<PAGE>
FELLOW SHAREHOLDERS
Before we review the financial markets and your Fund's performance, we want to
mention that you have received two consecutive annual reports because your
Fund's fiscal year-end was recently changed from February 28 to May 31.
MARKET ENVIRONMENT
Bond funds remained under pressure during the three months ended May 31, as
the Federal Reserve continued to tighten and interest rates rose across the
board. An acceleration in economic growth has been evident since mid-1993 when
the economy began to shake off previous handicaps: the sharp decline in
defense spending, the burden of debt accumulated during the 1980s by
households, and weak growth overseas. These problems have not gone away, but
the economy is achieving reasonably good growth on the strength of solid
consumer spending and robust business spending on fixed equipment.
Since the highly accommodative monetary policy of 1992 and 1993 has clearly
borne fruit, the Fed began dismantling it in early February. The federal funds
rate (the rate banks charge each other for overnight loans) was raised in a
series of steps from 3% to 4.25% to achieve what the Fed calls a "neutral"
monetary policy, neither restrictive nor stimulative. Money market yields rose
with the federal funds rate, climbing 100 to 150 basis points over the last
six months. Intermediate- and long-term yields rose as well, with increases
ranging from 125 to 180 basis points for the two-year Treasury note, for
example. The magnified response of intermediate yields reflected the
expectation that the Fed would tighten considerably further over the next year
or two.
PERFORMANCE AND STRATEGY REVIEW
This was a difficult environment for all bond investments, but in some ways
particularly so for the short-term maturities targeted by your Fund. While
rates rose broadly, the largest absolute increases were in the one- to
five-year maturity range. As a result the yield curve actually steepened at
the short end, even though it flattened overall.
INTEREST RATE LEVELS CHART
A line graph compares the yields of the 5-Year Treasury Bond, the 2-Year AA
Finance Note, the 2-Year Treasury Note, and the federal funds rate from
5/31/93 to 5/31/94.
We had been expecting interest rates to rise and had taken certain measures to
cushion the negative effect on the portfolio, such as shortening the duration
moderately and investing outside the U.S. (Duration is a more accurate
indicator of a portfolio's price sensitivity to interest rate changes than its
weighted average maturity.) In fact, rates rose much more swiftly and steeply
than we anticipated, so with hindsight we should have taken even more
defensive measures, like increasing the cash position. At the time, however,
we were reluctant to accept the substantial cut in yield that such a policy
would have entailed. The global rise in rates following the Fed's tightening
was also unexpected and torpedoed the prices of our overseas holdings
(primarily currency-hedged European notes listed as "hybrid securities" in the
Sector Diversification table following this report).
<PAGE>
Against this background, the Fund's return was negative for the quarter but
remained positive for the 12-month period, as shown below. Results lagged
those of our peer group average mainly because of the Fund's slightly longer
duration and exposure to foreign markets.
PERFORMANCE COMPARISON
Periods Ended 5/31/94
3 Months 12 Months
------------------------
Short-Term Bond Fund -1.65% 1.36%
Lipper Short Investment-
Grade Debt Funds Average -1.24 1.87
- ---------------------------------------------------
We made a number of changes to position the portfolio more effectively for
the rising rate environment we anticipate during the rest of the year. We sold
various longer-term corporate notes and replaced them with floating-rate notes
whose coupons reset periodically to reflect current short-term rates. At
quarter-end, about 7% of the Fund was in floating-rate corporate notes and
another 13% in adjustable rate mortgage securities. Concurrently, we sharply
reduced our position in inverse floating rate CMOs (collateralized mortgage
obligations) from 9% to 2%. These securities perform best when rates are
falling and were very beneficial to the Fund in the past. We also increased
the Fund's reserve position from a nominal amount to 8%. All these adjustments
reflect our decision to accept some loss of income in return for less
principal fluctuation. Accordingly, the Fund's overall yield has dropped
slightly.
OUTLOOK
The rise in interest rates along with higher taxes should dampen the pace of
economic growth during the balance of the year. However, consumer sentiment
has been buoyed by the falling unemployment rate and gains in personal income,
and interest rates are still relatively low compared with the 1980s. Thus, any
slowdown should be gradual. If economic growth is around a 3% rate in the
second half, the Federal Reserve will likely tighten monetary policy a bit
further before the year is out. The magnified response of note and bond yields
to the initial phase of Fed tightening is probably over, judging from the
reaction of bond yields to the tightening in May. A flattening of the yield
curve with short-term rates rising more than long-term yields is typical of
this phase of the interest rate cycle. Nevertheless, bond investors are highly
sensitive to signs of inflation, and bond markets will remain volatile.
We hope the second half of the year will be less harrowing than the first
half, but plan to maintain a defensive posture as we await further
developments.
Respectfully submitted,
/s/Veena A. Kutler
Veena A. Kutler
President
June 20, 1994
<PAGE>
STATISTICAL HIGHLIGHTS
T. ROWE PRICE SHORT-TERM BOND FUND / MAY 31, 1994
KEY STATISTICS
Dividend Yield* Periods Ended 5/31/94
- ----------------------------------- ---------------------
3 Months 5.51%
12 Months 5.95
Dividend Per Share
- -----------------------------------
3 Months $0.07
12 Months 0.29
Change in Per-Share Value
- -----------------------------------
3 Months (From $5.00 to $4.85) $-0.15
12 Months (From $5.07 to $4.85) -0.22
Weighted Average Maturity 2.1 yrs.
