 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 Price-Fleming on the first business day of the
next succeeding calendar month and is calculated as described next.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily Group Fee
accruals ("Daily Group Fee Accruals") for each month. The Daily Group Fee
Accrual for any particular day is computed by multiplying the Price Funds'
group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Price Fund's net assets for that day to the sum
of the aggregate net assets of the Price Funds for that day. The Daily Price
Funds' Group Fee Accrual for any particular day is calculated by multiplying
the fraction of one (1) over the number of calendar days in the year by the
annualized Daily Price Funds' Group Fee Accrual for that day as determined in
accordance with the following schedule:
<PAGE>
<TABLE>
Price Funds' Annual Group Base Fee Rate for Each
Level of Assets
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
------------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
------------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Next $40 billion
------------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion 0.295% Thereafter
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
For the purpose of calculating the Group Fee, the Price Funds include all the
mutual funds distributed by Investment Services, (excluding the T. Rowe Price
Spectrum Funds, and any institutional, index, or private label mutual funds).
For the purpose of calculating the Daily Price Funds' Group Fee Accrual for
any particular day, the net assets of each Price Fund are determined in
accordance with the funds' prospectus as of the close of business on the
previous business day on which the fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee
accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate and multiplying this product by the net assets of the fund for that day,
as determined in accordance with the fund's prospectus as of the close of
business on the previous business day on which the fund was open for
business. The individual fund fees of each fund are listed in the following
chart:
<TABLE>
<CAPTION>
<S> <C>
International Stock Fund 0.35%
International Discovery Fund 0.75
International Growth & Income Fund 0.35
European Stock Fund 0.50
Japan Fund 0.50
New Asia Fund 0.50
Latin America Fund 0.75
Emerging Markets Stock Fund 0.75
Global Stock Fund 0.35
Emerging Europe & Mediterranean Fund 0.75
</TABLE>
The following chart sets forth the total management fees if any, paid to
Price-Fleming by the funds, during the last three years:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
International Stock $67,463,000 $67,677,000 $67,678,000
International Discovery 2,637,000 2,476,000 3,313,000
International Growth & Income -- -- --
European Stock 11,960,000 10,502,000 7,315,000
Japan 2,345,000 1,261,000 1,444,000
New Asia 6,444,000 5,779,000 15,273,000
Latin America 2,162,000 3,530,000 3,989,000
Emerging Markets Stock 962,000 1,092,000 1,402,000
Global Stock 274,000 81,000 5,000
--------------------------------------------------------------------------------------------------------
</TABLE>
Foreign Equity Fund
For its services to the fund under the Management Agreement, Price-Fleming is
paid an annual fee, in monthly installments, based on the fund's average
daily net assets at the rate of 0.70%. For the fiscal years 1999, 1998, and
1997, Price-Fleming received from the fund management fees totaling
$22,916,000, $23,624,000, and $20,250,000, respectively.
<PAGE>
Limitation on Fund Expenses
The Management Agreement between each fund and Price-Fleming provides that
each fund will bear all expenses of its operations not specifically assumed
by Price-Fleming. Set forth in the prospectus are details of various expense
limitations agreed to by Price-Fleming and the funds.
T. Rowe Price Spectrum Fund, Inc.
The International Stock, International Discovery, European Stock, Japan, New
Asia, Latin America, and Emerging Markets Stock Funds are parties to Special
Servicing Agreements ("Agreement") between and among T. Rowe Price Spectrum
Fund, Inc. ("Spectrum Fund"), T. Rowe Price, Price-Fleming, and various other
T. Rowe Price funds which, along with such funds, are funds in which Spectrum
Fund invests (collectively all such funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors 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.
Management Related Services
As noted above, the Management Agreement spells out the expenses to be paid
by the fund. In addition to the Management Fee, the fund pays for the
following: shareholder service expenses; custodial, accounting, legal, and
audit fees; costs of preparing and printing prospectuses and reports sent to
shareholders; registration fees and expenses; proxy and annual meeting
expenses (if any); and director fees and expenses.
T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
acts as the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services. Services for certain types of
retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly owned subsidiary. The address for each is 100 East Pratt
St., Baltimore, MD 21202. Additionally, T. Rowe Price, under a separate
agreement with the funds, provides accounting services to the funds.
The funds paid the expenses shown in the following table for the fiscal year
ended October 31, 1999, to T. Rowe Price and its affiliates.
