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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. 1 /X/
Post-Effective Amendment No. __ / /
(Check appropriate box or boxes)
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
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(Exact Name of Registrant as Specified in Charter)
100 East Pratt Street, Baltimore, Maryland 21202
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Address of Principal Executive Offices
410-345-2000
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Registrant's Telephone Number, Including Area Code
Henry H. Hopkins, Esquire
Vice President and Legal Counsel
100 East Pratt Street, Baltimore, Maryland 21202
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Name and Address of Agent for Service
Approximate Date of Proposed Public Offering: As soon as practicable after this
registration statement becomes effective under the Securities Act of 1933.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
A Rule 24f-2 Notice for the registrant's fiscal year ended May 31, 1999 was
filed on July 30, 1999. Pursuant to Rule 429, this Registration Statement
relates to shares previously registered on Form N-1A (File No.: 002-87568).
It is proposed that this filing will become effective on August 24, 2000
pursuant to Rule 488.
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T. ROWE PRICE SHORT-TERM BOND FUND, INC.
CROSS REFERENCE SHEET
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PURSUANT TO RULE 481(A)
UNDER THE SECURITIES ACT OF 1933
N-14 Item No. Location
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PART A
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1. Beginning of Registration Cover Page of Registration
Statement and Outside Front Statement; Front Cover
Cover Page of Prospectus Page of Prospectus
2. Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3. Synopsis and Risk Factors Summary; Risk Factors
4. Information About the Transaction Summary; Reasons for the
Reorganization; Information
About the Reorganization
5. Information About the Registrant Prospectus Cover Page;
Summary; Comparison of
Investment Policies;
Information About TRP;
Information About PH Bond;
Financial Statements and
Experts
6. Information About the Company Prospectus Cover Page;
Being Acquired Summary; Comparison of
Investment Policies;
Information About TRP;
Information About PH Bond;
Financial Statements and
Experts
7. Voting Information Prospectus Cover Page;
Notice of Special Meeting of
Shareholders; Summary;
Voting Information
8. Interest of Certain Persons None
and Experts
9. Additional Information Required Not applicable
for Reoffering by Persons Deemed to be Underwriters
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PART B
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10. Cover Page Cover Page
11. Table of Contents Not Applicable
12. Additional Information about Incorporation of Documents
the Registrant by Reference in the
Statement of Additional
Information
13. Additional Information about Incorporation of Documents
the Company Being Acquired by Reference in the
Statement of Additional
Information
14. Financial Statements Incorporation of Documents
by Reference in the
Statement of Additional
Information and
Incorporation of Documents
by Reference in Part C
PART C
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The information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of this Registration Statement.
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Dear Shareholder:
We cordially invite you to attend a special meeting of shareholders of the
Summit Limited-Term Bond Fund and the Short-Term U.S. Government Fund on
Wednesday, October 25, 2000. The purpose of the meeting is to vote on
recommendations by the funds' Boards of Directors that would merge each fund's
assets into the Short-Term Bond Fund. Shareholders of each fund vote separately
on the proposal. The proxy contains detailed information on all three funds. We
ask you to read the enclosed information carefully and register your vote.
The directors and management of the Summit Limited-Term Bond and Short-Term U.S.
Government Funds considered the following in making their recommendation:
. Similar market exposure; similar longer-term returns. These three bond
funds have had similar average annual returns over the past three- and
five-year periods (see table below). Combining their assets under the
umbrella of the Short-Term Bond Fund continues to give shareholders broad
exposure to the short-term bond market and investment results consistent
with that market.
Average Annual Compound Total Returns
Periods Ended 6/30/2000 1 Year3 years 5 years 10 years
(or since
inception)
Summit Limited-Term Bond 3.85%5.09%5.27% 4.59%*
Short-Term U.S. Government 4.43 4.93 5.23 4.67**
Short-Term Bond 4.14 4.92 5.15 5.60
*Since inception on 10/29/93. ** Since inception on 9/30/91.
. Increased efficiencies. The merger of the two smaller funds into the larger
Short-Term Bond Fund increases the opportunity to achieve greater economies
of scale in its operations, potentially reducing expenses. The larger asset
size also gives the portfolio manager greater flexibility in carrying out
the fund's investment program to meet its objective.
. Continued high quality. Credit risk (the chance that a portfolio holding
will default) is minimal for all three funds; the Summit Limited-Term
Bond's and Short-Term Bond's average credit quality (AA as of 6/30/00) is
slightly lower than that of the Short-Term U.S. Government Fund (AAA- as of
6/30/00).
. Same or lower expense ratios. The transactions do not result in any
increase in expense ratios for shareholders in the two funds being merged,
because the Short-Term Bond Fund's
USG
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overall expense ratio will be capped at 0.55% through September 30, 2000,
equal to Summit Limited-Term's current ratio and below that of the
Short-Term U.S. Government Fund.
. No tax consequences to shareholders. The transactions do not create any tax
liabilities for shareholders in the funds to be merged; the exchange of
shares is tax-free. Shareholders in the two funds carry over their cost
basis and holding periods, which then apply to shares they will hold in the
Short-Term Bond Fund.
Your fund's managers and directors believe you will be better served over time
by voting for the merger of assets. If these proposals are approved on October
25, the mergers will take place a few days thereafter, and you will own shares
of equal value in the Short-Term Bond Fund.
We realize it may be difficult for you to attend the meeting to vote your
shares. However, we need your vote. You can vote by mail, telephone, or through
the Internet, as explained on the enclosed card. By voting promptly, you help
avoid the expense of additional mailings.
If you have any questions, please call us at 1-800-541-5910. Your vote is
extremely important.
Sincerely,
James S. Riepe
Vice Chairman of the Board
T. Rowe Price Associates, Inc.
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T. Rowe Price Short-Term U.S. Government Fund, Inc.
T. Rowe Price Summit Limited-Term Bond Fund
(a series of the T. Rowe Price Summit Funds, Inc.)
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
T. Rowe Price Funds
100 East Pratt Street
Baltimore, Maryland 21202
Patricia B. Lippert
Secretary
September 1, 2000
A special meeting of shareholders of the T. Rowe Price Short-Term U.S.
Government Fund, Inc. (the "U.S. Government Fund") and T. Rowe Price Summit
Limited-Term Bond Fund (the "Limited-Term Fund"), a series of the T. Rowe Price
Summit Funds, Inc. ("Summit Inc."), will be held on Wednesday, October 25, 2000,
at 8:00 a.m., eastern time, at the Four Seasons Hotel, 2800 Pennsylvania Avenue,
N.W., Washington, D.C. 20007. The following matters will be acted upon at that
time:
1. To consider and act upon a proposal to approve or disapprove an Agreement
and Plan of Reorganization ("Plan") for each fund. The Plans provide for the
transfer of substantially all of the assets of U.S. Government Fund and
Limited-Term Fund to T. Rowe Price Short-Term Bond Fund, Inc. (the "Short-Term
Bond Fund"), in exchange for shares of the Short-Term Bond Fund, and the
distribution of the Short-Term Bond Fund shares to the shareholders of the U.S.
Government Fund and Limited-Term Fund in liquidation of the U.S. Government
Fund and Limited-Term Fund; and
2. To transact such other business as may properly come before the meeting and
any adjournments thereof.
Only shareholders of record of common stock at the close of business on August
25, 2000, are entitled to notice of, and to vote at, this meeting or any
adjournment thereof. THE BOARDS RECOMMEND THAT SHAREHOLDERS VOTE IN FAVOR OF
THIS PROPOSAL.
PATRICIA B. LIPPERT
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<TABLE>
<CAPTION>
YOUR VOTE IS IMPORTANT
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SHAREHOLDERS ARE URGED TO DESIGNATE THEIR CHOICES ON EACH OF THE MATTERS TO BE
ACTED UPON BY USING ONE OF THE FOLLOWING THREE METHODS:
1. VOTE BY INTERNET.
. Read the proxy statement.
. Go to the proxy voting link found on your proxy card.
. Enter the control number found on your proxy card.
. Follow the instructions using your proxy card as a guide.
2. VOTE BY TELEPHONE.
. Read the proxy statement.
. Call the toll-free number found on your proxy card.
. Enter the control number found on your proxy card.
. Follow the recorded instructions using your proxy card as a guide.
3. VOTE BY MAIL.
. Date, sign, and return the enclosed proxy card in the envelope
provided, which requires no postage if mailed in the United States.
YOUR PROMPT RESPONSE WILL HELP ASSURE A QUORUM AT THE MEETING AND AVOID THE
ADDITIONAL EXPENSE OF FURTHER SOLICITATION.
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Acquisition of the Assets of
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND
(a series of the T. Rowe Price Summit Funds, Inc.)
By and In Exchange for Shares of
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
Special Meeting of Shareholders -- October 25, 2000
PROXY STATEMENT
This Combined Proxy Statement and Prospectus ("Statement") is furnished in
connection with the solicitation of proxies by the Boards of Directors of the T.
Rowe Price Short-Term U.S. Government Fund, Inc. ("U.S. Government Fund") and T.
Rowe Price Summit Funds, Inc. ("Summit Inc."), for use at a special meeting of
shareholders of the U.S. Government Fund and T. Rowe Price Summit Limited-Term
Bond Fund (the "Limited-Term Fund") to be held on Wednesday, October 25, 2000.
At the meeting, shareholders of U.S. Government Fund and Limited-Term Fund will
be asked to separately approve or disapprove an Agreement and Plan of
Reorganization dated September 1, 2000 (the "Plan" or "Plans"). A copy of the
Plan is included as Exhibit A to this Statement. If you have any questions,
please feel free to call us toll free, 1-800-541-5910.
The proposed Plans provide for the transfer of substantially all of the assets
of U.S. Government Fund and Limited-Term Fund to the T. Rowe Price Short-Term
Bond Fund, Inc. ("Short-Term Bond Fund") in exchange for shares of the
Short-Term Bond Fund and the distribution of the Short-Term Bond Fund shares
received in the exchange to shareholders of U.S. Government Fund and
Limited-Term Fund in complete liquidation of those funds. Shareholders of U.S.
Government Fund and Limited-Term Fund will receive Short-Term Bond Fund shares
having an aggregate net asset value equal to the aggregate net asset value of
their U.S. Government Fund and Limited-Term Fund shares on the business day
immediately preceding the closing date of the reorganization.
The Short-Term Bond Fund seeks a high level of income consistent with minimal
fluctuation in principal value and liquidity. The investment objective,
policies, and restrictions of the Short-Term Bond Fund, U.S.
<PAGE>
Government Fund, and Limited-Term Fund are similar, but differ in certain
respects, including the types of securities they invest in. See "Comparison of
Investment Objectives, Policies, and Restrictions."
This Statement, dated September 1, 2000, sets forth concisely the information
you should know about the Short-Term Bond Fund and the Plans before voting on
the Plans and the transactions contemplated thereby. Please read this Statement
and keep it for future reference. Further information about each fund is
contained in its prospectus. COPIES OF EACH FUND'S PROSPECTUS ARE AVAILABLE AT
NO COST BY CALLING 1-800-541-5910; BY WRITING T. ROWE PRICE SHORT-TERM BOND
FUND, INC., 100 EAST PRATT STREET, BALTIMORE, MARYLAND 21202; OR VISITING OUR
WEBSITE AT WWW.TROWEPRICE.COM. A Statement of Additional Information dated
September 1, 2000, containing further information about the Short-Term Bond Fund
and the Plan has been filed with the Securities and Exchange Commission and is
available upon request without charge at the above address, or by calling
1-800-541-5910. The Statement of Additional Information, the Annual Reports of
the U.S. Government and Short-Term Bond Funds and the Annual and Semiannual
Reports of the Limited-Term Fund are incorporated herein by reference. This
Statement was first mailed to shareholders on or about September 1, 2000.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS COMBINED PROXY STATEMENT AND
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Summary. . . . . . . . . . . . . . . . .6
Reasons For the Reorganization. . . . . 12
Information About the Reorganization. . 14
Financial Statements. . . . . . . . . . 19
Comparison of Investment Objectives, Policies, and Restrictions 22
Additional Information About the Funds. 32
Further Information About Voting and the Special Meeting 33
General Information About the Funds. . .36
Transfer Agent and Custodian. . . . . . 36
Legal Matters. . . . . . . . . . . . . .36
Experts. . . . . . . . . . . . . . . . .37
Exhibit A - Agreement and Plan of Reorganization 38
No person has been authorized to give any information or to make any
representations other than what is in this Statement or in the materials
expressly incorporated herein by reference. Any such other information or
representation should not be relied upon as having been authorized by T. Rowe
Price Short-Term U.S. Government Fund, Inc. and T. Rowe Price Summit Funds, Inc.
<PAGE>
SUMMARY
The information contained in this summary is qualified by reference to the more
detailed information appearing elsewhere in this Statement, and in the Plan,
which is included as Exhibit A to this Statement. Each Plan is identical so only
one Plan document is attached. References to "the Plan" mean each Plan.
What are shareholders being asked to vote on?
At a meeting held on July 18, 2000, the Boards of Directors of U.S. Government
Fund and Summit Inc., including a majority of the independent directors,
approved submitting the Plan to shareholders. The Plan provides for the transfer
of substantially all the assets of U.S. Government Fund and Limited-Term Fund to
the Short-Term Bond Fund in exchange for shares of the Short-Term Bond Fund.
Following the transfer, the Short-Term Bond Fund shares received in the exchange
will be distributed to shareholders of U.S. Government Fund and Limited-Term
Fund in complete liquidation of U.S. Government Fund and Limited-Term Fund. As a
result of the proposed transactions, the U.S. Government Fund and Limited-Term
Fund shareholders will cease to be shareholders of U.S. Government Fund and
Limited-Term Fund and instead will become the owners of shares of the Short-Term
Bond Fund having an aggregate net asset value equal to the aggregate net asset
value of the shareholder's U.S. Government Fund and Limited-Term Fund shares
determined on the business day preceding the closing date of the reorganization.
What vote is required to approve the Plan?
Approval of the Plan for the Limited-Term Fund requires an affirmative vote of
the lesser of (a) 67% or more of the fund's shares present at the meeting in
person or by proxy or (b) a majority of the fund's outstanding shares, and for
the U.S. Government Fund a majority of the fund's outstanding shares. THE BOARDS
OF DIRECTORS RECOMMEND THAT SHAREHOLDERS OF EACH FUND VOTE FOR THE PROPOSAL.
Shareholders of U.S. Government Fund and Limited-Term Fund vote separately on
the Plan and their votes are not dependent on one another.
Will there be any tax consequences to U.S. Government Fund and Limited-Term Fund
or their shareholders?
The reorganization is designed to have no adverse tax consequences to
shareholders of U.S. Government Fund and Limited-Term Fund or their
shareholders.
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In the opinion of counsel to the funds, for federal income tax purposes:
. no gain or loss will be recognized by U.S. Government Fund and Limited-Term
Fund or their shareholders as a result of the reorganization,
. the holding period and adjusted basis of the Short-Term Bond Fund shares
received by a shareholder will be the same as the holding period and
adjusted basis of the shareholder's shares of U.S. Government Fund and
Limited-Term Fund, and
. the holding period and adjusted basis of each asset of U.S. Government Fund
and Limited-Term Fund in the hands of the Short-Term Bond Fund will be the
same as the holding period and adjusted basis of the asset in the hands of
U.S. Government Fund and Limited-Term Fund immediately prior to the
reorganization. See "Information About the Reorganization - Tax
Considerations."