Weighted Average Effective Duration 2.0 yrs.
- ---------------------------------------------------------
*Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period.
QUALITY DIVERSIFICATION
Percent of Net Assets
TRPA Quality Rating* 5/31/93 2/28/94 5/31/94
- -------------------- ------- ------- -------
1 53% 56% 48%
2 18 12 17
3 22 26 31
4 7 5 3
5 0 1 1
- --------------------------------------------
WEIGHTED AVERAGE 1.9 1.8 1.9
- --------------------------------------------
*On a scale of 1 to 10, with Grade 1 representing highest quality.
SECTOR DIVERSIFICATION
Percent of Net Assets
5/31/93 2/28/94 5/31/94
- -----------------------------------------------------
Corporate Bonds & Notes 36% 30% 31%
U.S. Government Mortgage-
Backed Securities 32 25 24
Stripped Mortgage
Securities 0 4 6
Inverse Floating Rate
CMOs 2 9 2
Asset-Backed Securities 15 10 17
Commercial Paper 5 0 7
U.S. Government
Obligations/Agencies 8 14 6
Hybrid Instruments 0 5 5
U.S. $ Denominated
Foreign Securities 1 1 1
Non-U.S. $ Denominated
Foreign Securities 1 1 0
Other Assets Less Liabilities 0 1 1
- -----------------------------------------------------
<PAGE>
FISCAL-YEAR PERFORMANCE COMPARISON
A line graph compares the 5/31/94 value of a hypothetical $10,000 investment
made in the Short-Term Bond Fund at its inception (3/2/84) and a similar
investment made concurrently in the Lehman 1-3 Year Gov't/Corp. Index. At
5/31/94, the Fund investment would have been worth $21904 and the Lehman Index
investment would have been worth $23746.
FISCAL-YEAR PERFORMANCE
Periods Ended May 31, 1994
Since Inception
1 Year 5 Years* (3/2/84)*
------ -------- ---------------
1.36% 7.07% 7.95%
- --------------------------------
* Average Annual Compound Total Return
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
<PAGE>
INVESTMENT RECORD
T. ROWE PRICE SHORT-TERM BOND FUND
The table below shows the investment record of one share of the T. Rowe Price
Short-Term Bond Fund, purchased at the original offering price of $5.00. Over
this time, interest rates have been volatile. The results shown should not be
considered a representation of the dividend income or capital gain or loss
which may be realized from an investment made in the Fund today.
- ------------------------------------------------------------------------------
With
Dividends
and
Fiscal Net Capital With Capital
Year Asset Income Gain Dividends Gains Total
Ended Value Dividends Distributions/2/ Reinvested Reinvested Return
- ----------- ----- --------- ---------------- ---------- ---------- ------
2/28/851 $4.97 $0.53 - $5.53 $5.53 10.58%
1986 5.17 0.47 - 6.30 6.30 14.00
1987 5.21 0.40 - 6.86 6.86 8.78
1988 5.08 0.39 - 7.22 7.22 5.36
1989 4.88 0.41 - 7.54 7.54 4.31
1990 4.91 0.42 - 8.25 8.25 9.42
1991 4.94 0.39 $0.03 8.98 9.04 9.61
1992 5.05 0.35 - 9.85 9.91 9.70
1993 5.09 0.33 - 10.60 10.67 7.63
1994 5.00 0.31 - 11.06 11.14 4.36
5/31/943 4.85 0.07 - 10.88 10.95 -1.65
- -------------------------------------------------------------------------
Total $4.07 $0.03
- -------------------------------------------------------------------------
/1/ From inception 3/2/84 to 2/28/85.
/2/ Includes short-term capital gain of $0.03 on 12/31/90.
/3/ Fiscal year-end changed from February 28 to May 31; figures are for three
months from 3/1/94 to 5/31/94.