<TABLE>
<CAPTION>
Transfer Agent and Retirement Accounting
Fund Shareholder Services Subaccounting Services
---- -------------------- Services --------
--------
<S> <C> <C> <C>
International Stock $6,347,000 $4,529,000 $164,000
International Discovery 400,000 24,000 132,000
International Growth & Income 25,000 -- 97,000
European Stock 1,709,000 115,000 111,000
Japan 436,000 7,000 108,000
New Asia 1,735,000 138,000 122,000
Latin America 595,000 43,000 117,000
Emerging Markets Stock 260,000 19,000 106,000
Global Stock 136,000 28,000 106,000
Foreign Equity 32,000 -- 111,000
</TABLE>
<PAGE>
SERVICES BY OUTSIDE PARTIES
-------------------------------------------------------------------------------
The shares of some fund shareholders are held in omnibus accounts maintained
by various third parties, including retirement plan sponsors, insurance
companies, banks and broker-dealers. The fund has adopted an administrative
fee payment ("AFP") program that authorizes the fund to make payments to
these third parties. The payments are made for transfer agent, recordkeeping
and other administrative services provided by, or on behalf of, the third
parties with respect to such shareholders and the omnibus accounts. Under the
AFP program, the funds paid the amounts set forth below to various third
parties in 1999.
<TABLE>
<CAPTION>
<S> <C>
International Stock Fund $1,563,631.05
International Discovery Fund 23,430.79
European Stock Fund 5,698.23
New Asia Fund 36,371.44
Latin America Fund 25,952.64
</TABLE>
The Advisor Class has adopted an Advisor Class administrative fee payment
program ("Advisor Class AFP") under which various intermediaries, including
intermediaries receiving 12b-1 payments, may receive payments from the
Advisor Class in addition to 12b-1 fees for providing various recordkeeping
and transfer agent type services to the Advisor classes and/or shareholders
thereof. These services include: mailings of fund prospectuses, reports,
notices, proxies, and other materials to shareholders; transmission of net
purchase and redemption orders; maintenance of separate records for
shareholders reflecting purchases, redemptions, and share balances; mailing
of shareholder confirmations and periodic statements; and telephone services
in connection with the above.
DISTRIBUTOR FOR THE FUNDS
-------------------------------------------------------------------------------
Investment Services, a Maryland corporation formed in 1980 as a wholly owned
subsidiary of T. Rowe Price, serves as the fund's distributor. Investment
Services is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. The offering of the fund's shares is continuous.
Investment Services is located at the same address as the fund and T. Rowe
Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
fund will pay all fees and expenses in connection with: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling shares, except for those fees and expenses specifically
assumed by the fund. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the fund in connection with the sale
of its shares in the various states in which Investment Services is qualified
as a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for fund shares at net asset value. No sales charges are paid
by investors or the fund.
<PAGE>
International Stock Fund-Advisor Class
Distribution and Shareholder Services Plan
The fund Directors adopted a Plan pursuant to Rule 12b-1 on February 9, 2000
with respect to each Advisor Class. Each Plan provides that the Advisor Class
may compensate Investment Services or such other persons as the fund or
Investment Services designates, to finance any or all of the distribution,
shareholder servicing, maintenance of shareholder accounts, and/or other
administrative services with respect to Advisor Class shares. It is expected
that most, if not all, payments under the Plan will be made (either directly,
or indirectly through Investment Services) to brokers, dealers, banks,
insurance companies, and intermediaries other than Investment Services. Under
the Plan, each Advisor Class pays a fee at the annual rate of up to 0.25% of
that class's average daily net assets. Normally, the full amount of the fee
is paid to the intermediary on shares sold through that intermediary.
However, a lesser amount may be paid based on the level of services provided.
Intermediaries may use the payments for, among other purposes, compensating
employees engaged in sales and/or shareholder servicing of the Advisor Class,
as well as for a wide variety of other purposes associated with supporting,
distributing, and servicing the Advisor Class shares. The amount of fees paid
by an Advisor Class during any year may be more or less than the cost of
distribution and other services provided to the Advisor Class and its
investors. NASD rules limit the amount of annual distribution and service
fees that may be paid by a mutual fund and impose a ceiling on the cumulative
distribution fees paid. The Plan complies with these rules.
The Plan requires that Investment Services provide, or cause to be provided,
to the fund Directors for their review a quarterly written report identifying
the amounts expended by each Advisor Class and the purposes for which such
expenditures were made.
Prior to approving the Plan, the fund considered various factors relating to
the implementation of the Plan and determined that there is a reasonable
likelihood that the Plan will benefit each fund, its Advisor Class and the
Advisor Class's shareholders. The fund Directors noted that to the extent the
Plan allows a fund to sell Advisor Class shares in markets to which it would
not otherwise have access, the Plan may result in additional sales of fund
shares. This may enable a fund to achieve economies of scale that could
reduce expenses. In addition, certain on-going shareholder services may be
provided more effectively by intermediaries with which shareholders have an
existing relationship.