What are the investment objectives and policies of U.S. Government Fund,
Limited-Term Fund, and the Short-Term Bond Fund?
The U.S. Government Fund seeks the highest current income consistent with
minimal share price fluctuation. The Limited-Term Fund seeks a high level of
income consistent with moderate fluctuations in principal value. The Short-Term
Bond Fund seeks a high level of income consistent with minimal fluctuation in
principal value and liquidity. The investment policies and restrictions of U.S.
Government Fund, Limited-Term Fund, and the Short-Term Bond Fund are similar in
certain respects; however, Limited-Term Fund's weighted average effective
maturity may range up to five years while the U.S. Government Fund and
Short-Term Bond Fund's will not exceed three years. All funds invest primarily
in investment-grade securities. The Short-Term Bond Fund invests only in such
securities. The U.S. Government Fund focuses exclusively on securities rated AA
or higher, while the Limited-Term Fund can invest up to 10% of its assets in
below-investment-grade securities. There are other differences which fund
shareholders should consider. See "Comparison of Investment Objectives,
Policies, and Restrictions."
What are the management arrangements?
The U.S. Government Fund, Limited-Term Fund, and the Short-Term Bond Fund are
advised and managed by T. Rowe Price Associates, Inc. ("T. Rowe Price"), 100
East Pratt Street, Baltimore, Maryland 21202. T. Rowe Price was incorporated in
Maryland in 1947 as successor to the investment counseling firm founded by Mr.
Thomas Rowe Price, Jr. in 1937. As of June 30, 2000, T. Rowe Price and its
affiliates managed $179.0 billion for more than 8 million individual and
institutional investor accounts. All decisions regarding the purchase and sale
of fund investments are made by T. Rowe Price - specifically by each
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fund's portfolio manager. Each fund has an Investment Advisory Committee whose
chairman has day-to-day responsibility for managing the portfolio and works with
the committee in developing and executing each fund's investment program. The
Investment Advisory Committees comprise the following members:
U.S. Government Fund-Connice A. Bavely, Chairman, James M. McDonald, Edmund M.
Notzon, William T. Reynolds, Daniel O. Shackelford, and Edward A. Wiese. Ms.
Bavely joined T. Rowe Price as a senior portfolio manager in 1998 and was
appointed chairman of the committee in 1999. Prior to joining T. Rowe Price, Ms.
Bavely was a partner and senior portfolio manager at Atlantic Asset Management
Partners, LLC for six years.
Limited-Term Fund-Edward A. Wiese, Chairman, Connice A. Bavely, Steven G.
Brooks, Robert P. Campbell, Charles B. Hill, Cheryl A. Mickel, and Vernon A.
Reid, Jr. Mr. Wiese joined T. Rowe Price in 1984 and has been managing
investments since 1985.
Short-Term Bond Fund-Edward A. Wiese, Chairman, Connice A. Bavely, Steven G.
Brooks, Robert P. Campbell, Charles B. Hill, Cheryl A. Mickel, and Vernon A.
Reid. Mr. Wiese has been chairman of the committee since 1995. He joined T. Rowe
Price in 1984 and has been managing investments since 1985.
Fees and Expenses
Set forth below are the fees and expenses of the funds based on their most
recent fiscal year average net assets (or semiannual period average net assets
for Limited-Term Fund) and pro forma fees and expenses, assuming the transaction
takes place as scheduled.
<TABLE>
Table 1 Fees and Expenses of the Funds
<CAPTION>
Annual fund operating expense
(expenses that are deducted from fund assets)
Total annual Fee waiver/
Fund Management Other fund operating expense Net
------------------------ fee expenses expenses reimbursement expenses -----
<S> <C> <C> <C> <C> <C> <S>
U.S. Government/a/ 0.42% 0.33% 0.75% (0.05)% 0.70%
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Limited-Term/b/ 0.55 0.00 0.55 -- --
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Short-Term Bond 0.42 0.30 0.72 -- --
Pro Forma Combined
Short-Term Bond/U.S. 0.42 0.27 0.69 (0.14) 0.55/c/
Government
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Short-Term Bond/ 0.42 0.27 0.69 (0.14) 0.55/c/
Limited-Term
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Short-Term Bond/U.S. 0.42 0.26 0.68 (0.13) 0.55/c/
Government/Limited-Term
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/a/To limit the U.S. Government Fund's expenses, T. Rowe Price contractually
obligated itself to waive its fees and bear any expenses through May 31,
2002, which would cause the U.S. Government Fund's ratio of expenses to
average net asset to exceed 0.70%. The U.S.
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Government Fund previously operated under a 0.70% limitation that expired
May 31, 2000. Fees waived or expenses paid or assumed under these agreements
are subject to reimbursement to T. Rowe Price by the U.S. Government Fund
whenever the U.S. Government Fund's expense ratio is below 0.70%; however,
no reimbursement will be made after May 31, 2000 (for the first agreement);
after May 31, 2002 (for the second agreement); or after May 31, 2004 (for
the third agreement); or if it would result in the expense ratio exceeding
0.70%.
/b/ The management fee includes operating expenses.
/c/
If either merger is approved, T. Rowe Price contractually obligated itself to
waive its fees and bear any expenses through September 30, 2002, which would
cause the Short-Term Bond Fund's ratio of expenses to average net assets to
exceed 0.55%. Fees waived or expenses paid or assumed under these agreements
are subject to reimbursement to T. Rowe Price by the fund whenever the fund's
expense ratio is below 0.55%; however, no reimbursement will be made after
September 30, 2004, or if it would result in the expense ratio exceeding
0.55%. Any amounts reimbursed will have the effect of increasing fees
otherwise paid by the fund.
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 these
funds 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, the expense limitation currently in place is not renewed (if
applicable), you invest $10,000, earn a 5% annual return, and hold the
investment for the following periods and then redeem:
<TABLE>
<CAPTION>
Fund 1 year 3 years 5 years 10 years
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<S> <C> <C> <C> <C> <S>
U.S. Government $72 $229 $407 $921
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Limited-Term 56 176 307 689
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Short-Term Bond 74 230 401 894
Pro Forma Combined
Short-Term Bond/U.S. 56 192 356 835
Government
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Short-Term Bond/ 56 192 356 835
Limited-Term
------------------------------------
Short-Term Bond/U.S. 56 191 353 825
Government/Limited-Term
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</TABLE>
The investment management fees paid by the Short-Term Bond Fund and U.S.
Government Fund to T. Rowe Price are structured in the same manner (they include
a group fee and an individual fee) and paid at the same rate. The Limited-Term
Fund has an "all-inclusive" fee that includes management and operating expenses.
For the year ended May 31, 2000, the group fee rate and total combined
management fee rate for the Short-Term Bond Fund and U.S. Government Fund was
0.32% and 0.42%, respectively. The fund's calculate and accrue the fee daily.
The Limited-Term Fund's fee for year ended October 31, 1999, was 0.55%.
<PAGE>
Risk Factors
What are the main risks of investing in these funds and how do they differ?
Any of the following could cause a decline in the funds' price or income.
The risks are similar among the funds. However, credit and interest rate risk is
greater for the Limited-Term Fund because it can invest up to 10% of its assets
in below-investment-grade bonds and can have an effective weighted average
maturity of up to five years. The U.S. Government Fund and the Short-Term Bond
Fund's effective weighted average maturity can not exceed three years.
Short-Term Bond Fund is limited to investing in investment grade bonds, and the
U.S. Government Fund can only invest in AAA and AA bonds, so its credit quality
is the highest among the three funds.
. INTEREST RATE RISK This is the decline in bond prices that accompanies a
rise in the overall level of interest rates. It is the major source of risk
for investors in these funds. However, because short-term bonds are less
sensitive to interest rate increases or decreases than longer-term bonds,
price volatility for the funds is expected to be relatively modest.
. CREDIT RISK This is the chance that any of the funds' 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 overall credit quality for Limited-Term
Fund and Short-Term Bond Fund is high, their medium-quality securities are
more susceptible to adverse economic conditions and some of their BBB
securities may have speculative characteristics. The Limited-Term Fund's
investments in junk bonds should be regarded as speculative. Due to high
credit quality, the risk that the U.S. Government Fund will experience
declines in price and income as a result of credit downgrades or defaults
is limited. However, while Treasury and Ginnie Mae securities are backed by
the full faith and credit of the U.S. government, those sold by Fannie Mae
and Freddie Mac are not. Fannie Mae and Freddie Mac are privately owned,
government-chartered corporations that pool mortgages and guarantee the
timely payment of interest and ultimate payment of principal. Of course,
the U.S. Government Fund's nongovernment securities do not carry any type
of U.S. government guarantee.
. PREPAYMENT RISK AND EXTENSION RISK Because the funds can invest in
mortgage-backed securities, they have special risks related to changing
interest rates. 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
<PAGE>
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 funds' 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 fund investments in these complex and volatile instruments
could affect the fund's share prices. In addition to CMOs and better-known
instruments such as futures, other derivatives that may be used in limited
fashion by the funds include interest-only (IO) and principal-only (PO)
securities known as "strips." The value of these instruments is derived
from an underlying pool of mortgage-backed securities or a CMO. All these
instruments can be highly volatile, and their value can fall dramatically
in response to rapid or unexpected changes in the mortgage or interest rate
environment.
. FOREIGN INVESTING RISK (LIMITED-TERM FUND AND SHORT-TERM BOND FUND ONLY)
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 affects the funds primarily
to the extent that they hold nondollar foreign bonds.
There are additional differences in the investment programs of the funds which
shareholders should consider. See "Risk Factors" and "Comparison of Investment
Objectives, Policies, and Restrictions."
Each fund's share price may decline; so when shareholders sell their shares,
they may lose money.
What are the procedures for purchasing, redeeming, and pricing shares?
Shares of U.S. Government Fund, Limited-Term Fund, and the Short-Term Bond Fund
are sold on a continuous basis. Shares of the funds are sold at their net asset
value without a sales charge. The Limited-Term Fund requires a minimum initial
investment of $25,000. These minimums will not apply in connection with the
reorganization. The minimum subsequent investment is generally $1,000 ($100 for
retirement plans). The U.S. Government Fund and Short-Term Bond
<PAGE>
Fund requires a minimum initial investment of $2,500 ($1,000 for retirement
plans). These minimums will not apply in connection with the reorganization
transaction. The minimum subsequent investment is generally $100 ($50 for
retirement plans).
Redemption and exchange rights of the funds are identical. Shares of the funds
may be redeemed at their respective net asset values; however, if, in any 90-day
period, a shareholder redeems (sells) more than $250,000, or the 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.
The funds' procedures for pricing their shares are identical. Fund share prices
are calculated at the close of the New York Stock Exchange (normally 4:00 p.m.
ET) each day the exchange is open. To calculate the NAV, each fund's assets are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding.
What are the funds' policies on dividends and distributions?
The funds' policies on dividends and distributions are identical. Each fund has
a policy of distributing all of its net investment income and realized capital
gains to its respective shareholders. Dividends from net investment income for
each fund are declared daily and paid monthly. Distributions from net capital
gains, if any, are usually declared and paid in December. Dividends and capital
gain distributions are reinvested in additional shares, unless the shareholder
selects another option on the New Account Form. The tax treatment of a capital
gain distribution is determined by how long the fund held the portfolio
securities, not how long a fund shareholder held shares in the fund.
The reorganization is designed to have no adverse tax consequences to the funds
or their shareholders. Of course, fund shareholders who sell their shares may
have a capital gain or loss. And, dividends and other distributions from the
funds are also taxable. The funds follow the same policies on reporting tax
information to their shareholders and the IRS.
REASONS FOR THE REORGANIZATION
Reasons for the Reorganization and Liquidation
The Boards of Directors of U.S. Government Fund, Summit Inc., and Short-Term
Bond Fund, including a majority of the independent directors, has determined
that the proposed transactions are in the best interests of the shareholders of
U.S. Government Fund, Limited-Term Fund, and the Short-Term Bond Fund and that
the interests of
<PAGE>
shareholders of U.S. Government Fund, Limited-Term Fund, and the Short-Term Bond
Fund will not be diluted as a result of the proposed transaction.
The Boards of the funds believe the transaction is in the best interests of the
funds for the following reasons:
COMPATIBILITY OF INVESTMENT PROGRAMS. The exchanges will result in a
moderate increase in credit risk for shareholders in U.S. Government Fund, no
change for shareholders in Short-Term Bond Fund and a modest decrease in risk
for Limited-Term Fund. Both Short-Term Bond Fund and U.S. Government Fund have
three-year maximum average portfolio maturities which means they have similar
interest-rate risk. Limited-Term Fund, on the other hand, has a maximum
weighted-average maturity of five years. Therefore, Limited-Term Fund
shareholders can expect to experience a lower rate of interest-rate sensitivity
in the post-merger fund. Limited-Term Fund currently may invest up to 10% of its
assets in non-investment grade securities. Short-Term Bond Fund's investment
program does not permit any non-investment grade assets so any
below-investment-grade bonds held by Limited-Term Fund would be eliminated prior
to the merger. Finally, the assets received by Short-Term Bond Fund will be
consistent with its investment program.
IMPACT ON EXPENSE RATIO. Limited-Term Fund has the lowest expense ratio
among the three funds. If either merger is approved, T. Rowe Price has agreed to
adopt an expense limitation for the Short-Term Bond Fund of 0.55% through
September 30, 2002. Further information about this limitation may be found on
page 9. Shareholders will benefit from using the lowest expense ratio among the
funds.
ECONOMIES OF SCALE. Short-Term Bond Fund's asset base will increase
resulting in greater economies of scale. This will allow the fund more
flexibility in implementing its investment program.
TAX-FREE REORGANIZATION. The merger permits U.S. Government Fund and
Limited-Term Fund shareholders to defer recognition of gain or loss on their
investments. The merger permits Short-Term Bond Fund to receive assets from the
U.S. Government Fund and Limited-Term Fund that have the same holding period and
tax basis as the assets had while in the hands of the U.S. Government Fund and
Limited-Term Fund.
NO DILUTION. The assets of U.S. Government Fund and Limited-Term Fund will
be transferred to Short-Term Bond Fund at their fair market value on the
valuation date of the transaction. Shares of Short-Term Bond Fund equal in value
to the assets will be received in exchange. Expenses of the transaction, other
than brokerage, interest, taxes and extraordinary items, will be borne by T.
Rowe Price.
<PAGE>
These items will be borne by the fund that incurs them. Therefore, shareholders
of the funds will not be diluted as a result of the transaction.
The Boards of the funds based their decision to approve the Plan on an inquiry
into a number of factors, including the following:
(1)
the relative past growth in assets and investment performance and future
prospects of the funds and similar funds;
(2)the expense ratios of each fund and the impact of the proposed
transaction on them;
(3)the tax-free nature of the reorganization to the funds and their
shareholders;
(4)the compatibility of the investment objectives, policies, and
restrictions of the funds; and
(5)
the comparative investment performance of the funds.
If the Plan is not approved by U.S. Government Fund and Limited-Term Fund
shareholders, their Boards of Directors may consider other appropriate action,
such as the liquidation of U.S. Government Fund and Limited-Term Fund or a
merger or other business combination with an investment company other than
Short-Term Bond Fund. Such other actions may require shareholder approval.