<PAGE>
STATEMENT OF NET ASSETS (AMOUNTS IN THOUSANDS)
T. ROWE PRICE SHORT-TERM BOND FUND/MAY 31, 1994
<TABLE>
<CAPTION>
Corporate Bonds & Notes---30.8%
Face
Amount Value
------------- --------
<S> <C> <C>
BANKING & FINANCE---20.5%
American General Finance, 5.80%, 4/1/97........................................................... $7,000 $6,813
AVCO Financial Services, Sr. Notes, 7.50%, 11/15/96............................................... 5,000 5,094
Branch Banking & Trust Company, MTN, 4.75%, 5/15/96............................................... 5,000 4,852
Citicorp, 3.875%, 5/29/98......................................................................... 5,000 4,955
MTN, 5.70%, 2/12/96............................................................................. 5,000 4,960
Countrywide Funding, MTN, 6.92%, 6/1/95........................................................... 4,000 4,048
First Chicago, 9.875%, 7/1/99..................................................................... 5,000 5,494
MTN, 9.00%, 6/6/96.............................................................................. 5,000 5,235
Goldman Sachs Group L.P., 4.80%, 3/30/97.......................................................... 10,000 9,950
Hutton, E.F. Group, Notes, 8.875%, 5/1/96......................................................... 4,250 4,369
KeyCorp, MTN, 8.98%, 6/11/96...................................................................... 4,000 4,175
MBNA, 6.875%, 10/1/99............................................................................. 5,000 4,850
Mellon Financial, Gtd. Notes, 5.375%, 8/1/95...................................................... 5,000 4,970
Mercantile Bankshares, Sr. Notes, 6.13%, 7/15/98 (Private Placement).............................. 3,500 3,485
Morgan Stanley Group, 8.00%, 10/15/96............................................................. 5,000 5,130
NationsBank, 5.375%, 12/1/95...................................................................... 5,000 4,939
Salomon, MTN, 5.00%, 2/1/96....................................................................... 9,500 7,861
Shearson Lehman Holdings, MTN, 5.25%, 1/2/96...................................................... 5,000 4,948
Smith Barney Shearson, Sr. Notes, 5.375%, 6/1/96.................................................. 10,000 9,777
Society Bank, MTN, 6.50%, 4/25/97................................................................. 5,000 4,963
Suntrust Banks, Notes, 8.375%, 3/1/96............................................................. 3,000 3,092
Wells Fargo & Company, MTN, 8.35%, 11/1/96........................................................ 4,200 4,357
World Savings & Loan Assn., MTN, 4.875%, 3/1/96................................................... 5,000 4,878
123,195
INDUSTRIALS---6.9%
Ford Capital, Eurobond, 9.125%, 4/8/96............................................................ 5,000 5,219
Ford Motor Credit, MTN, 9.70%, 6/2/95............................................................. 1,000 1,037
General Electric Capital, MTN, 8.65%, 8/2/94...................................................... 800 805
GPA Leasing USA, Sub. I, Equip. Trust Certs., 9.125%, 12/2/96..................................... 3,870 3,449
IBM, Notes, 9.00%, 5/1/98......................................................................... 5,000 5,134
Northern Telecom, Notes, 8.25%, 6/13/96........................................................... 5,000 5,148
Phillip Morris Companies, MTN, 8.50%, 3/13/96..................................................... 5,000 5,167
Sears Roebuck & Company, MTN, 8.00%, 10/21/96..................................................... 1,500 1,524
8.58%, 7/24/95................................................................................ 2,500 2,585
9.19%, 3/7/95................................................................................. 600 626
Notes, 8.55%, 8/1/96............................................................................ 1,500 1,550
Sony Capital, MTN, 6.97%, 6/30/97................................................................. 4,500 4,505
Toyota Motor Credit, Eurobond, 7.25%, 12/13/96.................................................... 5,000 5,163
41,912
UTILITIES---3.4%
Florida Power, MTN, 8.40%, 8/1/96................................................................. 550 570
Grand Metropolitan Investment., Sr. Notes, 8.125%, 8/15/96........................................ 10,000 10,295
GTE, Deb., 8.85%, 3/1/98.......................................................................... 5,220 5,481
Southern New England Telecommunications, MTN, 7.65%, 9/5/95....................................... $4,000 $4,083
20,429
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (COST---$187,390) 185,536
U.S. Government Mortgage-Backed Securities---31.8%
U.S. GOVERNMENT GUARANTEED OBLIGATIONS---6.4%
Government National Mortgage Assn., I, 7.50%, 6/15 - 10/15/16..................................... 3,043 2,952
8.50%, 2/15/05 - 3/15/06...................................................................... 1,400 1,430
10.50%, 11/15/15.............................................................................. 642 703
11.00%, 7/15/13............................................................................... 412 465
11.50%, 10/15/10 - 3/15/15.................................................................... 386 443
12.00%, 1/15/13 - 4/15/15..................................................................... 263 304
12.50%, 7/15/10 - 5/15/14..................................................................... 391 456
13.00%, 11/15/12 - 4/15/15.................................................................... 167 196
ARM, II, 4.00%, 11/20 - 12/20/23................................................................ 7,004 6,545
4.75%, 3/20/22................................................................................ 979 950
4.875%, 7/20/21............................................................................... 1,205 1,169
5.00%, 4/20/22................................................................................ 1,445 1,410
5.50%, 10/20/21............................................................................... 11,086 10,823
Graduated Payment Mortgage, I, 9.50%, 8/15 - 10/15/09........................................... 132 135
11.00%, 8/15/10............................................................................. 124 134
11.25%, 6/15/13 - 1/15/16................................................................... 1,556 1,720
11.75%, 7/15/13 - 12/15/15.................................................................. 4,245 4,746
13.00%, 9/15/11............................................................................. 25 29
II, 11.00%, 9/20/13 - 4/20/14................................................................. 88 94
11.25%, 8/20/13 - 12/20/15.................................................................. 203 223
Midget, I, 9.00%, 7/15/01 - 2/15/06............................................................. 1,678 1,750
9.50%, 5/15/01 - 4/15/05...................................................................... 395 418