The Plan continues until March 31, 2001. The Plan is renewable thereafter
from year to year with respect to each fund, so long as its continuance is
approved at least annually (1) by the vote of a majority of the fund
Directors and (2) by a vote of the majority of the Rule 12b-1 Directors, cast
in person at a meeting called for the purpose of voting on such approval. The
Plan may not be amended to increase materially the amount of fees paid by any
Advisor Class thereunder unless such amendment is approved by a majority vote
of the outstanding shares of such Advisor Class and by the fund Directors in
the manner prescribed by Rule 12b-1 under the 1940 Act. The Plan is
terminable with respect to an Advisor Class at any time by a vote of a
majority of the Rule 12b-1 Directors or by a majority vote of the outstanding
shares in the Advisor Class.
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the fund's U.S.
securities and cash, but it does not participate in the fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
The fund has entered into a Custodian Agreement with The Chase Manhattan
Bank, N.A., London, pursuant to which portfolio securities which are
purchased outside the United States are maintained in the custody of various
foreign branches of The Chase Manhattan Bank and such other custodians,
including foreign banks and foreign securities depositories as are approved
in accordance with regulations under the 1940 Act. The
<PAGE>
address for The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman
Street, London, EC2P 2HD, England.
CODE OF ETHICS
-------------------------------------------------------------------------------
The fund, its investment adviser (Price-Fleming), and its principal
underwriter (T. Rowe Price Investment Services) have a written Code of Ethics
which requires all Access Persons to obtain prior clearance before engaging
in personal securities transactions. Transactions must be executed within
three business days of their clearance. In addition, all employees must
report their personal securities transactions within 10 days after the end of
the calendar quarter. Access Persons will not be permitted to effect
transactions in a security: if there are pending client orders in the
security; the security has been purchased or sold by a client within seven
calendar days; the security is being considered for purchase for a client; or
the security is subject to internal trading restrictions. In addition, Access
Persons are prohibited from profiting from short-term trading (e.g.,
purchases and sales involving the same security within 60 days). Any person
becoming an Access Person must file a statement of personal securities
holdings within 10 days of this date. All Access Persons are required to file
an annual statement with respect to their personal securities holdings. Any
material violation of the Code of Ethics is reported to the Board of the
fund. The Board also reviews the administration of the Code of Ethics on an
annual basis.
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the fund are made by Price-Fleming. Price-Fleming 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 equity securities, it is Price-Fleming's policy to
obtain quality execution at the most favorable prices through responsible
brokers and dealers and 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. As a
general practice, over-the-counter orders are executed with market-makers. In
selecting among market-makers, Price-Fleming 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, their expertise in
particular markets and brokerage and research services provided by them. 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. 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
<PAGE>
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, the 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 through 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 funds with a broker or dealer who
furnishes brokerage and/or research services benefitting such clients,
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.
Price-Fleming may receive research services in connection with brokerage
transactions, including designations in fixed price offerings.
Price-Fleming may cause a 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 a 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 is 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 brokers-dealers that 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 a particular fund will not necessarily be used by
Price-Fleming exclusively in connection with the management of that fund.
Some of Price-Fleming's other clients have investment objectives and programs
similar to those of the fund. Price-Fleming may 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
<PAGE>
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 may follow 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 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.
None of the funds allocates 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, from time to time, Price-Fleming may place orders for
the fund's portfolio transactions with broker-dealer affiliates of Robert
Fleming Holdings Limited ("RF"), an affiliate of Price-Fleming. RF, 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 International Holdings Limited,
a wholly owned subsidiary of Jardine Fleming Group Limited ("JF"). JF is
owned by RF. The affiliates through whose trading desks such orders may be
placed include Fleming Investment Management Limited ("FIM"). FIM is a wholly
owned subsidiary of RF. These trading desks operate under strict instructions
from the fund's portfolio manager as to quantity, price, and broker or dealer
designated to execute the transactions. Neither RF, JF, nor their affiliates
will receive any commission, fee, or other remuneration specifically for the
use of their trading desks, although orders for a fund's portfolio
transactions may be placed with affiliates of RF and JF who may receive a
commission for the trade.
The Board of Directors of the funds has authorized Price-Fleming to utilize
certain affiliates of RF and JF 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.
The above-referenced authorization was made in accordance with Section 17(e)
of the 1940 Act and Rule 17e-1 thereunder which require the funds'
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. It is not expected that any portion of the commissions,
fees, brokerage, or similar payments received by the affiliates of RF in such
transactions will be recaptured by the fund.
The following tables present information on affiliated brokers. Column 1
represents the total dollar amount of brokerage commissions paid to the
broker. The dollar amount of brokerage commissions paid for the two previous
fiscal year ends are also listed as marked. The second column represents the
percentage that the commissions paid to the affiliated broker represent the
aggregate brokerage commissions paid by the fund. The third column shows the
percentage that the dollar amount of transactions involving the payment of
commissions effected through the affiliated broker represents the aggregate
dollar amount of brokerage transactions.