INFORMATION ABOUT THE REORGANIZATION
The following summary of the terms and conditions of each Plan is qualified by
reference to the Plan, which is included as Exhibit A to this Statement. Each
Plan is identical so only one Plan document is attached. References below to
"the Plan" mean each Plan.
Plan of Reorganization
If the shareholders of U.S. Government Fund approve the Plan, and if
shareholders of Limited-Term Fund approve the Plan, the reorganization of U.S.
Government Fund and Limited-Term Fund will each be consummated on or about
November 1, 2000, or such other date as is agreed to by U.S. Government Fund and
Short-Term Bond Fund, and Limited-Term Fund and Short-Term Bond Fund (the
"Closing Date"). The parties may postpone the Closing Date until a later date on
which all of the conditions to the obligations of each of the parties under the
Plan are satisfied, provided that the Plan may be terminated by either party if
the Closing Date does not occur on or before January 31, 2001. See "Conditions
to Closing" below.
On the Closing Date, U.S. Government Fund and Limited-Term Fund will transfer
substantially all of their assets to Short-Term Bond Fund in exchange for shares
of the Short-Term Bond Fund having an
<PAGE>
aggregate net asset value equal to the aggregate value of the assets so
transferred as of the close of regular trading on the New York Stock Exchange on
the business day immediately preceding the Closing Date (the "Valuation Date").
The Short-Term Bond Fund will not assume or otherwise be responsible for any
liabilities of U.S. Government Fund and Limited-Term Fund. The number of
Short-Term Bond Fund shares issued in the exchange will be determined by
dividing the aggregate value of the assets of U.S. Government Fund and
Limited-Term Fund transferred (computed in accordance with the policies and
procedures set forth in the current Prospectus of the Short-Term Bond Fund,
subject to review and approval by U.S. Government Fund and Limited-Term Fund) by
the net asset value per share of the Short-Term Bond Fund as of the close of
regular trading on the Valuation Date. While it is not possible to determine the
exact exchange ratio until the Valuation Date, due to, among other matters,
market fluctuations and differences in the relative performances of U.S.
Government Fund, Limited-Term Fund, and the Short-Term Bond Fund, if the
Valuation Date had been June 30, 2000, shareholders of U.S. Government Fund and
Limited-Term Fund would have received 0.994 shares and 0.971 shares,
respectively, of the Short-Term Bond Fund for each of their fund shares held.
As soon as practicable after the Closing Date, U.S. Government Fund and
Limited-Term Fund will distribute, in liquidation of U.S. Government Fund and
Limited-Term Fund, pro rata to their shareholders of record as of the close of
business on the Valuation Date, the full and fractional shares of the Short-Term
Bond Fund received in the exchange. The U.S. Government Fund and Limited-Term
Fund will accomplish this distribution by transferring the Short-Term Bond Fund
shares then credited to the account of U.S. Government Fund and Limited-Term
Fund on the books of the Short-Term Bond Fund to open accounts on the share
records of the Short-Term Bond Fund in the names of U.S. Government Fund and
Limited-Term Fund's shareholders, and representing the respective pro rata
number of Short-Term Bond Fund shares due such shareholders. All issued and
outstanding shares of U.S. Government Fund and Limited-Term Fund will then be
simultaneously cancelled.
The U.S. Government Fund and Limited-Term Fund were closed to investments in new
accounts at 4:00 p.m. on July 18, 2000 and will be closed to existing accounts
by September 1, 2000.
The stock transfer books of the U.S. Government Fund and Limited-Term Fund will
be permanently closed as of the close of business on the Valuation Date. The
U.S. Government Fund and Limited-Term Fund will only accept redemption requests
received prior to the close of regular trading on the New York Stock Exchange on
the Valuation Date. Redemption requests received thereafter will be deemed to be
requests for redemption of the Short-Term Bond Fund shares to be distributed to
fund shareholders pursuant to the Plan.
<PAGE>
The Plan provides that after the Closing Date the U.S. Government Fund and
Limited-Term Fund will pay or make provision for all their liabilities and
distribute all of their remaining assets, if any, to their former shareholders.
Conditions to Closing
The obligations of U.S. Government Fund and Limited-Term Fund to transfer their
assets to the Short-Term Bond Fund pursuant to the Plan are subject to the
satisfaction of certain conditions precedent, including performance by the
Short-Term Bond Fund in all material respects of its agreements and undertakings
under the Plan, receipt of certain documents from the Short-Term Bond Fund,
receipt of an opinion of counsel to the Short-Term Bond Fund and approval of the
Plan by the shareholders of U.S. Government Fund and Limited-Term Fund as
described above. The obligation of the Short-Term Bond Fund to consummate the
reorganization is subject to the satisfaction of certain conditions precedent,
including performance by U.S. Government Fund and Limited-Term Fund of their
agreements and undertakings under the Plan, receipt of certain documents and
financial statements from U.S. Government Fund and Limited-Term Fund and receipt
of an opinion of counsel to U.S. Government Fund and Limited-Term Fund.
The consummation of the proposed transactions is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Boards of
Directors of the funds. The Plan may be terminated and the proposed transaction
abandoned at any time, before or after approval by the shareholders of U.S.
Government Fund and Limited-Term Fund, prior to the Closing Date. In addition,
the Plan may be amended in any mutually agreeable manner, except that no
amendment may be made subsequent to the meeting of shareholders of U.S.
Government Fund and Limited-Term Fund that would detrimentally affect the value
of Short-Term Bond Fund's shares to be distributed.
Expenses of Reorganization
T. Rowe Price is responsible for the payment of all expenses the funds incurred
in connection with the reorganization, other than taxes, interest, brokerage or
extraordinary items. These items will be borne by the fund that incurs them.
Tax Considerations
The reorganization is intended to qualify for federal income tax purposes as a
tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue Code
of 1986, as amended (the "Code"), with no gain or loss recognized as a
consequence of the reorganization by the Short-Term Bond Fund, U.S. Government
Fund, and Limited-Term Fund or their shareholders. The consummation of the
transactions contemplated under the Plan is conditioned upon receipt of an
opinion
<PAGE>
from Swidler Berlin Shereff Friedman, LLP, counsel to the funds, to the effect
that, on the basis of certain representations of fact by officers of U.S.
Government Fund, Limited-Term Fund, and Short-Term Bond Fund, the existing
provisions of the Code, current administrative rules and court decisions, for
federal income tax purposes:
. no gain or loss will be recognized by U.S. Government Fund and Limited-Term
Fund on the transfer of their assets to the Short-Term Bond Fund solely in
exchange for shares of the Short-Term Bond Fund and no gain or loss will be
recognized by U.S. Government Fund and Limited-Term Fund on the
distribution of shares received pursuant to the Plan to shareholders of
U.S. Government Fund and Limited-Term Fund in complete liquidation of U.S.
Government Fund and Limited-Term Fund;
. no gain or loss will be recognized by the Short-Term Bond Fund on the
receipt of the assets of U.S. Government Fund and Limited-Term Fund solely
in exchange for the Short-Term Bond Fund shares;
. the adjusted basis of each asset of U.S. Government Fund and Limited-Term
Fund in the hands of the Short-Term Bond Fund will be the same as the
adjusted basis of such asset in the hands of U.S. Government Fund and
Limited-Term Fund immediately prior to the transaction;
. the holding period of each asset of U.S. Government Fund and Limited-Term
Fund in the hands of the Short-Term Bond Fund will include the holding
period of such asset in the hands of U.S. Government Fund and Limited-Term
Fund immediately prior to the transaction;
. no gain or loss will be recognized by shareholders of U.S. Government Fund
and Limited-Term Fund upon the receipt of the Short-Term Bond Fund shares
(including fractional shares) solely in exchange for shares of U.S.
Government Fund and Limited-Term Fund;
. the adjusted basis of the Short-Term Bond Fund shares received by each
shareholder of U.S. Government Fund and Limited-Term Fund (including
fractional shares) will be the same as the adjusted basis of U.S.
Government Fund and Limited-Term Fund shares surrendered in exchange
therefore; and
. the holding period of the Short-Term Bond Fund shares (including fractional
shares) received by each shareholder of U.S. Government Fund and
Limited-Term Fund will include the holding period of U.S. Government Fund
and Limited-Term Fund shares surrendered in exchange therefore, provided
that such shares were held as a capital asset in the hands of U.S.
Government Fund and Limited-Term Fund shareholder on the date of the
exchange.
<PAGE>
It is anticipated that at the date of the reorganization, both U.S. Government
Fund, Limited-Term Fund, and Short-Term Bond Fund will have tax basis net
capital losses available to offset future tax basis net capital gains.
Applicable provisions of the Internal Revenue Code may limit the ability of
Short-Term Bond Fund to use such losses to offset future gains, or may extend
the period during which such offset would otherwise have occurred.
Shareholders should recognize that an opinion of counsel is not binding on the
Internal Revenue Service (the "IRS") or on any court. The funds do not expect to
obtain a ruling from the IRS regarding the consequences of the reorganization.
Accordingly, if the IRS sought to challenge the tax treatment of the
reorganization and was successful, neither of which is anticipated, the
reorganization would be treated as a taxable sale of assets of U.S. Government
Fund and Limited-Term Fund, followed by the taxable liquidation of U.S.
Government Fund and Limited-Term Fund.
Description of Short-Term Bond Fund Shares
Full and fractional shares of the Short-Term Bond Fund will be issued to
shareholders of U.S. Government Fund and Limited-Term Fund in accordance with
the procedures under the Plan as described above. Each Short-Term Bond Fund
share will be fully paid and nonassessable when issued, will have no preemptive
or conversion rights and will be transferrable on its books. Ownership of
Short-Term Bond Fund shares by former shareholders of U.S. Government Fund and
Limited-Term Fund will be recorded electronically and Short-Term Bond Fund will
issue a confirmation to such shareholders relating to those shares acquired as a
result of the reorganization. After the reorganization, former shareholders of
U.S. Government Fund and Limited-Term Fund who were eligible to participate in
the dividend reinvestment program, the automatic withdrawal plan or the
automatic investment plan will automatically become participants in the
corresponding programs offered in respect of the Short-Term Bond Fund.
The voting rights of U.S. Government Fund, Limited-Term Fund, and Short-Term
Bond Fund are the same. As shareholders of the Short-Term Bond Fund, former
shareholders of U.S. Government Fund and Limited-Term Fund will have the same
voting rights with respect to the Short-Term Bond Fund as they currently have
with respect to U.S. Government Fund, Limited-Term Fund, and the Short-Term Bond
Fund. The Short-Term Bond Fund does not routinely hold annual meetings of
shareholders.
Capitalization
The following table shows the unaudited capitalization of U.S. Government Fund,
Limited-Term Fund, and the Short-Term Bond Fund as of June 30, 2000, and on a
pro forma basis as of that date giving effect to the proposed acquisition of
U.S. Government Fund and
<PAGE>
Limited-Term Fund assets. The actual net assets of U.S. Government Fund,
Limited-Term Fund, and the Short-Term Bond Fund on the Valuation Date will
differ due to fluctuations in net asset values, subsequent purchases and
redemptions of shares.
<TABLE>
<CAPTION>
Net Assets Net Asset Value Shares
Fund (000's) Per Share Outstanding (000's)
------------------------ -----
<S> <C> <C> <C> <S>
U.S. Government $123,499 $4.49 27,492
--------------------------------------------------
Limited-Term 40,425 4.39 9,208
--------------------------------------------------
Short-Term Bond 286,671 4.52 63,463
Pro Forma Combined
Short-Term Bond/U.S. 410,170 4.52 90,786
Government
--------------------------------------------------
Short-Term 327,096 4.52 72,407
Bond/Limited-Term
--------------------------------------------------
Short-Term Bond/U.S. 450,595 4.52 99,729
Government/Limited-Term
-------------------------------------------------------------------------------
</TABLE>
Other Matters
To the extent permitted by law, the Plan may be amended without shareholder
approval by the Boards of Directors of the funds; may waive without shareholder
approval any default by U.S. Government Fund, Limited-Term Fund, or Short-Term
Bond Fund or the failure to satisfy any of the conditions of their obligations,
provided that no such amendment or waiver may be made if it would adversely
affect shareholders of U.S. Government Fund, Limited-Term Fund, or the
Short-Term Bond Fund. The Plan may be terminated and the reorganization
abandoned at any time before or, to the extent permitted by law, after the
approval of shareholders of U.S. Government Fund and Limited-Term Fund by action
of the Boards of Directors of the funds. The Boards of Directors of the funds
may, at their election, terminate the Plan in the event that the reorganization
has not closed on or before January 31, 2001.
FINANCIAL STATEMENTS
The audited financial statements for the fiscal years ended May 31, 2000 for the
Short-Term Bond Fund and U.S. Government Fund and October 31, 1999 for the
Limited-Term Fund, are incorporated by reference in this Statement.The unaudited
financial statements dated April 30, 2000 for the Limited-Term Fund contained in
the semiannual report are also incorporated by reference herein. Financial
highlight information for the funds is shown below. This information is
contained in the May 31, 2000 annual reports for Short-Term Bond Fund and U.S.
Government Fund and the March 1, 2000 prospectus for Limited-Term Fund.
<PAGE>
<TABLE>
Table 2 Financial Highlights
<CAPTION>
Year ended May 31
U.S. Government 1996 1997 1998 1999 2000
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 4.67 $ 4.59 $ 4.62 $ 4.65 $ 4.60
Income From Investment Operations
Net investment income 0.28 /a/ 0.28 /a/ 0.27 0.25/a/ 0.26/a/
---------------------------------------------------------------
Net gains or losses on
securities (both realized (0.08) 0.03 0.03 (0.05) (0.11)
and unrealized)
---------------------------------------------------------------
Total from investment
operations 0.20 0.31 0.30 0.20 0.15
Less Distributions
Dividends (from net (0.27) (0.27) (0.27) (0.25) (0.26)
investment income)
---------------------------------------------------------------
Distributions (from -- -- -- -- --
capital gains)
---------------------------------------------------------------
Returns of capital (0.01) (0.01) -- -- --
---------------------------------------------------------------
Total distributions (0.28) (0.28) (0.27) (0.25) (0.26)
---------------------------------------------------------------
Net asset value, $ 4.59 $ 4.62 $ 4.65 $ 4.60 $ 4.49
end of period
---------------------------------------------------------------
Total return/b/ 4.31% /a/ 6.90% /a/ 6.71%/a/ 4.39%/a/ 3.23%/a/
Ratios/Supplemental Data
Net assets, end of period $98,529 $92,697 $109,863 $134,227 $123,499
(in thousands)
---------------------------------------------------------------
Ratio of expenses to 0.70% /a/ 0.70% /a/ 0.70% /a/ 0.70% /a/ 0.70% /a/
average net assets
---------------------------------------------------------------
Ratio of net income to 5.93% /a/ 6.05% /a/ 5.88% /a/ 5.42%/a/ 5.60%/a/
average net assets
---------------------------------------------------------------
Portfolio turnover rate 152.8% 82.9% 107.5% 145.3% 54.7%
-------------------------------------------------------------------------------------------------
</TABLE>
/a/
Excludes expenses in excess of a 0.70% voluntary expense limitation in effect
through May 31, 2000.