10.00%, 4/15/98 - 10/15/04.................................................................... 1,169 1,251
11.50%, 4/15 - 5/15/00........................................................................ 129 140
38,486
U.S. GOVERNMENT AGENCY OBLIGATIONS---16.2%
Federal Home Loan Bank, VR, Step Up Note, 4.60%, 3/1/99........................................... 5,000 4,725
Federal Home Loan Mortgage, 5.25%, 6/1/97......................................................... 120 121
6.00%, 10/15/17 - 10/15/20.................................................................... 3,102 2,840
7.00%, 7/15/06 - 7/15/21...................................................................... 12,705 12,416
7.50%, 1/15/19................................................................................ 8,000 7,966
9.00%, 7/1/01 - 7/1/02........................................................................ 2,833 2,911
9.50%, 8/1/01 - 9/1/02........................................................................ 2,329 2,419
10.00%, 1/1/01 - 10/1/05...................................................................... 1,234 1,291
11.00%, 8/1/00 - 2/1/01....................................................................... 1,228 1,298
5 year balloon, 9.50%, 8/1 - 11/1/95............................................................ 490 506
7 year balloon, 9.50%, 4/1 - 8/1/97............................................................. 151 156
ARM, 5.208%, 3/1/19............................................................................. 2,124 2,078
5.21%, 8/1/15................................................................................. 89 90
5.248%, 12/1/18............................................................................... 839 818
5.25%, 12/1/17................................................................................ 678 663
5.375%, 10/1/17 - 1/1/20...................................................................... 2,079 2,113
5.473%, 1/1/20................................................................................ $1,005 $983
5.50%, 4/1/18................................................................................. 1,172 1,214
5.519%, 6/1/21................................................................................ 622 606
5.666%, 9/1/19................................................................................ 1,544 1,591
5.75%, 5/1/18................................................................................. 703 684
6.504%, 5/1/19................................................................................ 231 228
Federal National Mortgage Assn., 5.50%, 8/1/97 - 11/1/05.......................................... 392 381
6.00%, 9/1/10................................................................................. 2,397 2,325
6.50%, 1/25/23................................................................................ 21,504 20,590
7.00%, 9/25/18................................................................................ 4,000 3,904
7.50%, 5/25/18 - 8/25/21...................................................................... 7,334 7,355
9.00%, 3/1/97 - 7/1/98........................................................................ 3,417 3,530
9.50%, 5/1/97 - 1/1/98........................................................................ 385 399
10.00%, 6/1/97................................................................................ 233 245
11.00%, 10/1/00 - 4/1/04...................................................................... 530 569
ARM, 5.068%, 1/1/19............................................................................. 341 344
5.088%, 3/1/18................................................................................ 1,791 1,811
5.13%, 7/1/17................................................................................. 687 672
5.15%, 9/1/19................................................................................. 2,301 2,358
5.20%, 8/1/17................................................................................. 880 861
5.25%, 9/1 - 10/1/18.......................................................................... 274 268
5.255%, 5/1/19................................................................................ 992 1,011
5.375%, 3/1 - 9/1/17.......................................................................... 273 267
5.48%, 10/1/21................................................................................ 798 792
5.66%, 11/1/19................................................................................ 2,017 2,045
6.139%, 9/1/18................................................................................ 393 400
97,844
U.S. GOVERNMENT AGENCY-BACKED---1.0%
Collateralized Mortgage Obligation, 9.10%, 10/25/09............................................... 1,716 1,738
MLTrust XXXIII, CMO, 8.05%, 8/1/18................................................................ 4,082 4,098
5,836
INVERSE FLOATING RATE CMO'S---2.5%
Collateralized Mortgage Obligation, 17.00%, 3/20/18............................................... 1,436 1,438
Federal Home Loan Mortgage, 6.578%, 11/15/97...................................................... 3,382 3,099
10.537%, 8/15/08................................................................................ 5,000 3,450
10.931%, 5/15/08................................................................................ 1,024 861
13.163%, 3/15/97................................................................................ 1,840 1,874
15.557%, 5/15/99................................................................................ 2,201 2,253
Federal National Mortgage Assn., 13.81375%, 5/25/99............................................... 2,042 2,055
15,030
STRIPPED MORTGAGE SECURITIES**---5.7%
American Housing Trust, Interest Only, 0.803%, 1/25/22............................................ 312,847 8,212
Federal Home Loan Mortgage, CMO, Interest Only, 4.7125%, 4/15/23.................................. 48,100 3,638
6.00%, 12/15/08................................................................................. 4,973 1,414
6.50%, 8/15/13.................................................................................. 17,260 3,290
Inverse Floating Rate, CMO, Interest Only, 0.50%, 8/15/16....................................... $68,962 $733
4.7125%, 4/15/23.............................................................................. 42,179 2,663
5.0375%, 5/15/22.............................................................................. 25,513 2,280
6.163%, 1/15/18............................................................................... 24,606 1,500
Federal National Mortgage Assn., CMO, Interest Only, 6.50%, 8/25/13............................... 36,986 7,073
Inverse Floating Rate, Interest Only, 4.6625%, 11/25/23......................................... 13,135 858
Principal Only, Zero Coupon, 2/15/17............................................................ 2,691 2,570
34,231
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES (COST---$195,713) 191,427
Asset-Backed Securities---17.4%
AUTO LOANS-BACKED---1.9%