<PAGE>
The following amounts and percentages were paid to JFS during the year 1999:
<TABLE>
<CAPTION>
Total Brokerage Percent of Brokerage Percent of Dollar
Fund --------------- -------------------- -----------------
---- Commissions Commissions Paid to Amount of
----------- ------------------- ---------
Affiliated Brokers Transactions
------------------ ------------
Involving
---------
Affiliated
----------
Brokers
-------
<S> <C> <C> <C>
International Stock $ 66,871 1% 1%
International Discovery 57,629 5 5
International Growth & Income -- -- --
European Stock 7,061 1 1
Japan 64,341 9 9
New Asia 332,889 10 9
Foreign Equity 26,632 1 1
Latin America -- -- --
Emerging Markets Stock 17,452 5 4
Global Stock 152 1 1
</TABLE>
The following brokerage commission amounts were paid to JFS during the years
1998 and 1997:
<TABLE>
<CAPTION>
Fund 1998 1997
---- ---- ----
<S> <C> <C>
International Stock $38,393 $ 228,000
International Discovery 48,484 180,995
European Stock -- --
Japan 25,876 127,117
New Asia -- 1,051,831
Foreign Equity 31,284 70,010
Latin America -- --
Emerging Markets Stock 17,268 69,648
Global Stock 81 206
</TABLE>
The following amounts and percentages were paid to RF&Co during the year
1999:
<TABLE>
<CAPTION>
Total Brokerage Percent of Brokerage Percent of Dollar
Fund --------------- -------------------- -----------------
---- Commissions Commissions Paid to Amount of
----------- ------------------- ---------
Affiliated Brokers Transactions
------------------ ------------
Involving Affiliated
--------------------
Brokers
-------
<S> <C> <C> <C>
International Stock $189,739 3% 3%
International Discovery 6,837 1 1
International Growth & Income -- -- --
European Stock 47,198 5 5
Japan -- -- --
New Asia -- -- --
Foreign Equity 50,635 2 2
Latin America 112,032 27 27
Emerging Markets Stock 13,190 4 4
Global Stock 1,565 1 2
</TABLE>
<PAGE>
The following brokerage commission amounts were paid to RF&Co during the
years 1998 and 1997:
<TABLE>
<CAPTION>
Fund 1998 1997
---- ---- ----
<S> <C> <C>
International Stock $409,044 $317,208
International Discovery 17,219 22,867
European Stock 104,784 51,846
Japan -- 6,478
New Asia -- --
Foreign Equity 141,877 96,488
Latin America 281,701 95,295
Emerging Markets Stock 38,476 27,548
Global Stock 812 402
</TABLE>
The following amounts and percentages were paid to Ord Minnett during the
year 1999:
<TABLE>
<CAPTION>
Total Brokerage Percent of Brokerage Percent of Dollar
Fund --------------- -------------------- -----------------
---- Commissions Commissions Paid to Amount of Transactions
----------- ------------------- ----------------------
Affiliated Brokers Involving Affiliated Brokers
------------------ ----------------------------
<S> <C> <C> <C>
International Stock $16,789 1% 1%
International
Discovery 3,954 1 1
International Growth &
Income 165 1 1
European Stock -- -- --
Japan -- -- --
New Asia -- -- --
Foreign Equity 6,264 1 1
Latin America -- -- --
Emerging Markets Stock -- -- --
Global Stock 56 1 1
</TABLE>
The following brokerage commission amounts were paid to Ord Minnett during
the years 1998 and 1997:
<TABLE>
<CAPTION>
Fund 1998 1997
---- ---- ----
<S> <C> <C>
International Stock $50,801 $43,327
International Discovery 3,441 17,775
European Stock -- 358
Japan -- --
New Asia -- --
Foreign Equity 23,040 14,063
Latin America -- --
Emerging Markets Stock -- --
Global Stock 72 131
</TABLE>
<PAGE>
The following amounts and percentages were paid to Fleming Martin during the
year 1999:
<TABLE>
<CAPTION>
Total Brokerage Percent of Brokerage Percent of Dollar
Fund --------------- -------------------- -----------------
---- Commissions Commissions Paid to Amount of Transactions
----------- ------------------- ----------------------
Affiliated Brokers Involving Affiliated Brokers
------------------ ----------------------------
<S> <C> <C> <C>
International Stock -- -- --
International
Discovery -- -- --
International Growth &
Income -- -- --
European Stock -- -- --
Japan -- -- --
New Asia -- -- --
Foreign Equity -- -- --
Latin America -- -- --
Emerging Markets Stock $6,609 2% 2%
Global Stock -- -- --
</TABLE>
In accordance with the written procedures adopted pursuant to Rule 17e-1, the
independent directors of each fund reviewed the 1999 transactions with
affiliated brokers and determined that such transactions resulted in an
economic advantage to the funds either in the form of lower execution costs
or otherwise.