/b/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>
<TABLE>
Table 2 Financial Highlights (continued)
<CAPTION>
Year ended October 31
Limited-Term 1995 1996 1997 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <S>
Net asset value,
beginning
of period $ 4.64 $ 4.65 $ 4.60 $ 4.61 $ 4.69
Income From Investment Operations
Net investment income 0.32 0.30 0.29 0.28 0.26
--------------------------------------------------
Net gains or losses
on securities
(both realized and 0.01 (0.05) 0.01 0.08 (0.21)
unrealized)
--------------------------------------------------
Total from investment
operations 0.33 0.25 0.30 0.36 0.05
Less Distributions
Dividends (from net (0.31) (0.29) (0.28) (0.28) (0.26)
investment income)
--------------------------------------------------
Distributions (from -- -- -- -- --
capital gains)
--------------------------------------------------
Returns of capital (0.01) (0.01) (0.01) -- --
--------------------------------------------------
Total distributions (0.32) (0.30) (0.29) (0.28) (0.26)
--------------------------------------------------
Net asset value, end $ 4.65 $ 4.60 $ 4.61 $ 4.69 $ 4.48
of period
--------------------------------------------------
Total return/a/ 7.36% 5.48% 6.73% 7.97% 1.06%
Ratios/Supplemental Data
Net assets, end of
period $27,004 $25,984 $29,620 $40,904 $52,992
(in thousands)
--------------------------------------------------
Ratio of expenses to
average 0.55% 0.55% 0.55% 0.55% 0.55%
net assets
--------------------------------------------------
Ratio of net
investment income to 6.85% 6.43% 6.28% 5.96% 5.65%
average net assets
--------------------------------------------------
Portfolio turnover 84.3% 116.1% 74.5% 52.0% 42.2%
rate
-------------------------------------------------------------------------------
</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>
<TABLE>
Table 2 Financial Highlights
<CAPTION>
Year ended May 31
Short-Term Bond 1996 1997 1998 1999 2000
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <S>
Net asset value,
beginning of period $ 4.72 $ 4.64 $ 4.65 $ 4.69 $ 4.63
Income From Investment Operations
Net investment income 0.29 0.27 0.27 0.26 0.26
-------------------------------------------------------
Net gains or losses
on securities (both
realized and (0.08) 0.01 0.04 (0.06) (0.11)
unrealized)
-------------------------------------------------------
Total from investment
operations 0.21 0.28 0.31 0.20 0.15
Less Distributions
Dividends (from net (0.28) (0.26) (0.27) (0.26) (0.26)
investment income)
-------------------------------------------------------
Distributions (from -- -- -- -- --
capital gains)
-------------------------------------------------------
Returns of capital (0.01) (0.01) -- -- --
-------------------------------------------------------
Total distributions (0.29) (0.27) (0.27) (0.26) (0.26)
-------------------------------------------------------
Net asset value, $ 4.64 $ 4.65 $ 4.69 $ 4.63 $ 4.52
end of period
-------------------------------------------------------
Total return/a/ 4.58% 6.28% 6.87% 4.23% 3.39%
Ratios/Supplemental Data
Net assets, end of $429,498 $373,284 $331,955 $324,098 $286,671
period (in thousands)
-------------------------------------------------------
Ratio of expenses to 0.72% 0.74% 0.72% 0.73% 0.72%
average net assets
-------------------------------------------------------
Ratio of net income 6.15% 5.91% 5.82% 5.44% 5.74%
to average net assets
-------------------------------------------------------
Portfolio turnover 118.7% 103.9% 73.0% 51.6% 50.7%
rate
------------------------------------------------------------------------------------
</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.
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES, AND RESTRICTIONS
The investment objective, policies, and restrictions of the funds are described
in greater detail in their prospectuses.
Investment Policies and Objectives
In seeking to achieve their respective investment objectives, the funds are
guided by similar but different investment policies and restrictions which
should be considered by the shareholders of U.S. Government Fund and
Limited-Term Fund. Unless otherwise specified, the investment policies and
restrictions of the Short-Term Bond Fund, U.S. Government Fund, and Limited-Term
Fund described below may be
<PAGE>
changed without shareholder approval. Fundamental policies may not be changed
without the approval of the lesser of (i) 67% of a fund's shares present at a
meeting of shareholders if the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (ii) more than 50% of a fund's
outstanding shares.
. U.S. GOVERNMENT FUND. The U.S. Government Fund seeks the highest current
income consistent with minimal share price fluctuation.
The fund will invest primarily in a diversified portfolio of short-term
U.S. government-backed securities. At least 65% of total assets will
normally consist of: Treasury issues; agency-backed fixed rate, adjustable
rate, and balloon mortgage securities, including collateralized mortgage
obligations (CMOs); and government agency notes and bonds. Mortgage-backed
securities, such as those issued by the Government National Mortgage
Association (Ginnie Mae), the Federal National Mortgage Association (Fannie
Mae), and the Federal Home Loan Mortgage Association (Freddie Mac), tend to
offer higher yields than Treasuries with comparable maturities but with
little or no additional credit risk.
Up to 35% of the fund's assets may be invested in nongovernment securities
such as corporate notes and bonds and asset-backed securities. These
securities must meet the fund's high credit-quality standards and be rated
AA or higher by at least one major rating agency at the time of purchase
or, if unrated, must have a T. Rowe Price equivalent. Within this broad
structure, investment decisions reflect the manager's outlook for interest
rates and the economy as well as the relative prices and yields of the
various securities.
While the fund's weighted average effective maturity will not exceed three
years, there is no limit on the effective maturity of individual issues at
the time of purchase. (An issue's effective maturity is based on its
nearest call or expected prepayment date rather than its maturity date.)
The fund also may make limited investments in derivatives, which can
provide higher yields and in some cases reduce interest rate risk; certain
derivative securities, however, could make the portfolio more risky.
The fund may sell securities for a variety of reasons, such as to adjust
the portfolio's average maturity or quality, or to shift assets into
higher-yielding securities.
. LIMITED-TERM FUND. The Limited-Term Fund seeks a high level of income
consistent with moderate fluctuations in principal value.
The fund invests at least 65% of total assets in short- and
intermediate-term bonds. There are no maturity limitations on individual
securities purchased, but the fund's average
<PAGE>
effective maturity will not exceed five years. Targeting effective maturity
provides additional flexibility in portfolio management but, all else being
equal, could result in higher volatility than would be true of a fund
targeting a stated maturity or maturity range.
At least 90% of the fund's portfolio will consist of investment-grade
securities rated in the four highest credit categories (AAA, AA, A, BBB) by
at least one national rating agency or, if unrated, that have received the
T. Rowe Price equivalent. In an effort to enhance yield, up to 10% of
assets can be invested in below-investment-grade securities, commonly
referred to as "junk" bonds, including those with the lowest rating. The
fund's holdings may include mortgage-backed securities, derivatives, and
foreign investments. The fund's income level should be higher than the
money fund's, but its share price will vary.
Within this broad structure, investment decisions reflect the manager's
outlook for interest rates and the economy as well as the prices and yields
of the various securities. For example, if rates are expected to fall, the
manager may seek longer-term securities (within the fund's program) that
would provide higher yields and appreciation potential. And if, for
instance, the economic outlook is positive, the manager may take advantage
of the 10% "basket" for noninvestment-grade bonds.
The fund may also invest in other securities, including futures and
options, in keeping with the fund's objective.
. SHORT-TERM BOND FUND. The Short-Term Bond Fund seeks a high level of income
consistent with minimal fluctuation in principal value and liquidity.
The fund invests in a diversified portfolio of short- and intermediate-term
investment-grade corporate, government, and mortgage-backed securities. The
fund may also invest in bank obligations, collateralized mortgage
obligations, foreign securities, and hybrids. Normally, at least 65% of
total assets will be invested in short-term bonds. The fund's average
effective maturity will not exceed three years, and no security's effective
maturity will exceed seven years when purchased. (An issue's effective
maturity is based on its nearest call date rather than its maturity date.)
The fund will purchase only securities that are rated within the four
highest credit categories (AAA, AA, A, BBB) by at least one national rating
agency or, if unrated, that have a T. Rowe Price equivalent rating.
Within this broad structure, investment decisions reflect the manager's
outlook for interest rates and the economy as well as the prices and yields
of the various securities. For example,
<PAGE>
if rates are expected to fall, the manager may seek longer-term securities
(within the fund's program) that would provide higher yields and
appreciation potential.
The fund may also invest in other securities, including futures and
options, in keeping with the fund's objective.
Each fund may sell holdings for a variety of reasons, such as to adjust a
portfolio's average maturity or quality, or to shift assets into higher-yielding
securities.
Investment Restrictions
Except as previously discussed, the investment restrictions of the funds are
substantially the same. None of the funds will 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. However, the Short-Term Bond 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.
What kinds of securities can the funds invest in?
Each fund may invest in a wide variety of fixed income securities, including
money market securities, mortgage-backed securities, asset-backed securities,
hybrid instruments and foreign securities (the U.S. Government Fund does not
invest in foreign securities). Additionally, the funds may engage in different
types of management practices, including: borrowing money and using interest
rate futures and other derivatives.
How has each fund performed?
The bar charts 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 funds can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns during the years depicted in the charts.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
LOGO LOGO
The U.S. Government
Fund's total return The Limited-Term Fund's total return for the six months
for the six months ended 6/30/00 was 2.88%.
ended 6/30/00 was
2.48%.
</TABLE>
<TABLE>
<CAPTION>
<S><C>
LOGO
The Short-Term Bond Fund's total return for the six months
ended 6/30/00 was 2.77%.
</TABLE>
<PAGE>
<TABLE>
Table 3 Average Annual Total Returns
<CAPTION> Periods ended
December 31, 1999
Inception
1 year 5 years 10 years Since inception date
------------------------
<S> <C> <C> <C> <C> <S>
U.S. Government Fund -- 9/30/91
Salomon Smith Barney
6-month Treasury Bill
Index -- 4.82
Salomon Smith Barney
2-year Treasury Index --
Lipper Short U.S.
Government Funds
Average --
Limited-Term Fund 1.07 5.81 -- 4.49 10/29/93
Merrill Lynch 1-5
Year Corporate
Government Bond Index 2.19 6.86 -- 5.47/a/
Lipper
Short-Intermediate
Investment Grade Debt
Funds Average 0.89 6.23 -- 4.69/a/
Short-Term Bond Fund -- 3/01/84
Lehman Brothers 1-3
Years
Government/Corporate
Bond Index --
Lipper Short
Investment-Grade Debt --
Funds Average
-------------------------------------------------------------------------------
</TABLE>
These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.
/a/ Since 10/31/93.
Performance of U.S. Government Fund
The following information is excerpted from U.S. Government Fund's annual report
dated May 31, 2000.
In a difficult environment for short-term bonds, your fund posted modest total
returns for the 6- and 12-month periods ended May 31, 2000. Results were
comparable to the benchmarks for the year, but fell short for the six months.
Your returns were provided entirely by dividend income over both periods. As a
result of rising interest rates, the fund's share price declined $0.11 during
the year, from $4.60 to $4.49 at the end of the period. Rising dividend income
per share of $0.26 (up a penny from the year ended May 31, 1999) overcame the
decline in net asset value. The fund's six-month dividend yield rose to 5.87%
from 5.51% on November 30.
Although we entered the latest six-month period with a duration we consider
neutral versus our peers (2.2 years), we reduced duration even further as the
period progressed. (Duration is a measure of a bond fund's sensitivity to
interest rates; for example, a duration of two years means the fund's share
price will rise or fall about 2% for each one--
<PAGE>
percentage-point fall or rise in interest rates.) Unfortunately, we did not move
quickly enough to reduce interest rate sensitivity, and this hurt performance.
The silver lining in an environment of sharply rising short-term interest rates,
of course, is rising income for shareholders. During the past six months, we
positioned the portfolio in high-quality instruments that offer attractive yield
advantages over Treasuries and reliable payment streams. Meanwhile, we
significantly reduced the fund's allocation to Treasuries during the period, as
reflected in the decline of U.S. government obligations from 25% to 16% as of
May 31. Exposure to mortgage-backed securities remained steady at 50%, and
within that sector we are focused on collateralized mortgage obligations (CMOs)
that are protected against prepayment risk. (CMOs are securities backed by pools
of mortgages. When homeowners refinance, they pay off their existing mortgages
and replace them with lower interest mortgages. In substantial numbers,
homeowner refinancing, or prepayment, can hurt the value of mortgage-backed
securities by reducing their yields. Certain types of CMOs are structured so
that their payment streams are buffered against prepayments.) In addition, we
also emphasized securities backed by commercial mortgages, which are less
interest rate sensitive than residential mortgages.
The fund's exposure to asset-backed securities also rose during the past six
months, to 18% from 11%. Structured securities backed by credit card debt and
automobile loans offer top-quality credit ratings (AAA) and yet have yields well
in excess of AAA corporate short-term debt. These instruments also have high
liquidity, meaning they can be bought and sold easily with minimal impact on
their prices. We also own some floating-rate securities backed by credit cards.
The floating-rate feature causes these instruments to increase their coupon
payments when interest rates rise, thus increasing their total returns.
Going forward, we plan to retain our defensive duration posture as we feel the
Fed will probably increase rates at least once more before year-end. We continue
to look for added value in the mortgage, corporate, and asset-backed sectors and
to focus on highly liquid securities.
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the U.S.
Government Fund since inception. The result is compared with benchmarks, which
may include a broad-based market index and a peer group average or index. Market
indexes do not include expenses, which are deducted from fund returns as well as
mutual fund averages and indexes.
<PAGE>
LOGO
Performance of Limited-Term Fund
The following information is excerpted from Limited-Term Fund's semiannual
report dated April 30, 2000.
The Fed's aggressive rate hikes had a harsh effect on shorter-term securities,
making it difficult for your fund to make much headway. Nonetheless, it posted a
positive return of 1.44% for the six months and stayed ahead of its Lipper group
average. Twelve-month results of 1.87% also outdistanced the Lipper benchmark.
Dividends per share did not rise but, due to the fund's relatively modest
expenses, remained comparatively high within its peer group. Income helped
compensate for a modest decline in share price from $4.48 to $4.41 during the
six-month period.
To defend against rising rates, we took steps to reduce the fund's interest rate
exposure. We shortened weighted average maturity from 3.7 years to 3.4 years,
and effective duration (a measure of sensitivity to movements in interest rates)
fell correspondingly from 3.0 to 2.7 years. This effort provided increased
protection against principal loss.
Corporate bonds became a less attractive investment for us after October.
Generally speaking, we believe that cost pressures may begin to threaten
corporate balance sheets because rapid economic growth in the absence of
inflation has resulted in higher production costs without the flexibility to
pass those costs through to consumers. We have already seen corporate profit
margins come under pressure, increasing the likelihood that credit quality will
erode. Corporate bonds-particularly lower-rated high-yield issues-have already
been hurt by deteriorating liquidity and declining prices. Therefore, we reduced
corporate holdings from 47% of assets to 41% mainly by selling underperforming
sectors, such as retail and consumer products, but also by trimming industrials,
utilities, and telecom where risk appeared to have risen modestly. To keep the
fund's yield competitive, the proceeds of these sales were deployed into AAA
rated asset-backed securities, mortgage-backed securities, and Treasuries.
<PAGE>
Quality diversification reflected our preference for high quality. The
percentage of assets in AAA securities rose from 38% to 41% of assets, while AA
and A holdings both climbed. Our stake in BBB rated issues fell from 21% to
16%-a positive considering the underperformance of these issues. Average
portfolio credit quality remained at a solid AA.