Ford Credit Grantor Trust, 7.80%, 2/15/96......................................................... 161 162
General Motors Acceptance Grantor Trust, 7.90%, 1/15/96........................................... 65 64
Meridian Grantor Trust, 7.95%, 2/15/96............................................................ 74 74
Olympic Automobile Receivable Trust, 4.95%, 10/15/99.............................................. 1,966 1,916
UCFC Loan Trust, 3.8875%, 12/25/24................................................................ 4,656 4,661
USAA Auto Loan Grantor Trust, 5.00%, 11/15/99..................................................... 4,613 4,597
11,474
CREDIT CARD RECEIVABLES-BACKED---2.6%
Chase Credit Card Trust, 8.45%, 11/15/97.......................................................... 192 193
Dover Credit Card Trust, 8.25%, 10/15/97.......................................................... 221 221
MBNA Master Credit Card Trust, 3.587%, 3/15/01.................................................... 10,000 9,938
Sears Credit Account Trust, 9.35%, 10/15/97....................................................... 5,000 5,170
15,522
FOREIGN GOVERNMENT-BACKED---1.9%
AP Investment II, Collateral Note, (144a), 7.125%, 10/4/94........................................ 2,250 2,250
MAS Capital Cayman Limited, (144a), Zero Coupon, 4/15/94.......................................... 10,000 9,394
11,644
HOME EQUITY LOANS-BACKED---1.8%
AFC Mortgage Loan Trust, 6.40%, 5/25/25........................................................... 9,923 9,627
SPNB Home Equity Loan, 7.85%, 5/15/98............................................................. 117 118
U.S. Home Equity Loan, 8.50%, 4/15/21............................................................. 1,322 1,344
11,089
TRADE RECEIVABLES-BACKED---3.3%
Encyclopedia Brittannica, 6.76%, 3/15/02.......................................................... 5,000 4,900
ITT Floorplan Receivables, MTN, 3.7625%, 2/15/01.................................................. 10,000 9,969
John Deere Owner Trust, 3.675%, 9/29/99........................................................... 2,377 2,376
Unisys Receivables, 5.05%, 11/15/96............................................................... 2,500 2,447
19,692
WHOLE LOANS-BACKED---5.9%
Great Western Bank, ARM, 5.15%, 7/25/17........................................................... 2,200 2,167
Guardian Savings & Loan, MPC, ARM, 6.829%, 12/25/19............................................... 3,898 3,771
6.841%, 12/25/19................................................................................ 3,206 3,102
7.172%, 10/25/19................................................................................ 581 562
Homeowners Federal Savings & Loan, MPC, ARM, 5.414%, 12/1/17...................................... 1,874 1,889
Mercury Savings Trust, ARM, 6.171%, 10/25/18...................................................... 1,295 1,274
Prudential Home Mortgage Securities, 7.20%, 4/28/22............................................... 8,210 8,040
Resolution Trust Corp., MPC, 5.937%, 1/25/22...................................................... $1,874 $1,877
5.235%, 11/15/20................................................................................ 3,010 2,996
Ryland Mortgage Securities, ARM, 5.518%, 10/1/20.................................................. 3,368 3,403
Salomon Mortgage Security VII, CMO, 8.731%, 11/25/20.............................................. 366 367
Sears Mortgage Securities, 5.297%, 8/29/21........................................................ 5,902 5,756
35,204
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES (COST---$105,865) 104,625
U.S. Government Obligations---5.5%
U.S. Treasury Notes, 4.25%, 12/31/95.............................................................. 26,155 25,562
5.125%, 3/31/96................................................................................. 3,900 3,845
6.125%, 12/31/96................................................................................ 3,500 3,496
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST---$33,401) 32,903
Hybrid Instruments---5.4%
Barclays Bank, Basket Notes, 5.00%, 1/16/96; principal repayment value is indexed to average swap
rate of four European currencies; includes put option at 80% of par............................. 19,250 16,846
International Bank for Reconstruction, Zero Coupon, 8/7/97; floating coupon rate determined by
exchange rate spread between two European currencies............................................ 4,600 3,812
Salomon Inc., Basket Note, 5.00%, 2/1/96; principal repayment value is indexed to average swap
rate of three European currencies; includes put option at 80% of par............................ 14,750 12,206
- -------------------------------------------------------------------------------------------------------------------------
TOTAL HYBRID INSTRUMENTS (COST---$37,416) 32,864
U.S. $ Denominated Foreign Securities/1/---1.2%
Asian Development Bank, Eurobonds, 8.00%, 12/10/96................................................ 2,000 2,039
Province of Ontario, Sr. Notes, 8.25%, 4/8/96..................................................... 5,000 5,155
- -------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. $ DENOMINATED FOREIGN SECURITIES (COST---$6,984) 7,194
Non-U.S. $ Denominated Foreign Securities/2/---0.2%
Mexican Cetes Treasury Bills, 11.99%, 6/9/94 (Cost---$1,054)...................................... MXN 3,288 984
Commercial Paper---6.7%
BP Australia Finance Ltd., 4.35%, 6/1/94.......................................................... $13,839 13,837
Harvard University, 4.25%, 6/1/94................................................................. 13,564 13,562
UBS Finance (Delaware), 4.30%, 6/1/94............................................................. $13,000 $12,999
- -------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST---$40,398) 40,398
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES---99.0% (COST---$608,221) 595,931
- -------------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities---1.0% ............................................................. 5,993
--------
NET ASSETS CONSISTING OF:
Accumulated net investment income---net of distributions.......................................... 121
Accumulated realized gains/losses---net of distributions.......................................... (16,471)
Unrealized depreciation of investments............................................................ (12,290)
Paid-in-capital applicable to 124,222,034 shares of $0.01 par value capital
stock outstanding; 1,000,000,000 shares authorized.............................................. 630,564
-------------
NET ASSETS---100.0%............................................................................... $601,924
--------
--------
NET ASSET VALUE PER SHARE......................................................................... $4.85
--------
--------
- -------------------------------------------------------------------------------------------------------------------------
<FN>
/1/Marketable securities (payable in U.S. dollars) issued or guaranteed by a
foreign government or community.