Other
The amounts shown below involved trades with brokers acting as agents or
underwriters, in which such brokers received total commissions, including
discounts received in connection with underwritings for the fiscal years
ended 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
International Stock $6,541,536 $7,269,954 $9,102,292
International Discovery 1,114,250 465,793 1,526,634
International Growth & Income 45,662 -- --
European Stock 943,554 1,752,000 1,016,985
Japan 751,766 463,374 440,701
New Asia 3,466,222 2,635,426 7,978,905
Latin America 414,229 651,009 927,301
Emerging Markets Stock 346,455 323,787 780,941
Global Stock 781,182 82,781 61,979
Foreign Equity 2,551,877 2,524,406 3,506,559
</TABLE>
The percentage of total portfolio transactions, placed with firms which
provided research, statistical, or other services to T. Rowe Price in
connection with the management of the fund, or in some cases, to the fund for
the fiscal year ended 1999, 1998, and 1997, are shown below:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
International Stock 96% 93% 94%
International Discovery 94 85 83
International Growth & Income 100 -- --
European Stock 94 94 95
Japan 91 94 70
New Asia 90 83 87
Latin America 73 57 90
Emerging Markets Stock 89 72 87
Global Stock 100 99 99
Foreign Equity 97 92 95
</TABLE>
<PAGE>
The portfolio turnover rate for each fund for the fiscal years ended 1999,
1998, and 1997, was as follows:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
International Stock 17.6% 12.2% 15.8%
International Discovery 98.2 34.2 72.7
International Growth & Income 35.8/a/ -- --
European Stock 15.7 26.8 17.5
Japan 58.8 66.9 32.3
New Asia 69.9 68.1 41.8
Latin America 43.2 19.0 32.7
Emerging Markets Stock 59.0 54.5 84.3
Global Stock 37.5 47.1 41.8
Foreign Equity 18.2 18.6 15.9
-------------------------------------------------------------------------------
</TABLE>
(a) From the commencement of operations December 21, 1998, to October 31,
1999.
PRICING OF SECURITIES
-------------------------------------------------------------------------------
Equity securities are valued at the last quoted sales price at the time the
valuations are made. A security that is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their amortized cost in local
currency which, when combined with accrued interest, approximates fair value.
For the purposes of determining the fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value, are stated at fair
value as determined in good faith by or under the supervision of the officers
of the fund, as authorized by the Board of Directors.
Trading in the portfolio securities of each fund may take place in various
foreign markets on certain days (such as Saturday) when the funds are not
open for business and do not calculate their net asset values. In addition,
trading in a fund's portfolio securities may not occur on days when the fund
is open.
NET ASSET VALUE PER SHARE
-------------------------------------------------------------------------------
The purchase and redemption price of the fund's shares is equal to the fund's
net asset value per share or share price. The fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total
<PAGE>
number of shares outstanding. The net asset value per share of the fund,
other than the Japan Fund, is calculated as of the close of trading on the
New York Stock Exchange ("NYSE") every day the NYSE is open for trading. The
net asset value per share of the Japan Fund is calculated as of the close of
trading on the NYSE each day the NYSE and the Tokyo Stock Exchange ("TSE")
are both open. The NYSE is closed on the following days: New Year's Day, Dr.
Martin Luther King, Jr. Holiday, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The TSE is
scheduled to be closed on the following weekdays in 2000: January 3; February
11; March 20; May 3, 4, and 5; July 20; September 15; October 10; and
November 3 and 23, as well as the following weekdays in 2001: January 1, 2,
3, and 8; February 12; March 20; April 30; May 3 and 4; July 20; September
24; October 8; November 23; and December 24 and 31. If the TSE closes on any
additional or different dates, the Japan Fund will be closed on such dates.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, or in
the case of the Japan Fund, either the NYSE or TSE is closed, (b) during
which trading on the NYSE is restricted, (c) during which an emergency exists
as a result of which disposal by the fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the fund may by order permit such
a suspension for the protection of the fund's shareholders; provided that
applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c),
or (d) exist.
DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, dividends and capital gain distributions, if any,
will be reinvested on the reinvestment date using the NAV per share of that
date. The reinvestment date normally precedes the payment date by one day,
although the exact timing is subject to change and can be as great as 10
days.
TAX STATUS
-------------------------------------------------------------------------------
The fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.