As inflation pressures have grown, we have increased our small but strategic
allocation to Treasury inflation-protected securities (TIPS) by two percentage
points. Our holdings now stand at 3% of assets. These securities have a lower
coupon than traditional Treasuries, but their principal adjusts upward at the
rate of inflation so that the securities provide a stable real return. They act
as a good inflation hedge for short-term investors, and we expect that we will
continue to use TIPS as long as the threat of inflation lingers.
Performance Comparison
This chart shows the value of a hypothetical $25,000 investment in the
Limited-Term Fund since inception. The result is compared with benchmarks, which
may include a broad-based market index and a peer group average or index. Market
indexes do not include expenses, which are deducted from fund returns as well as
mutual fund averages and indexes.
LOGO
Performance of Short-Term Bond Fund
The following information is excerpted from Short-Term Bond Fund's annual report
dated May 31, 2000.
The harsh rate environment made it difficult for your fund to make much headway
in the past year. Nonetheless, it posted a return of 2.09% for the six months,
superior to the 1.70% advance of the Lipper Short Investment-Grade Debt Funds
Average. That showing helped it post a 3.39% one-year result that also outpaced
the Lipper, despite trailing the benchmark earlier in the year. Twelve-month
dividends per share rose by one penny over six months ago, and income helped
compensate for a modest decline in share price from $4.56 to $4.52 during the
six-month period.
<PAGE>
With rates rising steadily, we steered the fund toward a more defensive
strategy. An important part of this effort was to reduce the portfolio's
sensitivity to interest rates. Over the past six months, we have trimmed
weighted average maturity from 2.3 years to 2.1 years, and cut effective
duration (a measure of interest rate exposure where higher numbers indicate
greater sensitivity to rate changes) from 2.0 to 1.8 years.
This effort helped us to keep principal losses to a minimum. One of the ways we
implemented this strategy was by maintaining a reserve position (invested
largely in money market securities) at a relatively high 18%. We also felt it
was prudent to raise the credit quality of the portfolio. We elevated the
position in AAA securities from 38% to 42% of assets; AA holdings rose from 17%
to 20%, and A issues rose from 22% to 24%. Correspondingly, we sharply reduced
our stake in lower-rated securities. Six months ago, the fund had 23% of assets
in bonds rated BBB and BB. At the period's end we reduced that stake to 14%, all
in BBB securities -- those at the weak end of the investment-grade spectrum.
This change aided results since lower-rated bonds underperformed during the
six-month period. Average portfolio credit quality remained at a solid AA.
Corporate bonds became a less attractive investment for us after November.
Generally speaking, we believe that cost pressures may begin to threaten
corporate balance sheets. Rapid economic growth in the absence of inflation has
resulted in higher production costs without the flexibility to pass those costs
through to consumers. We have already seen corporate profit margins come under
pressure, increasing the likelihood that credit quality will erode. Corporate
bonds -- particularly lower-rated, high-yield issues -- have already been hurt
by deteriorating liquidity and declining prices. Therefore, we reduced corporate
holdings from 47% of assets to 41% mainly by selling underperforming sectors
such as consumer products. However, we held steady positions in the
transportation and media and communication sectors, where we see fundamentals
continuing to improve. To keep the fund's yield competitive, the proceeds of
these sales were deployed into AAA rated asset-backed securities,
mortgage-backed securities, and Treasuries.
As inflation pressures have grown, we have increased our small but strategic
allocation to Treasury inflation-protected securities (TIPS) to 3% of assets.
These securities have a lower coupon than traditional Treasuries, but their
principal value adjusts upward at the rate of inflation, providing a stable real
(after inflation) return of approximately 4%. TIPS act as a good inflation hedge
for short-term investors, and we expect to use them as long as the threat of
inflation lingers.
<PAGE>
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the
Short-Term Bond Fund over the past 10 fiscal year periods. The result is
compared with benchmarks, which may include a broad-based market index and a
peer group average or index. Market indexes do not include expenses, which are
deducted from fund returns as well as mutual fund averages and indexes.
LOGO
ADDITIONAL INFORMATION ABOUT THE FUNDS
How can I get more information about the funds?
The funds file proxy materials, reports and other information with the
Securities and Exchange Commission. These reports can be inspected and copied at
the public reference facilities maintained by the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048, and Chicago Regional Office, Citicorp Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of these materials can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates.
A copy of U.S. Government Fund and Short-Term Bond Fund's most current annual
shareholder report was mailed to all shareholders of record at the close of
business for the funds' fiscal period-end, and Limited-Term Fund's most current
semiannual and annual shareholder report was mailed to all shareholders of
record at the close of business for the fund's semiannual and fiscal period-end.
If you would like to receive additional copies of any report, please contact T.
Rowe Price by calling 1-800-541-5910; writing to T. Rowe Price, 100 East Pratt
Street, Baltimore, Maryland 21202; or visiting our website at
www.troweprice.com. All copies are provided free of charge.
<PAGE>
FURTHER INFORMATION ABOUT VOTING AND THE SPECIAL MEETING
Who is asking for my vote?
For the reasons set forth under "Reasons for the Reorganization," the Boards of
the U.S. Government Fund and Summit Inc., including a majority of the
independent directors, have concluded that the reorganization is in the best
interests of the shareholders of U.S. Government Fund and Limited-Term Fund and
therefore recommend that shareholders vote for approval of the Plan. The votes
will be formally counted at the special meeting on Wednesday, October 25, 2000,
and if the special meeting is adjourned, at any later meeting. The U.S.
Government Fund and Limited-Term Fund's shareholders may vote in person at the
special meeting, by Internet, by telephone, or by returning your completed proxy
card in the postage-paid envelope provided. Details can be found on the enclosed
proxy insert. Do not mail the proxy card if you are voting by Internet or
telephone.
Who is eligible to vote?
Shareholders of record at the close of business on August 25, 2000, (the "RECORD
DATE") are entitled to vote. The notice of special meeting, the proxy card, and
the proxy statement were mailed to shareholders of record on or about September
1, 2000.
Shareholders are entitled to one vote for each full share and a proportionate
vote for each fractional share of the fund(s) they held as of August 25, 2000.
Under Maryland law, shares owned by two or more persons (whether as joint
tenants, co-fiduciaries, or otherwise) will be voted as follows, unless a
written instrument or court order providing to the contrary has been filed with
the fund(s): (1) if only one votes, that vote will bind all; (2) if more than
one votes, the vote of the majority will bind all; and (3) if more than one
votes and the vote is evenly divided, the vote will be cast proportionately.
What is the required quorum?
To hold the meeting for the U.S. Government Fund, a majority of U.S. Government
Fund's shares entitled to be voted must have been received by proxy or be
present at the meeting. To hold the meeting for the Limited-Term Fund, a
majority of Limited-Term Fund's shares entitled to be voted must have been
received by proxy or be present at the meeting. In the event that a quorum is
present but sufficient votes in favor of the proposal are not received by the
meeting date, the persons named as proxies may propose one or more adjournments
to permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of the shares present in person or by proxy at
the meeting to be adjourned. The persons named as
<PAGE>
proxies will vote in favor of such adjournment if they determine that additional
solicitation is reasonable and in the interests of U.S. Government Fund and
Limited-Term Fund's shareholders.
How are the votes counted?
The individuals named as proxies (or their substitutes) on the enclosed proxy
card (or cards, if you have multiple accounts) will vote according to your
directions if your proxy is received properly executed, or in accordance with
your instructions given when voting by telephone or Internet. You may direct the
proxy holders to vote your shares on the proposal by checking the appropriate
box "FOR" or "AGAINST," or instruct them not to vote those shares on the
proposal by checking the "ABSTAIN" box. Alternatively, you may simply sign,
date, and return your proxy card(s) with no specific instructions as to the
proposal. IF YOU PROPERLY EXECUTE YOUR PROXY CARD AND GIVE NO VOTING
INSTRUCTIONS WITH RESPECT TO THE PROPOSAL, YOUR SHARES WILL BE VOTED FOR THE
PROPOSAL.
Abstentions and "broker non-votes" (as defined below) are counted for purposes
of determining whether a quorum is present for purposes of convening the
meeting. "Broker non-votes" are shares held by a broker or nominee for which an
executed proxy is received by the fund but are not voted as to proposal because
instructions have not been received from the beneficial owners or persons
entitled to vote, and the broker or nominee does not have discretionary voting
power. Because the proposal must be approved by a percentage of voting
securities present at the meeting or a majority of outstanding shares,
abstentions and broker non-votes will be considered to be voting securities that
are present and will have the effect of being counted as votes against the
proposal.
For shares held in IRA accounts, the custodian shall, without written direction
from the investor, vote shares for which no voting instructions are timely
received in the same proportion as shares for which voting instructions from
other shareholders are timely received.
Can additional matters be acted upon at the special meeting?
The management of U.S. Government Fund and Limited-Term Fund knows of no other
business which may come before the meeting. However, if any additional matters
are properly presented at the meeting, it is intended that the persons named in
the enclosed proxy, or their substitutes, will vote on such matters in
accordance with their judgment.
How can proxies be recorded?
You may record your votes on the proxy card enclosed with this statement and
mail it in the prepaid envelope provided to Management Information Services
Corp., who U.S. Government Fund and Limited--
<PAGE>
Term Fund has retained to tabulate the votes. In addition, U.S. Government Fund
and Limited-Term Fund have arranged to have votes recorded through the Internet
or by telephone. The telephone and Internet voting procedures are designed to
authenticate shareholders' identities, to allow shareholders to authorize the
voting of their shares in accordance with their instructions, and to confirm
that their instructions have been properly recorded.
How can proxies be solicited, and who pays for the costs involved?
Directors, officers, or employees of the funds or of its investment manager, T.
Rowe Price, may solicit proxies by mail, in person, or by telephone. In the
event that votes are solicited by telephone, shareholders would be called at the
telephone number T. Rowe Price has in its records for their accounts, and would
be asked for their Social Security number or other identifying information. The
shareholders would then be given an opportunity to authorize proxies to vote
their shares at the meeting in accordance with their instructions. To ensure
that shareholders' instructions have been recorded correctly, confirmation of
the instructions is also mailed. A special toll-free number will be available in
case the information contained in the confirmation is incorrect.
The costs of the meeting, including the solicitation of proxies, will be paid by
T. Rowe Price. To ensure that sufficient shares of common stock are represented
at the meeting to permit approval of the proposal outlined in this Statement, T.
Rowe Price may retain the services of a proxy solicitor to assist it in
soliciting proxies for a fee plus reimbursement of out-of-pocket expenses.
Securities brokers, custodians, fiduciaries, and other persons holding shares as
nominees will be reimbursed, upon request, for their reasonable expenses in
sending solicitation materials to the principals of the accounts.
Can I change my vote after I mail my proxy?
Any proxy, including those given via the Internet or by telephone, may be
revoked at any time before it is voted by filing a written notice of revocation
with U.S. Government Fund, Short-Term Bond Fund, and Limited-Term Fund, by
delivering a properly executed proxy bearing a later date, or by attending the
meeting and voting in person.
<PAGE>
GENERAL INFORMATION ABOUT THE FUNDS
Who are the principal holders of each fund's shares?
Table 4 sets forth the persons owning more than 5% of fund's outstanding common
stock as of June 30, 2000.
<TABLE>
Table 4 Record Ownership of the Funds' Shares
<CAPTION>
Fund Owner % Ownership
---------------------------------------------------------------------------------------------
<S> <S> <C>
Limited-Term Maryland Higher Education 14.5
Investment Program
217 E. Redwood Street
Suite 2050
Baltimore, Maryland 21202-3313
---------------------------------------------------------------------------------------------
U.S. Government T. Rowe Price Trust Company 6.7
Attn.: TRPS Inst. Control Dept.
P.O. Box 17215
Baltimore, Maryland 21297-1215
---------------------------------------------------------------------------------------------
Short-Term Bond T. Rowe Price Trust Company 22.1
Attn.: TRPS Inst. Control Dept.
P.O. Box 17215
Baltimore, Maryland 21297-1215
---------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 2000, the executive officers and directors of the Short-Term Bond
Fund, as a group, beneficially owned, directly or indirectly, 65,507 shares,
representing less than 1% of its outstanding stock.
TRANSFER AGENT AND CUSTODIAN
T. Rowe Price Services, Inc., 100 East Pratt Street, Baltimore, Maryland 21202,
serves as the transfer agent and dividend disbursing agent for the funds. State
Street Bank and Trust Company ("State Street"), 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian for the funds' domestic securities and The
Chase Manhattan Bank, N.A., London ("Chase"), Woolgate House, Coleman Street,
London, England, EC2P 2HD, is the custodian of the Limited-Term and Short-Term
Bond Funds' portfolio securities purchased outside the United States.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the Short-Term Bond
Fund are being passed upon by Swidler Berlin Shereff Friedman, LLP, 405
Lexington Avenue, New York, New York 10174.
<PAGE>
EXPERTS
The financial statements of the Short-Term Bond Fund, U.S. Government Fund, and
Limited-Term Fund included in the Annual Reports to Shareholders for the fiscal
years ended May 31, 2000 for the U.S. Government Fund and Short-Term Bond Fund,
and October 31, 1999 for the Limited-Term Fund have been incorporated by
reference in reliance on the reports of PricewaterhouseCoopers LLP given on
their authority as experts in auditing and accounting.
<PAGE>
Exhibit A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made this 1st
day of September, 2000, by and between T. Rowe Price Short-Term Bond Fund, Inc.,
a corporation organized and existing under the laws of Maryland (the "Acquiring
Fund"), and the T. Rowe Price Short-Term U.S. Government Fund, Inc., a
corporation organized and existing under the laws of Maryland, (the "Acquired
Fund").
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made this 1st
day of September, 2000, by and between T. Rowe Price Short-Term Bond Fund, Inc.,
a corporation organized and existing under the laws of Maryland (the "Acquiring
Fund"), and the T. Rowe Price Summit Funds, Inc., on behalf of its separately
designated series, the T. Rowe Price Summit Limited-Term Bond Fund (the
"Acquired Fund"). With respect to the T. Rowe Price Summit Limited-Term Bond
Fund, all references in this agreement to the Acquired Fund are, as applicable,
to T. Rowe Price Summit Funds, Inc. on behalf of the Acquired Fund.
W I T N E S S E T H:
The Acquiring Fund and the Acquired Fund are each registered under the
Investment Company Act of 1940 ("1940 Act") as an open-end management investment
company. The Acquired Fund owns securities that are assets of the character in
which the Acquiring Fund is permitted to invest. The Acquiring Fund and the
Acquired Fund have agreed to combine through the transfer of substantially all
of the assets of the Acquired Fund to the Acquiring Fund in exchange solely for
shares of Common Stock, par value $.01 per share, of the Acquiring Fund (the
"Acquiring Fund Shares") and the distribution of Acquiring Fund Shares to the
shareholders of the Acquired Fund in liquidation of the Acquired Fund. The
Acquiring Fund wishes to enter into a definitive agreement setting forth the
terms and conditions of the foregoing transactions as a "plan of reorganization"
and "liquidation" within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree as follows:
1. ASSETS TO BE TRANSFERRED
A.