/2/Denominated in foreign currency.
** - For Interest Only securities, face amount represents notional
principal, on which the Fund receives interest.
ARM - Adjustable Rate Mortgages
CMO - Collateralized Mortgage Obligation
MPC - Mortgage Pass-Through Certificates
MTN - Medium Term Notes
VR - Variable Rate
144a - Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers.
MXN - Mexican peso denominated
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
T. ROWE PRICE SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1994 Year Ended
[double dagger] Feb. 28, 1994
--------------------- -------------
Amounts in Thousands
-----------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest income................................. $10,107 $43,323
--------------------- -------------
Expenses
Investment management fees.................... 708 2,873
Shareholder servicing fees & expenses......... 447 1,420
Custodian and accounting fees & expenses....... 58 271
Registration fees & expenses.................... 16 104
Legal & auditing fees......................... 14 35
Prospectus & shareholder reports.............. 13 47
Directors' fees & expenses.................... 3 15
Miscellaneous................................. 4 17
--------------------- -------------
Total expenses................................ 1,263 4,782
--------------------- -------------
Net investment income........................... 8,844 38,541
--------------------- -------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss
Securities.................................... (4,537) (4,158)
Currencies and forward currency exchange
contracts................................... (6) (10)
--------------------- -------------
Net realized loss............................. (4,543) (4,168)
Change in unrealized appreciation or (15,924) (7,588)
depreciation.................................... --------------------- -------------
Net loss on investments......................... (20,467) (11,756)
--------------------- -------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS ................................ $(11,623) $26,785
--------------------- -------------
--------------------- -------------
- ------------------------------------------------------------------------------------
<FN>
[double dagger] The Fund's fiscal year-end was changed to May 31.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
T. ROWE PRICE SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
Three
Months Ended
May 31, 1994 Year Ended
[double ---------------------------------------
dagger] Feb. 28, 1994 Feb. 28, 1993
------------ ------------- -------------
Amounts in Thousands
----------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income.................................. $8,844 $38,541 $31,042
Net realized loss on investments....................... (4,543) (4,168) (2,167)
Change in unrealized appreciation or depreciation of
investments ......................................... (15,924) (7,588) 5,370
------------ ------------- -------------
Increase (decrease) in net assets from operations........ (11,623) 26,785 34,245
------------ ------------- -------------
Distributions to shareholders
Net investment income.................................. (8,723) (34,238) (31,053)
Tax return of capital.................................. - (4,489) -
------------ ------------- -------------
Decrease in net assets from distributions to
shareholders......................................... (8,723) (38,727) (31,053)
------------ ------------- -------------
Capital share transactions/1/
Sold .................................................. 63,603 459,507 419,725
Distributions reinvested .............................. 7,356 35,993 24,593
Redeemed .............................................. (116,755) (371,822) (288,160)
------------ ------------- -------------
Increase (decrease) in net assets from capital share
transactions......................................... (45,796) 123,678 156,158
------------ ------------- -------------
Total increase (decrease) ............................... (66,142) 111,736 159,350
NET ASSETS
Beginning of period.................................... 668,066 556,330 396,980
------------ ------------- -------------
End of period.......................................... $601,924 $668,066 $556,330
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
/1/Share transactions
Sold .................................................. 12,926 shs. 90,418 shs. 82,708 shs.
Distributions reinvested .............................. 1,505 7,089 4,859
Redeemed .............................................. (23,760) (73,263) (56,936)
------------ ------------- -------------
Increase (decrease) in shares outstanding ............. (9,329) shs. 24,244 shs. 30,631 shs.
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
<FN>
[double dagger] The Fund's fiscal year-end was changed to May 31.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
T. ROWE PRICE SHORT-TERM BOND FUND / MAY 31, 1994
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Short-Term Bond Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. Effective March 1, 1994, the fiscal year-end of the Fund
changed from February 28 to May 31.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities 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 money market yields.