Dividends and distributions paid by the fund (other than Global 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. Income dividends paid by the Global Stock
Fund are eligible for the dividends-received deduction for corporate
shareholders, only to the extent the Global Stock Fund's income consists of
dividends paid by United States Corporations. Capital gain distributions paid
from this 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. The fund must declare dividends by
December 31 of each year equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to avoid a federal
excise tax and distribute within 12 months 100% of ordinary income and
capital gains as of December 31 to avoid federal income tax.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the ordinary income dividend paid by the fund will be
increased. If the result is a loss, the income dividend paid by the fund will
be decreased, or to the extent such dividend has already been paid, it may be
classified as a return of capital. Adjustments to reflect these gains and
losses will be made at the end of the fund's taxable year.
<PAGE>
At the time of your purchase, the fund's net asset value may reflect
undistributed income, 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, the fund is permitted to carry forward its net realized capital
losses, if any, for eight years and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute
such gains.
Income received by the fund from sources within various foreign countries may
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 or
governments, the fund may file an election with the Internal Revenue Service
to "pass through" to the fund's shareholders the amount of any foreign income
taxes paid by the fund. Pursuant to this election, shareholders will be
required to: (1) include in gross income, even though not actually received,
their respective pro rata share of foreign taxes paid by the fund; (2) treat
their pro rata share of foreign taxes as paid by them; and (3) 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 a 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 (1) the foreign taxes paid,
and (2) 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.
If, in any taxable year, the fund should not qualify as a regulated
investment company under the Code: (1) 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; (2) 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 the fund may qualify for the 70% deduction for dividends
received by corporations; and (3) foreign tax credits would not "pass
through" to shareholders.
Taxation of Foreign Shareholders
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 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 by the fund are not subject to tax
unless the foreign shareholder is a nonresident alien individual who was
physically present in the U.S. during the tax year for more than 182 days.
Passive Foreign Investment Companies
The fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies. Such trusts have been the
only or primary way to invest in certain countries. In addition to bearing
their proportionate share of the trust's expenses (management fees and
operating expenses), shareholders will also indirectly bear similar expenses
of such trusts. Capital gains on the sale of such holdings are considered
ordinary income regardless of how long the fund held 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.
<PAGE>
To avoid such tax and interest, the fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; deductions for losses are allowable only to the extent
of any gains resulting from these deemed sales for prior taxable years. Such
gains and losses will be treated as ordinary income. The fund will be
required to distribute any resulting income even though it has not sold the
security and received cash to pay such distributions.
INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------
Total Return Performance
The fund's calculation of total return performance includes the reinvestment
of all capital gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a shareholder in the
fund. Total return is calculated as the percentage change between the
beginning value of a static account in the fund and the ending value of that
account measured by the then current net asset value, including all shares
acquired through reinvestment of income and capital gain dividends. The
results shown are historical and should not be considered indicative of the
future performance of the fund. Each average annual compound rate of return
is derived from the cumulative performance of the fund over the time period
specified. The annual compound rate of return for the fund over any other
period of time will vary from the average.
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
10/31/99 10/31/99 10/31/99 10/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
International Stock Fund 20.67% 61.36% 168.44% 1,227.03% 05/09/80
International Discovery
Fund 82.11 69.96 151.83 223.61 12/30/88
International Growth &
Income Fund 8.27 -- -- 10.0 12/21/98
European Stock Fund 11.44 124.34 -- 200.41 02/28/90
Japan Fund 102.68 26.39 -- 59.90 12/30/91
Latin America Fund 13.57 -17.55 -- -14.92 12/29/93
New Asia Fund 48.73 -15.75 -- 84.32 09/28/90
Emerging Markets Stock
Fund 40.08 -- -- 16.23 03/31/95
Global Stock Fund 24.17 -- -- 86.12 12/29/95
Foreign Equity Fund 20.79 62.24 170.99 161.78 09/07/89
-------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
10/31/99 10/31/99 10/31/99 10/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
International Stock Fund 20.67% 10.04% 10.38% 14.20% 05/09/80
International Discovery
Fund 82.11 11.20 9.68 11.45 12/30/88
International Growth &
Income Fund 8.27* -- -- -- 12/21/98
European Stock Fund 11.44 17.21 -- 12.04 02/28/90
Japan Fund 102.68 4.79 -- 6.17 12/30/91
Latin America Fund 13.57 -3.79 -- -2.73 12/29/93
New Asia Fund 48.73 -3.37 -- 6.96 09/28/90
Emerging Markets Stock
Fund 40.08 -- -- 3.33 03/31/95
Global Stock Fund 24.17 -- -- 17.57 12/29/95
Foreign Equity Fund 20.79 10.16 10.48 9.95 09/07/89
-------------------------------------------------------------------------------
</TABLE>
* For the period from fund's inception, 12/21/98, to 10/31/99.