REORGANIZATION. Prior to the close of regular trading on the New York Stock
Exchange (the "Exchange") on the Closing Date (as hereinafter defined), all the
assets of the Acquired Fund, net of appropriate reserves and those assets
described in paragraph 1.C. below, shall be delivered as provided in paragraph
2.C. to State Street
<PAGE>
Bank and Trust Company, custodian of the Acquired Fund's U.S. assets (the
"Custodian") or, in the case of securities maintained outside of the United
States, The Chase Manhattan Bank, N.A., London (the "Foreign Custodian"), if
applicable, in exchange for and against delivery by the Acquiring Fund to the
Acquired Fund on the Closing Date of a number of Acquiring Fund Shares
(including, if applicable, fractional shares) having an aggregate net asset
value equal to the value of the assets of the Acquired Fund so transferred,
assigned and delivered, all determined and adjusted as provided in paragraph
1.B. below. Notwithstanding the foregoing, the assets of the Acquired Fund to be
acquired by the Acquiring Fund shall constitute at least 90% of the fair market
value of the net assets of the Acquired Fund and at least 70% of the fair market
value of the gross assets of the Acquired Fund as described on the "Valuation
Date" (hereinafter defined).
B.
VALUATION. The net asset value of shares of the Acquiring Fund and the value of
the assets of the Acquired Fund to be transferred shall, in each case, be
computed as of the close of regular trading on the Exchange on the Valuation
Date (as hereinafter defined). The net asset value of the Acquiring Fund Shares
shall be computed in the manner set forth in the Acquiring Fund's current
prospectus and statement of additional information under the Securities Act of
1933 (the "1933 Act") and the 1940 Act. The value of the assets of the Acquired
Fund to be transferred shall be computed by the Acquiring Fund in accordance
with the policies and procedures of the Acquiring Fund as described in the
Acquiring Fund's current prospectus and statement of additional information
under the 1933 Act and the 1940 Act, subject to review and approval by the
Acquired Fund and to such adjustments, if any, agreed to by the parties.
C.EXCLUDABLE ASSETS. If on the Closing Date the assets of the Acquired Fund
include accounts receivable, causes of actions, claims and demands of whatever
nature, contract rights, leases, business records, books of accounts and
shareholder records, the Acquiring Fund may for reasonable cause refuse either
to accept or to value such assets (other than fully collectible and transferable
dividends, interest and tax refunds). For purposes of this paragraph l.C.,
"reasonable cause" includes the inability to obtain a reliable value, the
likelihood of engaging in protracted collection efforts or the likelihood of
engaging in burdensome administrative responsibilities to receive value. In
addition, there shall be deducted from the assets of the Acquired Fund described
in paragraph 1.A. assets not transferred pursuant to paragraph 1.A. and cash in
an amount estimated by the Acquired Fund to be sufficient to pay all the
liabilities of the Acquired Fund, including, without limitation, (i) amounts
owed to any shareholders including declared but unpaid dividends and amounts
owed to any former shareholders in respect of redemptions in the ordinary course
of business, (ii) accounts payable and other accrued and unpaid expenses
incurred in the normal operation of its business
<PAGE>
up to and including the Closing Date, and (iii) the costs and expenses, if any,
incurred by the Acquired Fund in making and carrying out this Agreement (other
than costs and expenses to be paid for by T. Rowe Price Associates, Inc.).
2. DEFINITIONS
A.CLOSING AND CLOSING DATE. Subject to the terms and conditions hereof, the
closing of the transactions contemplated by this Agreement (the "Closing") shall
be conducted at the offices of the Acquiring Fund in Baltimore, Maryland
beginning at 10:00 a.m., Eastern time, on November 1, 2000, or at such other
place or on such later business day as may be agreed upon by the parties. In the
event that on the Valuation Date (i) the Exchange is closed or trading thereon
is restricted, or (ii) trading or the reporting of trading on the Exchange or
elsewhere is disrupted so that accurate appraisal of the value of the Acquired
Fund assets or the net asset value of the Acquiring Fund Shares is impractical,
the Closing shall be postponed until the first business day after the first
business day when trading on the Exchange or elsewhere shall have been fully
resumed and reporting thereon shall have been restored, or such other business
day as soon thereafter as may be agreed upon by the parties. The date on which
the Closing actually occurs is herein referred to as the "Closing Date."
B.
VALUATION DATE. The business day next preceding the Closing Date shall be the
"Valuation Date." The stock transfer books of the Acquired Fund will be
permanently closed as of the close of business on the Valuation Date. The
Acquired Fund shall only accept redemption requests received by it in proper
form prior to the close of regular trading on the Exchange on the Valuation
Date. Redemption requests received thereafter shall be deemed to be redemption
requests for Acquiring Fund shares to be distributed to Acquired Fund
shareholders pursuant to the Plan (assuming that the transactions contemplated
by this Agreement have been consummated).
C.
DELIVERY. Portfolio securities shall be delivered by the Acquired Fund to the
Custodian or the Foreign Custodian, to be held until the Closing for the account
of the Acquired Fund, no later than three (3) business days preceding the
Closing (the "Delivery Date"), duly endorsed in proper form for transfer in such
condition as to constitute a good delivery thereof, in accordance with the
custom of brokers, and shall be accompanied by all necessary state stock
transfer stamps, if any, or a check for the appropriate purchase price thereof.
Cash of the Acquired Fund shall be delivered by the Acquired Fund on the Closing
Date and shall be in the form of currency or wire transfer in federal funds,
payable to the order of the Custodian or the Foreign Custodian. A confirmation
for the Acquiring Fund Shares, credited to the account of the Acquired Fund and
registered in the name of the Acquired Fund, shall be delivered by the Acquiring
Fund to the Acquired Fund at the Closing.
<PAGE>
3. FAILURE TO DELIVER SECURITIES. If, on the Delivery Date, the Acquired Fund
is unable to make delivery under paragraph 2.C. to the Custodian or the Foreign
Custodian of any of the portfolio securities of the Acquired Fund, the Acquiring
Fund may waive the delivery requirements of paragraph 2.C. with respect to said
undelivered securities, if the Acquired Fund has delivered to the Custodian or
the Foreign Custodian by or on the Delivery Date and, with respect to said
undelivered securities, such documents in the form of executed copies of an
agreement of assignment and escrow agreement and due bills and the like as may
be required by the Acquiring Fund or the Custodian or the Foreign Custodian,
including brokers' confirmation slips.
4. POST-CLOSING DISTRIBUTION AND LIQUIDATION OF THE ACQUIRED FUND. As soon as
practicable after the Closing, the Acquired Fund shall pay or make provisions
for all of its debts, taxes and other liabilities and shall distribute all of
the remaining assets thereof to the shareholders of the Acquired Fund; and the
Acquired Fund shall no longer be listed on Form N-SAR. At, or as soon as may be
practicable following the Closing Date, the Acquired Fund shall for federal
income tax purposes be liquidated, and distribute the Acquiring Fund Shares
received hereunder by instructing the Acquiring Fund that the pro rata interest
(in full and fractional Acquiring Fund Shares) of each of the holders of record
of shares of the Acquired Fund as of the close of business on the Valuation Date
as certified by the Acquired Fund's transfer agent (the "Acquired Fund Record
Holders") be registered on the books of the Acquiring Fund in the names of each
of the Acquired Fund Record Holders. The Acquiring Fund agrees to comply
promptly with said instruction. All issued and outstanding shares of the
Acquired Fund shall thereupon be cancelled on the books of the Acquired Fund.
The Acquiring Fund shall have no obligation to inquire as to the validity,
propriety or correctness of any such instruction, but shall, in each case,
assume that such instruction is valid, proper and correct. The Acquiring Fund
shall record on its books the ownership of Acquiring Fund Shares by Acquired
Fund Record Holders. No redemption or repurchase of any Acquiring Fund Shares
credited to Acquired Fund Record Holders in respect of the Acquired Fund Shares
represented by unsurrendered stock certificates shall be permitted until such
certificates have been surrendered to the Custodian for cancellation. Any
transfer taxes payable upon issuance of Acquiring Fund Shares in a name other
than the name of the Acquired Fund Record Holder on the books of the Acquiring
Fund as of the Closing Date shall, as a condition of such issuance and transfer,
be paid by the person to whom such Acquiring Fund Shares are to be issued and
transferred.
5. ACQUIRED FUND SECURITIES. The Acquired Fund has provided the Acquiring Fund
with a list of all of the Acquired Fund's portfolio investments as of the date
of execution of this Agreement. The Acquired Fund may sell any of these
investments and will confer with
<PAGE>
the Acquiring Fund with respect to investments for the Acquired Fund. The
Acquiring Fund will, within a reasonable time prior to the Closing Date, furnish
the Acquired Fund with a statement of the Acquiring Fund's investment
objectives, policies, and restrictions and a list of the investments, if any, on
the list referred to in the first sentence of this paragraph 5 that do not
conform to such objectives, policies, and restrictions. In the event that the
Acquired Fund holds any investments that the Acquiring Fund may not hold, the
Acquired Fund will, consistent with the foregoing and its own policies and
restrictions, use its reasonable efforts to dispose of such investments prior to
the Closing Date, provided, however, that in no event will the Acquired Fund be
required to dispose of assets to an extent which would cause less than 50% of
the historic business assets of the Acquired Fund to be transferred to the
Acquiring Fund pursuant to this Agreement or to take any action that is
inconsistent with paragraph 8.M. below. In addition, if it is determined that
the portfolios of the Acquired Fund and the Acquiring Fund, when aggregated,
would contain any investments exceeding certain percentage limitations
applicable to the Acquiring Fund with respect to such investments, the Acquired
Fund will, if requested by the Acquiring Fund, in a manner consistent with the
foregoing and its own policies and restrictions, use its reasonable efforts to
dispose of an amount of such investments sufficient to avoid violating such
limitations as of the Closing Date. On the Delivery Date, the Acquired Fund
shall deliver to the Acquiring Fund a list setting forth the securities then
owned by the Acquired Fund (the "Securities List"), which shall be prepared in
accordance with the requirements of the Code and the regulations promulgated
thereunder for specific identification tax lot accounting and which shall
clearly reflect the basis used for determination of gain and loss realized on
the partial sale of any security transferred to the Acquiring Fund. The records
from which the Securities List will be prepared shall be made available by the
Acquired Fund prior to the Closing Date for inspection by the Acquiring Fund's
Treasurer or his designee or the auditors of the Acquiring Fund upon reasonable
request.
6. LIABILITIES AND EXPENSES. The Acquiring Fund shall not assume any of the
liabilities of the Acquired Fund, and the Acquired Fund will use its reasonable
efforts to discharge all its known liabilities, so far as may be possible, prior
to the Closing Date. The Acquiring Fund shall not be responsible for any of the
Acquired Fund's expenses in connection with the carrying-out of this Agreement.
7. LEGAL OPINIONS.
A.OPINION OF ACQUIRED FUND COUNSEL. At the Closing, the Acquired Fund shall
furnish the Acquiring Fund with such written opinions (including opinions as to
certain federal income tax matters) of Swidler Berlin Shereff Friedman, LLP, and
the factual representations supporting such opinions as shall be, in form and
substance reasonably satisfactory to the Acquiring Fund.
<PAGE>
B.
OPINION OF ACQUIRING FUND COUNSEL. At the Closing, the Acquiring Fund shall
furnish the Acquired Fund with a written opinion of Swidler Berlin Shereff
Friedman, LLP, and the factual representations supporting such opinions shall
be, in form and substance reasonably satisfactory to the Acquired Fund.
8. ACQUIRED FUND REPRESENTATIONS, WARRANTIES AND COVENANTS. The Acquired Fund
hereby represents and warrants to the Acquiring Fund, and covenants and agrees
with the Acquiring Fund:
A.
that the audited statement of assets and liabilities, including the schedule of
portfolio investments, and the related statement of operations and statement of
changes in net assets of the Acquired Fund as of October 31, 1999 and May 31,
2000 and for the year then ended heretofore delivered to the Acquiring Fund were
prepared in accordance with generally accepted accounting principles, reflect
all liabilities of the Acquired Fund, whether accrued or contingent, which are
required to be reflected or reserved against in accordance with generally
accepted accounting principles, and present fairly the financial position and
results of operations of the Acquired Fund as of said date and for the period
covered thereby;
B.
that the Limited-Term Fund will furnish to the Acquiring Fund an unaudited
statement of assets and liabilities, including the schedule of portfolio
investments (or a statement of net assets in lieu of a statement of assets and
liabilities and a schedule of portfolio investments), and the related statement
of operations and statement of changes in net assets of the Limited-Term Fund
for the period commencing on the date following the date specified in paragraph
8.A. above and ending on April 30, 2000. These financial statements will be
prepared in accordance with generally accepted accounting principles and will
reflect all liabilities of the Limited-Term Fund, whether accrued or contingent,
which are required to be reflected or reserved against in accordance with
generally accepted accounting principles, will present fairly the financial
position and results of operations of the Limited-Term Fund as of the dates of
such statements and for the periods covered thereby;
C.
that there are no legal, administrative or other proceedings pending or, to the
knowledge of the Acquired Fund, overtly threatened against the Acquired Fund
which would individually or in the aggregate materially affect the financial
condition of the Acquired Fund or the Acquiring Fund's ability to consummate the
transactions contemplated hereby;
D.
that the execution and delivery of this Agreement by the Acquired Fund and the
consummation of the transactions contemplated herein have been authorized by the
Board of Directors by vote taken at a meeting of the Board of Directors of the
Acquiring Fund duly called and held on July 18, 2000, and that the Acquired Fund
will (i) take all steps necessary duly to call, give notice of, convene and hold
<PAGE>
a meeting of the shareholders of the Acquired Fund as soon as practicable and in
accordance with applicable Maryland and federal law, for the purpose of
approving this Agreement and the transactions contemplated herein and for such
other purposes as may be necessary and desirable, and (ii) recommend to such
shareholders the approval of this Agreement and the transactions contemplated
herein and such other matters as may be submitted to such shareholders in
connection with the transactions contemplated herein;
E.
that from the date of this Agreement through the Closing Date, there shall not
have been:
(1)
any material change in the business, results of operations, assets or
financial condition or the manner of conducting the business of the
Acquired Fund (other than changes in the ordinary course of its business or
relating to the transactions contemplated by this Agreement, including,
without limitation, dividends and distributions in the ordinary course,
changes in the net asset value per share, redemptions in the ordinary
course of business, and changes in sales volume), which has had a material
adverse effect on such business, results of operations, assets or financial
condition, except in all instances as set forth in the financial statements
of the Acquired Fund referred to in paragraphs 8.A. and B. above;
(2)
any loss (whether or not covered by insurance) suffered by the Acquired
Fund materially and adversely affecting the assets of the Acquired Fund,
other than depreciation of securities;
(3)
issued any option to purchase or other right to acquire stock of the
Acquired Fund of any class granted by the Acquired Fund to any person
(excluding sales in the ordinary course and a dividend reinvestment
program);
(4)
any indebtedness incurred by the Acquired Fund for borrowed money or any
commitment to borrow money entered into by the Acquired Fund, except as
provided in the current prospectus and statement of additional information
of the Acquired Fund or so long as it will not prevent the Acquired Fund
from complying with paragraph 8.I.;
(5)
any amendment to the Articles of Incorporation or By-Laws of the Acquired
Fund except to effectuate the transactions contemplated hereunder or
otherwise as disclosed in writing to the Acquiring Fund; or
(6)
any grant or imposition of any lien, claim, charge or encumbrance upon any
asset of the Acquired Fund except as provided in the current prospectus and
statement of
<PAGE>
additional information of the Acquired Fund or so long as it will not
prevent the Acquired Fund from complying with paragraph 8.I.;
F.