For purposes of determining the Fund's net asset value per share, all assets
and liabilities initially expressed in foreign currencies are converted into
U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by, or under the supervision of, the officers of
the Fund, as authorized by the Board of Directors.
B) Currency translation - Foreign currency amounts are translated into U.S.
dollars at prevailing exchange rates as follows: assets and liabilities at the
rate of exchange at the end of the respective period, purchases and sales of
securities and income and expenses at the rate of exchange prevailing on the
dates of such transactions.
C) Premiums and Discounts - Except for Mortgage-Backed securities, premiums
and discounts on debt securities are amortized for both financial and tax
reporting purposes.
D) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles.
NOTE 2 - FINANCIAL INSTRUMENTS
As a part of its investment program, the Fund engages in the following
activities, the nature and risk of which are set forth more fully in the
Fund's Prospectus and Statement of Additional Information.
A) Securities Lending - To earn additional income, the Fund lends its
securities to approved brokers. At May 31, 1994, the market value of
securities on loan was $749,000 for which the Fund was fully collateralized by
cash. Although the risk is mitigated by the collateral, the Fund could
experience a delay in recovering its securities and possibly experience a
capital loss if the borrower fails to return them.
B) Other - Purchases and sales of portfolio and U.S. Government securities
excluding short-term were as follows:
Three Months
Ended Year Ended
May 31, 1994 Feb. 28, 1994
------------ -------------
Portfolio Securities
Purchases $130,391,000 $120,168,000
Sales 89,567,000 98,975,000
U.S. Government Securities
Purchases $211,635,000 $580,284,000
Sales 332,303,000 461,296,000
<PAGE>
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The Fund has unused realized capital loss carryforwards
for federal income tax purposes of $15,909,000 at May 31, 1994, which expire
in 1995 through 2002.
At May 31, 1994, the aggregate cost of investments for federal income tax
and financial reporting purposes was $608,221,000 and net unrealized
depreciation aggregated $12,290,000, of which $4,609,000 related to
appreciated investments and $16,899,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.10% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at May 31, 1994,
and for the three months then ended was 0.34%. The rate at February 28, 1994
was 0.34%, and for the year then ended was 0.35%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc. (RPS)
are wholly owned subsidiaries of the Manager. TRPS provides transfer and
dividend disbursing agent functions and shareholder services for all accounts.
RPS provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Fund. The Manager, under a separate agreement,
calculates the daily share price and maintains the financial records of the
Fund. The Fund is one of several T. Rowe Price mutual funds (the Underlying
Funds) in which the T. Rowe Price Spectrum Income Fund (Spectrum) invests. In
accordance with an Agreement between Spectrum, the Underlying Funds, the
Manager and TRPS, expenses from the operation of Spectrum are borne by the
Underlying Funds based on each Underlying Fund's proportionate share of assets
owned by Spectrum. For the three months ended May 31, 1994, and the year ended
February 28, 1994, the Fund incurred fees totalling approximately $407,000 and
$1,314,000, respectively, for these services provided by related parties. At
May 31, 1994, investment management and service fees payable were $427,000.
<PAGE>
FINANCIAL HIGHLIGHTS
T. ROWE PRICE SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
For a share outstanding throughout each period
-----------------------------------------------------------------
Three Months
Ended Year Ended
May 31, 1994 ----------------------------------------------------
[double Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
dagger] 1994 1993 1992 1991 1990
------------ ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $5.00 $5.09 $5.05 $4.94 $4.91 $4.88
------------ ---------- ---------- ---------- ---------- --------
Investment Activities
Net investment income....................... 0.07 0.31 0.33 0.35 0.39 0.42
Net realized and unrealized gain (loss)..... (0.15) (0.09) 0.04 0.11 0.06 0.03
------------ ---------- ---------- ---------- ---------- --------
Total from Investment Activities.............. (0.08) 0.22 0.37 0.46 0.45 0.45
------------ ---------- ---------- ---------- ---------- --------
Distributions
Net investment income....................... (0.07) (0.28) (0.33) (0.35) (0.39) (0.42)
Net realized gain........................... - - - - (0.03) -
Tax return of capital....................... - (0.03) - - - -
------------ ---------- ---------- ---------- ---------- --------
Total Distributions........................... (0.07) (0.31) (0.33) (0.35) (0.42) (0.42)
------------ ---------- ---------- ---------- ---------- --------
NET ASSET VALUE, END OF PERIOD................ $4.85 $5.00 $5.09 $5.05 $4.94 $4.91
------------ ---------- ---------- ---------- ---------- --------
------------ ---------- ---------- ---------- ---------- --------
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return.................................. (1.65)% 4.36% 7.63% 9.70% 9.61% 9.42%
Ratio of Expenses to Average Net Assets....... 0.79% 0.74% 0.76% 0.88% 0.93% 0.95%
[dagger]
Ratio of Net Investment Income to
Average Net Assets.......................... 5.56% 6.00% 6.59% 7.07% 7.90% 8.43%
[dagger]
Portfolio Turnover Rate....................... 222.8% 90.8% 68.4% 380.7% 980.4% 161.1%
[dagger]
Net Assets, End of Year
(in thousands).............................. $601,924 $668,066 $556,330 $396,980 $218,634 $209,711
- ----------------------------------------------------------------------------------------------------------------
<FN>
[double dagger] The Fund's fiscal year-end was changed to May 31.