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the fund's
total return performance, ranking, or any other measure of the fund's
performance may be compared to any one or combination of the following: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities comparable to those in which the fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the fund or the general economic, business, investment, or
financial environment in which the fund operates; (3) various financial,
economic, and market statistics developed by brokers, dealers, and other
persons may be used to illustrate aspects of the fund's performance; (4) the
effect of tax-deferred compounding on the fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the fund invests may be compared to
relevant indices or surveys in order to evaluate the fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by Investment
Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
financial, and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the fund;
individual securities within the fund's portfolio; and their philosophy
regarding the selection of individual stocks, including why specific stocks
have been added, removed, or excluded from the fund's portfolio.
Other Features and Benefits
The fund is a member of the T. Rowe Price family of funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price and/or Investment Services may be made available.
No-Load Versus Load and 12b-1 Funds
Many mutual funds charge sales fees to investors or use fund assets to
finance distribution activities. These fees are in addition to the normal
advisory fees and expenses charged by all mutual funds. There are several
types
<PAGE>
of fees charged which vary in magnitude and which may often be used in
combination. A sales charge (or "load") can be charged at the time the fund
is purchased (front-end load) or at the time of redemption (back-end load).
Front-end loads are charged on the total amount invested. Back-end loads or
"redemption fees" are charged either on the amount originally invested or on
the amount redeemed. 12b-1 plans allow for the payment of marketing and sales
expenses from fund assets. These expenses are usually computed daily as a
fixed percentage of assets.
The T. Rowe Price funds, including the Advisor Classes, are considered to be
"no-load" funds. They impose no front-end or back-end sales loads. However,
the Advisor Classes do charge 12b-1 fees. Under applicable National
Association of Securities Dealers Regulation, Inc. ("NASDR") regulations,
mutual funds that have no front-end or deferred sales charges and whose total
asset-based charges for sales-related expenses and/or service fees (as
defined by NASDR) do not exceed 0.25% of average net assets per year may be
referred to as no-load funds.
Redemptions in Kind
The fund has filed a notice of election under Rule 18f-1 of the 1940 Act.
This permits the fund to effect redemptions in kind as set forth in its
prospectus.
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the fund, it would be the responsibility of the
shareholder to dispose of the securities. The shareholder would be at risk
that the value of the securities would decline prior to their sale, that it
would be difficult to sell the securities and that brokerage fees could be
incurred.
Issuance of Fund Shares for Securities
Transactions involving issuance of fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
CAPITAL STOCK
-------------------------------------------------------------------------------
The T. Rowe Price International Funds, Inc. (the "International Corporation")
is a Maryland corporation. The Institutional International Funds, Inc. (the
"Institutional Corporation") was organized in 1989, as a Maryland
corporation. Each Corporation is registered with the SEC under the 1940 Act
as a diversified, open-end investment company, commonly known as a "mutual
fund."
Currently, the International Corporation consists of the following 13 series,
each representing a separate class of shares and having different objectives
and investment policies. The 13 series are as follows: International Stock
Fund, International Bond Fund, International Discovery Fund, European Stock
Fund, New Asia Fund, Global Bond Fund, Japan Fund, Latin America Fund,
Emerging Markets Bond Fund, Emerging Markets Stock Fund, Global Stock Fund,
International Growth & Income Fund, and Emerging Europe & Mediterranean Fund.
Effective May 1, 1998, the T. Rowe Price Global Government Bond Fund changed
its name to the T. Rowe Price Global Bond Fund. (The bond funds are described
in a separate Statement of Additional Information.) Currently, the
Institutional Corporation consists of one series, the Foreign Equity Fund.
Each Charter also provides that the Board of Directors may issue additional
series of shares.
The fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the 1940 Act and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other
<PAGE>
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. The Board of Directors may
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the fund has authorized to issue
without shareholder approval.
Each share of each series 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
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the fund, a special meeting of
shareholders of the fund shall be called by the Secretary of the fund on the
written request of shareholders entitled to cast at least 10% of all the
votes of the fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of the fund to the extent required by
Section 16(c) of the 1940 Act.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The fund's shares are registered for sale under the 1933 Act. Registration of
the fund's shares is not required under any state law, but the fund is
required to make certain filings with and pay fees to the states in order to
sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is The Chrysler Building,
405 Lexington Avenue, New York, New York 10174, is legal counsel to the fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the funds.
<PAGE>
The financial statements of the funds for the year ended October 31, 1999.