that there are no material contracts outstanding to which the Acquired Fund is
bound other than as disclosed to the Acquiring Fund;
G.
that the Acquired Fund has filed all federal, state and local tax returns and
reports required by law to have been filed, that all federal, state and local
income, franchise, property, sales, employment or other taxes payable pursuant
to such returns and reports have been paid so far as due, or provision has been
made for the payment thereof, and that, to the knowledge of the Acquired Fund,
no such return is currently under audit and no assessment has been asserted with
respect to any such return other than with respect to all such matters which are
not material individually or in the aggregate;
H.
that, as promptly as practicable, but in any case within 60 days after the
Closing Date, the Acquired Fund shall furnish the Acquiring Fund with a
statement of the earnings and profits of the Acquired Fund for federal income
tax purposes;
I.
that on the Closing Date the Acquired Fund will have good and marketable title
to the assets of the Acquired Fund to be conveyed hereunder, free and clear of
all liens, mortgages, pledges, encumbrances, charges, claims and equities
whatsoever, and full right, power and authority to sell, assign, transfer and
deliver such assets and shall deliver such assets to the Acquiring Fund as set
forth in paragraph 1.A. hereof. Upon delivery of such assets, the Acquiring Fund
will receive good and marketable title to such assets, free and clear of all
liens, mortgages, pledges, encumbrances, charges, claims and equities, except as
to adverse claims of which the Acquiring Fund has notice at or prior to the time
of delivery. Except as set forth on the Securities List, none of the securities
comprising the assets of the Acquired Fund will be "restricted securities" under
the 1933 Act or the rules and regulations of the Securities and Exchange
Commission (the "Commission") thereunder;
J.that the Proxy Statement/Prospectus (hereinafter defined) at the time of
delivery by the Acquired Fund to its shareholders in connection with the meeting
of shareholders to approve this transaction, on the Closing Date and at the time
of the liquidation of the Acquired Fund set forth in paragraph 4. above, as
amended or as supplemented if it shall have been amended or supplemented, will
conform in all material respects to the applicable requirements of the 1933 Act,
the Securities Exchange Act of 1934 (the "1934 Act") and the 1940 Act and the
rules and regulations of the Commission thereunder, and will not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the
<PAGE>
circumstances under which they were made, not materially misleading, except that
no representations or warranties in this section apply to statements or
omissions which are based on written information furnished by the Acquiring Fund
to the Acquired Fund;
K.
that the Acquired Fund is not, and the execution, delivery and performance of
this Agreement will not result, in a material violation of any provision of its
Articles of Incorporation or By-Laws or of any material agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquired Fund is a
party or by which it is bound and that this Agreement constitutes a valid and
legally binding obligation of the Acquired Fund, enforceable against the
Acquired Fund in accordance with its terms, except as enforceability may be
affected by bankruptcy laws, laws affecting creditors generally and general
principles of equity;
L.
that the Acquired Fund will take all actions within its control necessary to
cause the exchange of Acquiring Fund Shares for assets of the Acquired Fund made
under this Agreement to qualify, as of and after the Closing, as a
reorganization within the meaning of Section 368(a)(1)(C) of the Code; and
M.
that the Acquired Fund is registered with the Commission under the 1940 Act,
classified as a management company and subclassified as an open-end company.
9. ACQUIRING FUND REPRESENTATIONS, WARRANTIES AND COVENANTS. The Acquiring
Fund hereby represents and warrants to the Acquired Fund, and covenants and
agrees with the Acquired Fund:
A.
that the audited statement of assets and liabilities, including the schedule of
portfolio investments, and the related statement of operations and statement of
changes in net assets of the Acquiring Fund as of May 31, 2000 and for the year
then ended heretofore delivered to the Acquired Fund were prepared in accordance
with generally accepted accounting principles, reflect all liabilities of the
Acquiring Fund, whether accrued or contingent, which are required to be
reflected or reserved against in accordance with generally accepted accounting
principles, and present fairly the financial position and results of operations
of the Acquiring Fund as of said date and for the period covered thereby;
B.
that there are no legal, administrative or other proceedings pending or, to its
knowledge, overtly threatened against the Acquiring Fund which would
individually or in the aggregate materially affect the financial condition of
the Acquiring Fund's ability to consummate the transactions contemplated hereby;
C.
that the execution and delivery of this Agreement by the Acquiring Fund and the
consummation of the transactions contemplated herein have been authorized by the
Board of Directors of the Acquiring Fund by vote taken at a meeting of the Board
of Directors
<PAGE>
of the Acquiring Fund duly called and held on July 18, 2000, and that approval
by the Acquiring Fund's shareholders of this Agreement or the consummation of
the transactions contemplated herein is not required under applicable Maryland
and federal law;
D.
that from the date of this Agreement through the Closing Date, there shall not
have been any material change in the business, results of operations, assets or
financial condition or the manner of conducting the business of the Acquiring
Fund (other than changes in the ordinary course of its business, including,
without limitation, dividends and distributions in the ordinary course, changes
in the net asset value per share, redemptions in the ordinary course of business
and changes in sales volume), which has had an adverse material effect on such
business, results of operations, assets or financial condition, except in all
instances as set forth in the financial statements of the Acquiring Fund
referred to in paragraph 9.A. and B. above;
E.
that the Acquiring Fund is registered with the Commission under the 1940 Act,
classified as a management company and subclassified as an open-end diversified
company;
F.
that the shares of the Acquiring Fund to be issued pursuant to paragraph 1.A.
will be duly registered under the 1933 Act by the Registration Statement
(hereinafter defined) in effect on the Closing Date and at the time of the
liquidation of the Acquired Fund set forth in paragraph 4. above;
G.
that the Acquiring Fund Shares are duly authorized and validly issued and are
fully paid, nonassessable and free of any preemptive rights and conform in all
material respects to the description thereof contained in the Proxy
Statement/Prospectus as in effect on the Closing Date and at the time of the
liquidation of the Acquired Fund set forth in paragraph 4. above;
H.
that the Acquiring Fund is not, and the execution, delivery and performance of
this Agreement will not result, in a material violation of any provision of the
Acquiring Fund's Articles of Incorporation or By-Laws or of any material
agreement, indenture, instrument, contract, lease or other undertaking to which
the Acquiring Fund is a party or by which it is bound, and that this Agreement
constitutes a valid and legally binding obligation of the Acquiring Fund,
enforceable against the Acquiring Fund in accordance with its terms, except as
enforceability may be affected by bankruptcy laws, laws affecting creditors
generally and general principles of equity;
I.
that the Acquiring Fund will take all actions within its control necessary to
cause the exchange of Acquiring Fund Shares for assets of the Acquired Fund made
under this Agreement to qualify, as of and after the Closing, as a
reorganization within the meaning of Section 368(a)(1)(C) of the Code;
<PAGE>
J.
that the Acquiring Fund has filed all federal, state and local tax returns and
reports required by law to have been filed, that all federal, state and local
income, franchise, property, sales, employment or other taxes payable pursuant
to such returns and reports have been paid so far as due, or provision has been
made for the payment thereof, and that, to the knowledge of the Acquiring Fund,
no such return is currently under audit and no assessment has been asserted with
respect to any such return, other than with respect to all such matters those
which are not material individually or in the aggregate;
K.
that the Proxy Statement/Prospectus at the time of delivery by the Acquired Fund
to its shareholders in connection with the meeting of shareholders to approve
this transaction, on the Closing Date and at the liquidation of the Acquired
Fund set forth in paragraph 4. above, as amended or as supplemented if it shall
have been amended or supplemented, and the Registration Statement on the
effective date thereof, on the Closing Date and at the liquidation of the
Acquired Fund set forth in paragraph 4. above, will conform in all material
respects to the applicable requirements of the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations of the Commission thereunder, and will
not include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading, except that no representations or warranties in this
section apply to statements or omissions which are based on written information
furnished by the Acquired Fund to the Acquiring Fund; and
L.
the current prospectus and statement of additional information of the Acquiring
Fund (copies of which have been delivered to the Acquired Fund) conform in all
material respects to the applicable requirements of the 1933 Act and the 1940
Act and the rules and regulations of the Commission thereunder and do not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not materially
misleading.
10. CERTAIN CONDITIONS.
Unless waived by the parties in writing in their sole discretion, all
obligations of the parties hereunder are subject to the fulfillment, prior to or
at the Closing, of each of the following conditions:
A.
REGISTRATION STATEMENT AND PROXY STATEMENT/ PROSPECTUS. The Acquiring Fund will
file a registration statement on Form N-14 with the Commission under the 1933
Act in order to register the Acquiring Fund Shares to be issued hereunder. Such
registration statement in the form in which it shall become effective and, in
the event any post-effective amendment thereto becomes effective prior to the
Closing Date, such registration statement as
<PAGE>
amended, is referred to herein as the "Registration Statement." The Acquired
Fund will file preliminary proxy materials with the Commission under the 1940
Act and the 1934 Act, relating to the meeting of the shareholders of the
Acquired Fund at which this Agreement and the transactions herein contemplated
will be considered and voted upon, in the form of a combined proxy statement and
prospectus and related statement of additional information included in the
Registration Statement. The combined proxy statement and prospectus and related
statement of additional information that is first filed pursuant to Rule 497(b)
under the 1933 Act is referred to herein as the "Proxy Statement/Prospectus."
The Acquiring Fund and the Acquired Fund each will exert reasonable efforts to
cause the Registration Statement to become effective under the 1933 Act as soon
as practical and agree to cooperate in such efforts. The Registration Statement
shall have become effective under the 1933 Act and no stop orders suspending the
effectiveness thereof shall have been issued and, to the knowledge of the
parties hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act. Upon
effectiveness of the Registration Statement, the Acquired Fund will cause the
Proxy Statement/Prospectus to be delivered to the shareholders of the Acquired
Fund entitled to vote on the transactions contemplated by this Agreement at
least 20 days prior to the date of the meeting of shareholders called to act
upon such transactions.
B.
SHAREHOLDER VOTE. The obligations of the Acquired Fund under this Agreement
shall be subject to the shareholders of the Acquired Fund duly approving the
execution and delivery of this Agreement and the transactions contemplated
herein.
C.
PENDING OR THREATENED PROCEEDINGS. On the Closing Date, no action, suit or other
proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
D.
APPROPRIATE ARTICLES. The Acquired Fund shall execute and cause to be filed with
the Maryland State Department of Assessments and Taxation, such articles of
transfer, articles supplementary or other documents, as necessary to eliminate
designation of the Acquired Fund, as appropriate.
E.
DECLARATION OF DIVIDEND. The Acquired Fund shall have declared a dividend or
dividends which, together with all previous such dividends, shall have the
effect of distributing to the Acquired Fund shareholders all of the investment
company taxable income and realized capital gain for all taxable periods of the
Acquired Fund which are required to be distributed to avoid federal income or
excise tax applicable to regulated investment companies.
<PAGE>
F.
STATE SECURITIES LAWS. The parties shall have received all permits and other
authorizations necessary under state securities laws to consummate the
transactions contemplated herein.
G.
PERFORMANCE OF COVENANTS. Each party shall have performed and complied in all
material respects with each of its agreements and covenants required by this
Agreement to be performed or complied with by it prior to or at the Valuation
Date and the Closing Date.
H.
REPRESENTATIONS AND WARRANTIES. The representations and warranties of each party
set forth in this Agreement will be true and correct on the Closing Date, and
each party shall deliver to the other a certificate of a duly authorized officer
of such party to that effect.
11. NOTICES. All notices, requests, instructions and demands in the course of
the transactions herein contemplated shall be in writing addressed to the
respective parties as follows and shall be deemed given: (i) on the next day if
sent by prepaid overnight courier and (ii) on the same day if given by hand
delivery or telecopy.
If to the Acquiring Fund or Acquired Fund:
Henry H. Hopkins, Esquire
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Fax Number (410) 345-6575
with a copy to:
Joel H. Goldberg, Esquire
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, New York 10174
Fax Number (212) 891-9598
or to such other address as the parties from time to time may designate by
written notice to all other parties hereto.
12. TERMINATION.
A.
This Agreement may be terminated by the Acquiring Fund or the Acquired Fund upon
the giving of written notice to the other, if the conditions specified in
paragraphs 8., 9. and 10. have not been performed or do not exist on or before
January 31, 2001.
B.
In the event of termination of this Agreement pursuant to paragraph 12.A. of
this Agreement, neither party (nor its officers or directors) shall have any
liability to the other.
13. EXHIBITS. All Exhibits shall be considered as part of this Agreement.
<PAGE>
14. MISCELLANEOUS. This Agreement shall bind and inure to the benefit of the
parties and their respective successors and assigns. It shall be governed by,
construed and enforced in accordance with the laws of the State of Maryland. The
Acquired Fund and the Acquiring Fund represent and warrant to each other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein. The Acquired Fund and the Acquiring
Fund agree that no party has made any representation, warranty or covenant not
set forth herein and that this Agreement constitutes the entire agreement
between the parties as to the subject matter hereof. The representations,
warranties and covenants contained in this Agreement or in any document
delivered pursuant hereto or in connection herewith shall survive the
consummation of the transactions contemplated hereunder for a period of three
years thereafter. The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement shall be executed in any number
of counterparts, each of which shall be deemed an original. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement. Whenever used herein, the use of any gender shall include all
genders.
15. AMENDMENTS. The Acquired Fund and the Acquiring Fund by mutual consent of
their Board of Directors or authorized committees or officers may amend this
Agreement in such manner as may be agreed upon, whether before or after the
meeting of stockholders of the Acquired Fund at which action upon the
transactions contemplated hereby is to be taken; provided, however, that after
the requisite approval of the stockholders of the Acquired Fund has been
obtained, this Agreement shall not be amended or modified so as to change the
provisions with respect to the transactions herein contemplated in any manner
which would materially and adversely affect the rights of such stockholders
without their further approval.
16. WAIVER. The failure of any party hereto to enforce at any time any of the
provisions of this Agreement shall in no way be construed to be a waiver of any
such provision, nor in any way to affect the validity of this Agreement or any
part hereof or the right of any party thereafter to enforce each and every such
provision. No waiver of any breach of this Agreement shall be held to be a
waiver of any other or subsequent breach.
17. LIABILITY.
A.The Acquired Fund and the Acquiring Fund acknowledge and agree that all
obligations of the Acquired Fund under this Agreement are binding only with
respect to the Acquired Fund;
<PAGE>
that any liability of the Acquired Fund under this Agreement or in connection
with the transactions contemplated herein shall be discharged only out of the
assets of the Acquired Fund.
B.The Acquiring Fund and the Acquired Fund acknowledge and agree that all
obligations of the Acquiring Fund under this Agreement are binding only with
respect to the Acquiring Fund; that any liability of the Acquiring Fund under
this Agreement or in connection with the transactions contemplated herein shall
be discharged only out of the assets of the Acquiring Fund.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and by their officers thereunto duly authorized, as of the day and
year first above written.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and by their officers thereunto duly authorized, as of the day and
year first above written.
WITNESS: T. ROWE PRICE SHORT-TERM BOND FUND, INC.