[dagger] Annualized.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
T. Rowe Price Short-Term Bond Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the selected per
share data and information (which appears under the heading "Financial
Highlights") present fairly, in all material respects, the financial position
of T. Rowe Price Short-Term Bond Fund, Inc. at May 31, 1994, the results of
its operations, the changes in its net assets and the selected per share data
and information for each of the fiscal periods presented in conformity with
generally accepted accounting principles. These financial statements and
selected per share data and information (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards 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 audits, which included
confirmation of securities at May 31, 1994 by correspondence with custodians
and brokers and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
June 17, 1994
<PAGE>
T. ROWE PRICE NO-LOAD MUTUAL FUNDS
STABILITY
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
California Tax-Free Money
New York Tax-Free Money
Summit Municipal Money Market
Tax-Exempt Money
CONSERVATIVE INCOME
Adjustable Rate U.S. Government
Short-Term Bond
Short-Term Global Income
Summit Limited-Term Bond
U.S. Treasury Intermediate
Florida Insured Intermediate Tax-Free
Maryland Short-Term Tax-Free Bond
Summit Municipal Intermediate
Tax-Free Insured Intermediate Bond
Tax-Free Short-Intermediate
INCOME
Global Government Bond
GNMA
New Income
Spectrum Income
Summit GNMA
U.S. Treasury Long-Term
California Tax-Free Bond
Georgia Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Virginia Tax-Free Bond
Tax-Free Income
AGGRESSIVE INCOME
High Yield
International Bond
Tax-Free High Yield
CONSERVATIVE
GROWTH
Balanced
Capital Appreciation
Dividend Growth
Equity Income
Equity Index
Growth & Income
Spectrum Growth
GROWTH
Blue Chip Stock
European Stock
Growth Stock
International Stock
Japan
Mid-Cap Growth
New Era
Small-Cap Value
AGGRESSIVE GROWTH
International Discovery
Latin America
New America Growth
New Asia
New Horizons
OTC
Science & Technology
Call if you want to know about any T. Rowe Price Fund. We'll send you a
prospectus with more complete information, including management fees and other
expenses. Read it carefully before you invest or send money.
<PAGE>
SHAREHOLDER SERVICES
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety
of information and services-at no extra cost.
TELEPHONE SERVICES
ACCESS YOUR ACCOUNT 24 HOURS A DAY BY CALLING 1-800-638-2587.
Tele*Access[registered trademark]---Gives you your account balance, date and
amount of your last transaction, latest dividend payment, and fund prices and
yields; lets you buy, sell, and exchange shares among identically registered
accounts and move assets between your bank and fund accounts.
SHAREHOLDER SERVICE REPRESENTATIVES ARE AVAILABLE FROM 8:00 A.M. TO 10:00
P.M., MONDAY-FRIDAY, AND SATURDAY AND SUNDAY FROM 9:00 A.M. TO 5:00 P.M., E.T.
CALL 1-800-225-5132.
Shareholder Service Center---Call to exchange shares or move money between
your bank and fund accounts.
ACCOUNT SERVICES
Checking---Write checks for $500 or more on any money market and most bond
fund accounts.
Automatic Investing---Build your account over time by investing directly
from your bank account or paycheck. A low, $50 minimum makes it easy to get
started.
Automatic Withdrawal---If you need money from your fund account on a regular
basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options---Reinvest all or some of your
distributions or take them in cash. We give you maximum flexibility and
convenience.
INVESTMENT INFORMATION
Combined Statement---A comprehensive overview of your T. Rowe Price
accounts. The summary page gives your earnings by tax category, provides total
portfolio value, and lists your investments by type-stock, bond, and money
market. Detail pages itemize account transactions by fund.
Quarterly Shareholder Reports---Portfolio managers review the performance of
the funds in plain language and discuss T. Rowe Price's economic outlook.
The T. Rowe Price Report---A quarterly newsletter with relevant articles on
market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Insights---A library of information that includes reports on mutual fund tax
issues, investment strategies, and financial markets.
Detailed Investment Guides---Our widely acclaimed Asset Mix Worksheet,
College Planning Kit, Retirees Financial Guide, Retirement Planning Kit (also
available on disk for PC use) and Guide to Risk-Adjusted Performance can help
you determine and reach your investment goals.
DISCOUNT BROKERAGE
Trade stocks, bonds, options, and precious metals at substantial savings over
full-cost brokers.
Tele*Trade---Call this automated phone service after business hours to place
your orders.
Fax*Trade---Buy and sell by simply faxing your order.
Tele*Quote---Provides 24-hour access to stock and option quotes.
Money Fund Sweep Feature---Buy and sell securities and have your "sweep"
account automatically debited or credited. Dividend and interest payments are
credited daily.
If you have questions or would like to add a service to your account, please
call our Shareholder Service Center.