The report of independent accountants are included in each fund's Annual
Report for the year ended October 31, 1999. A copy of each Annual and
Semiannual Report accompanies this Statement of Additional Information. The
following financial statements and the report of independent accountants
appearing in each Annual Report for the year ended October 31, 1999, and the
unaudited Semiannual Report for the six months ended April 30, 2000, are
incorporated into this Statement of Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
INTERNATIONAL INTERNATIONAL EUROPEAN
STOCK DISCOVERY STOCK
----- --------- -----
<C> <S> <S> <S>
Financial Highlights 12 10 10
Portfolio of Investments, October
31, 1999 13-24 11-18 11-17
Statement of Assets and
Liabilities, October 31, 1999 25 19 18
Statement of Operations, year
ended October 31, 1999 26 20 19
Statement of Changes in Net
Assets, years ended
October 31, 1999 and October 31,
1998 27 21 20
Notes to Financial Statements,
October 31, 1999 28-31 22-25 21-24
Report of Independent Accountants 32 26 25
</TABLE>
<TABLE>
<CAPTION>
LATIN NEW ASIA JAPAN
AMERICA -------- -----
-------
<C> <S> <S> <S>
Financial Highlights 12 9 11
Portfolio of Investments, October 31, 1999 13-15 10-13 12-15
Statement of Assets and Liabilities, October 31,
1999 16 14 16
Statement of Operations, year ended October 31,
1999 17 15 17
Statement of Changes in Net Assets, years ended
October 31, 1999 and October 31, 1998 18 16 18
Notes to Financial Statements, October 31, 1999 19-22 17-20 19-22
Report of Independent Accountants 23 21 23
</TABLE>
<TABLE>
<CAPTION>
EMERGING FOREIGN EQUITY
MARKETS STOCK --------------
-------------
<S> <S> <C>
Financial Highlights 9 8
Portfolio of Investments, October 31, 1999 10-17 9-13
Statement of Assets and Liabilities, October
31, 1999 18 14
Statement of Operations, year ended October
31, 1999 19 15
Statement of Changes in Net Assets, years
ended
October 31, 1999 and October 31, 1998 20 16
Notes to Financial Statements, October 31,
1999 21-25 17-18
Report of Independent Accountants 26 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOBAL STOCK
------------
<C> <S>
Financial Highlights 12
Statement of Net Assets, October 31, 1999 13-27
Statement of Operations, year ended October 31, 1999 28
Statement of Changes in Net Assets, years ended
October 31, 1999 and October 31, 1998 29
Notes to Financial Statements, October 31, 1999 30-33
Report of Independent Accountants 34
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH & INCOME
---------------
<C> <S>
Financial Highlights 11
Statement of Net Assets, October 31, 1999 12-20
Statement of Operations, December 21, 1998
(commencement of operations) to October 31, 1999 21
Statement of Changes in Net Assets,
December 21, 1998 (commencement of operations)
to October 31, 1999 22
Notes to Financial Statements, October 31, 1999 23-25
Report of Independent Accountants 26
</TABLE>
<TABLE>
<CAPTION>
SEMI-ANNUAL REPORT REFERENCES:
INTERNATIONAL INTERNATIONAL EUROPEAN
STOCK DISCOVERY STOCK
----- --------- -----
<C> <S> <S> <S>
Financial Highlights 12 10 11
Portfolio of Investments, April 30,
2000 13-22 11-20 12-18
Statement of Assets and Liabilities,
April 30, 2000 23 21 19
Statement of Operations, for the six
months ended
April 30, 2000 24 22 20
Statement of Changes in Net Assets,
for the
six months ended April 30, 2000 and
year ended October 31, 1999 25 23 21
Notes to Financial Statements, April
30, 2000 26-29 24-27 22-26
</TABLE>
<TABLE>
<CAPTION>
EMERGING JAPAN FOREIGN EQUITY
MARKETS STOCK ----- --------------
-------------
<S> <S> <C> <C>
1
Financial Highlights 9 0 8
Portfolio of Investments, April 30,
2000 10-17 11-14 9-13
Statement of Assets and Liabilities,
April 30, 2000 18 15 14
Statement of Operations, for the six
months ended
April 30, 2000 19 16 15
Statement of Changes in Net Assets, for
the
six months ended April 30, 2000 and
year ended October 31, 1999 20 17 16
Notes to Financial Statements, April
30, 2000 21-25 18-21 17-18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GLOBAL STOCK NEW ASIA LATIN AMERICA
------------ -------- -------------
<S> <S> <C> <C>
Financial Highlights 13 9 10
Statement of Net Assets, April 30,
2000 14-26 10-14 11-14
Statement of Operations, for the six
months ended
April 30, 2000 27 15 15
Statement of Changes in Net Assets,
for the
six months ended April 30, 2000 and
year ended October 31, 1999 28 16 16
Notes to Financial Statements, April
30, 2000 29-32 17-21 17-20
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH & INCOME
---------------
<C> <S>
Financial Highlights 10
Statement of Net Assets, April 30, 2000 11-20
Statement of Operations, for the six months ended April
30, 2000 21
Statement of Changes in Net Assets, for the six months
ended April 30, 2000 and December 21, 1998
(commencement of operations) to October 31, 1999 22
Notes to Financial Statements, April 30, 2000 23-26
</TABLE>