__________________By _______________________(SEAL)
Title: Vice President
WITNESS: T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
__________________By _______________________(SEAL)
Title: Vice President
WITNESS: T. ROWE PRICE SUMMIT FUNDS, INC., on behalf of the T. Rowe Price
Summit Limited-Term Bond Fund
__________________By ________________________(SEAL)
Title: Vice President
<PAGE>
VOTE BY TOUCH-TONE PHONE, THE INTERNET, OR BY MAIL
--------------------------------------------------
Call Toll-Free: 1-888-221-0697 Or By Accessing WWW.PROXYWEB.COM
Invest With Confidence
SEE THE ENCLOSED INSERT FOR FURTHER INSTRUCTIONS ON VOTING BY PHONE OR INTERNET
T. Rowe Price
***CONTROL NUMBER: 999 999 999 999 99***
Ram Logo
Please fold and detach card at perforation
before mailing
-------------------------------------------------------------------------------
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND ("Fund") MEETING TIME: 8:00 A.M.
EASTERN TIME THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS
By my signature below, I appoint William T. Reynolds and James S. Riepe as
proxies to vote all Fund shares that I am entitled to vote at the Special
Meeting of Shareholders to be held on October 25, 2000, at 8:00 a.m., ET at the
Four Seasons Hotel, 2800 Pennsylvania Avenue, N.W., Washington, D.C. 20007, and
at any adjournments of the meeting. Messrs. Reynolds or Riepe may vote my
shares, and they may appoint substitutes to vote my shares on their behalf. I
instruct Messrs. Reynolds and Riepe to vote this proxy as specified on the
reverse side, and I revoke any previous proxies that I have executed. I
acknowledge receipt of the Fund's Notice of Special Meeting of Shareholders and
proxy statement.
PLEASE SIGN, DATE, AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE IF YOU ARE NOT VOTING BY PHONE OR INTERNET.
Date_____________________
NOTE: Please sign exactly as
name appears on this proxy. Joint
owners should each sign
personally. Directors and other
fiduciaries should indicate the
capacity in which they sign, and
where more than one name appears,
a majority must sign. If a
corporation, this signature
should be that of an authorized
officer who should state his or
her title.
_______________________________________
CONTINUED ON REVERSE SIDE Signature(s) (and Title(s),
if applicable)
SLT
<PAGE>
Please refer to the Proxy Statement discussion of this proposal. THE PROXY WILL
BE VOTED FOR THE PROPOSAL IF YOU DO NOT SPECIFY OTHERWISE. Your appointed
---
attorneys will vote any other matters that arise at the meeting in accordance
with their best judgement. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
---
FOLLOWING:
Please fold and detach card at perforation before mailing.
-----------------------------------------------------------------------------
Please vote by checking the appropriate box below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR AGAI
1. To approve or disapprove an Agreement and Plan of / / /
Reorganization ("Plan"). The Plan provides for the transfer of
substantially all of the assets of the T. Rowe Price Summit
Limited-Term Bond Fund ("Fund"), to T. Rowe Price Short-Term
Bond Fund, Inc. (the "Short-Term Bond Fund"), in exchange for
shares of the Short-Term Bond Fund and the distribution of
Short-Term Bond Fund shares to the shareholders of the Fund in
liquidation of the Fund.
PLEASE SIGN ON REVERSE SIDE
SLT
</TABLE>
<PAGE>
VOTE BY TOUCH-TONE PHONE, THE INTERNET, OR BY MAIL
--------------------------------------------------
Call Toll-Free: 1-888-221-0697 Or By Accessing WWW.PROXYWEB.COM
Invest With Confidence
SEE THE ENCLOSED INSERT FOR FURTHER INSTRUCTIONS ON VOTING BY PHONE OR INTERNET
T. Rowe Price
***CONTROL NUMBER: 999 999 999 999 99***
Ram Logo
Please fold and detach card at perforation
before mailing
-----------------------------------------------------------------------------
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC. ("Fund") MEETING TIME: 8:00
A.M. EASTERN TIME THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS
By my signature below, I appoint William T. Reynolds and James S. Riepe as
proxies to vote all Fund shares that I am entitled to vote at the Special
Meeting of Shareholders to be held on October 25, 2000, at 8:00 a.m., ET at the
Four Seasons Hotel, 2800 Pennsylvania Avenue, N.W., Washington, D.C. 20007, and
at any adjournments of the meeting. Messrs. Reynolds or Riepe may vote my
shares, and they may appoint substitutes to vote my shares on their behalf. I
instruct Messrs. Reynolds and Riepe to vote this proxy as specified on the
reverse side, and I revoke any previous proxies that I have executed. I
acknowledge receipt of the Fund's Notice of Special Meeting of Shareholders and
proxy statement.
PLEASE SIGN, DATE, AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE IF YOU ARE NOT VOTING BY PHONE OR INTERNET.
Date_____________________
NOTE: Please sign exactly as
name appears on this proxy. Joint
owners should each sign
personally. Directors and other
fiduciaries should indicate the
capacity in which they sign, and
where more than one name appears,
a majority must sign. If a
corporation, this signature
should be that of an authorized
officer who should state his or
her title.
_______________________________________
CONTINUED ON REVERSE SIDE Signature(s) (and Title(s),
if applicable)
<PAGE>
USG
<PAGE>
Please refer to the Proxy Statement discussion of this proposal. THE PROXY WILL
BE VOTED FOR THE PROPOSAL IF YOU DO NOT SPECIFY OTHERWISE. Your appointed
---
attorneys will vote any other matters that arise at the meeting in accordance
with their best judgement. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
---
FOLLOWING:
Please fold and detach card at perforation before mailing.
------------------------------------------------------------------------------
Please vote by checking the appropriate box below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FOR AGAI
1. To approve or disapprove an Agreement and Plan of / / /
Reorganization ("Plan"). The Plan provides for the transfer of
substantially all of the assets of the T. Rowe Price Short-
Term U.S. Government Fund, Inc. ("Fund"), to T. Rowe Price
Short-Term Bond Fund, Inc. (the "Short-Term Bond Fund"), in
exchange for shares of the Short-Term Bond Fund and the
distribution of Short-Term Bond Fund shares to the
shareholders of the Fund in liquidation of the Fund.
PLEASE SIGN ON REVERSE SIDE
USG
</TABLE>
<PAGE>
PAGE 1
Voting Your Proxy: It's Easier Than Ever
The enclosed proxy discusses matters affecting your T. Rowe Price fund. IT'S
IMPORTANT TO VOTE on these issues, and voting promptly can save money for your
fund by making a second mailing unnecessary. In addition to the option of
mailing the proxy card back to us, we now offer you TWO OTHER WAYS TO VOTE - by
touch-tone telephone and by computer via the Internet. Using either SAVES TIME
for you and HELPS REDUCE YOUR FUND'S EXPENSES. T. Rowe Price Ram Logo T. Rowe
Price Investment Services, Inc., Distributor.
So after you've read the proxy information about your fund, but BEFORE you sign,
seal, and mail the proxy card, consider voting either by telephone or by
computer via the Internet.
GRAPHIC OF TELEPHONE
By touch-tone TELEPHONE:
. have the proxy card handy
. call 1-888-221-0697 toll free
. enter the control number found in the upper left corner of your proxy card
. follow the simple recorded instructions
GRAPHIC OF COMPUTER SCREEN
By COMPUTER via the Internet:
. have the proxy card handy
. go to the Website WWW.PROXYWEB.COM
. enter the control number found in the upper left corner of your proxy card
. follow the instructions on the screen
IF YOU VOTE BY COMPUTER OR TELEPHONE, YOU DO NOT NEED TO MAIL THE PROXY CARD.
Thank you.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION FOR
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
----------------------------------------
Acquisition of the assets of
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC. (THE U.S. GOVERNMENT FUND)
T. ROWE PRICE SUMMIT FUNDS, INC. ON BEHALF OF
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND (THE LIMITED-TERM FUND)
By and in exchange for shares of
T. ROWE PRICE SHORT-TERM BOND FUND, INC. (THE SHORT-TERM BOND FUND)
This Statement of Additional Information relates specifically to the proposed
acquisition of substantially all of the assets of the U.S. Government Fund and
Limited-Term Fund by the Short-Term Bond Fund in exchange for shares of the
Short-Term Bond Fund.
This Statement of Additional Information consists of this Cover Page, the
Statement of Additional Information of the Short-Term Bond Fund, U.S. Government
Fund, the Statement of Additional of the Limited-Term Fund, the annual reports
of the Short-Term Bond Fund, U.S. Government Fund, and the Limited-Term Fund and
the semiannual report of the Limited-Term Fund. Each of these documents
described below is attached hereto and incorporated by reference herein.
(1)
Statement of Additional Information, dated October 1, 1999, revised to March 31,
2000 for the Short-Term Bond Fund and the U.S. Government Fund;
(2)
Statement of Additional Information dated March 1, 2000 for the Limited-Term
Fund;
(3)
the annual report, dated April 30, 2000 for the Short-Term Bond Fund and U.S.
Government Fund, and October 31, 1999 for the Limited-Term Fund; and
4) the semiannual report, dated April 1, 2000 for the Limited-Term Fund.
This Statement of Additional Information is not a prospectus; a Proxy
Statement/Prospectus dated September 1, 2000, relating to the above-reference
transaction may be obtained from T. Rowe Price Associates, Inc. This Statement
of Additional Information should be read in conjunction with such Proxy
Statement/Prospectus. The date of this Statement of Additional Information is
September 1, 2000.
0
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is October 1, 1999,
revised to March 31, 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 Fund
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,
1999 (or March 31, 2000, for the T. Rowe Price High Yield Fund-Advisor
Class), which may be obtained from T. Rowe Price Investment Services, Inc.
("Investment Services").
Each fund's financial statements for the year ended May 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.
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
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<S> <C> <C> <C> <C>
Capital Stock 66 Management of the Funds 38
------------------------------ --------------------------------------------
Code of Ethics 54 Net Asset Value Per Share 61
------------------------------ --------------------------------------------
Custodian 54 Portfolio Management Practices 21
------------------------------ --------------------------------------------
Distributor for the 52 Portfolio Transactions 54
Funds
------------------------------ --------------------------------------------
Dividends and 62 Pricing of Securities 60
Distributions
------------------------------ --------------------------------------------
Federal Registration 68 Principal Holders of Securities 47
of Shares
------------------------------ --------------------------------------------
Independent 68 Ratings of Commercial Paper 71
Accountants
------------------------------ --------------------------------------------
Investment Management 4 Ratings of Corporate Debt Securities 72
Services 8
------------------------------ --------------------------------------------
Investment Objectives 2 Risk Factors 2
and Policies
------------------------------ --------------------------------------------
Investment Performance 64 Services 52
by Outside Parties
------------------------------ --------------------------------------------
Investment Program 7 Tax Status 62
------------------------------ --------------------------------------------
Investment 35 Yield Information 63
Restrictions
------------------------------ --------------------------------------------
Legal Counsel 68
------------------------------ --------------------------------------------
</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/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")
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
-------------------------------------------------------------------------------
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.
2
<PAGE>
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 event in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus. 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 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 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 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
3
<PAGE>
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 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
4
<PAGE>
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 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 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 funds invest. In addition, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including
in some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year. 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
5
<PAGE>
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.
. 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 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
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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.
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.
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.
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.
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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 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
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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.
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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--
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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.
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
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the value of the Hybrid Instrument. Also, the prices of the Hybrid Instrument
and the Benchmark or Underlying Asset may not move in the same direction or
at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party 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, there will be greater fluctuations in the fund's
net asset value than if the fund did not purchase them.
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:
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
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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 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
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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 or institutional investors or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent, marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The fund has a right to call each loan and obtain the securities,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation of any important vote. The 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
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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 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. (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 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
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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 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.
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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) 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 through and until 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
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.
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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 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.
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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.
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
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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 requirement may impair a fund's ability to
sell portfolio securities or currencies at a time when such sale might be
advantageous.
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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 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.
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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 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
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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 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.
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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
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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 interests 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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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 5% 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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(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: 1115 East
Illinois Road, Lake Forest, Illinois 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, Massacusetts 02535
DAVID K. FAGIN, 4/9/38, Director, Western Exploration and Development, Ltd.
(6/97 to present); Director (5/92 to present); 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, Managing Director, and Director, T. Rowe Price; Chairman of the
Board and Director, T. Rowe Price Investment Services, Inc., T. Rowe Price
Services, Inc., and T. Rowe Price Retirement Plan Services, Inc.; Chairman of
the Board, President, Director, and Trust Officer, T. Rowe Price Trust
Company; Director, Price-Fleming and General Re Corporation
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HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, Price-Fleming and
T. Rowe Price Retirement Plan Services, Inc.; Director and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
PATRICIA B. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
CARMEN F. DEYESU, 8/1/41, Treasurer-Vice President, T. Rowe Price, T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company
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 and Director,
Price-Fleming; 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-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 and Director,
Price-Fleming; 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
DEBORAH L. BOYER, 1/2/68, Executive Vice President-Vice President, T. Rowe
Price; formerly Assistant Vice President and Government Bond Trader for First
Chicago NBD Corporation
ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price
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 and Director,
Price-Fleming; 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-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,
Price-Fleming; 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 Price-Fleming
41
<PAGE>
ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price
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 and
Director, Price-Fleming; 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
MARY C. 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-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, Price-Fleming 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
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board and Director,
Price-Fleming; 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
42
<PAGE>
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 and Director,
Price-Fleming; 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,
Price-Fleming; 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
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
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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
DEBRA R. DIES, 5/12/71, Vice President-Assistant Vice President, T. Rowe
Price; formerly employed at J.P. Morgan Securities
CHARLES B. HILL, 9/22/61, Vice President-Vice President, T. Rowe Price
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
THEODORE E. ROBSON, 2/10/65, Vice President-Assistant Vice President, T. Rowe
Price
ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price
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
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,
Price-Fleming; 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 and Director,
Price-Fleming; 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
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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
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 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/ Trustees(b)
-------- -------------------------------------------- -----------
----------------------- --------------------------------------
<S> <C> <C>
Corporate Income Fund
Calvin W. Burnett, Ph.D., $65
Trustee $1,476 ,000
81,
Anthony W. Deering, Trustee 1,338 000
F. Pierce Linaweaver, Trustee 1,476 66,000
John G. Schreiber, Trustee 1,476 65,500
-----------------------------------------------------------------------------------------------------------------------------------
GNMA Fund
Calvin W. Burnett, Ph.D., $2, $65
Trustee 423 ,000
81,
Anthony W. Deering, Trustee 1,677 000
F. Pierce Linaweaver, Trustee 2,423 66,000
John G. Schreiber, Trustee 2,423 65,500
-----------------------------------------------------------------------------------------------------------------------------------
High Yield Fund
Calvin W. Burnett, Ph.D., $65
Director $2,960 ,000
81,
Anthony W. Deering, Director 1,917 000
F. Pierce Linaweaver, Director 2,960 66,000
John G. Schreiber, Director 2,960 65,500
-----------------------------------------------------------------------------------------------------------------------------------
New Income Fund
Calvin W. Burnett, Ph.D., $65
Director $3,334 ,000
81,
Anthony W. Deering, Director 2,065 000
F. Pierce Linaweaver, Director 3,334 66,000
John G. Schreiber, Director 3,334 65,500
-----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Balanced Fund
Donald W. Dick, Jr., Director $1,150 $81,000
David K. Fagin, Director 1,256 65,000
Hanne M. Merriman, Director 1,256 65,000
Hubert D. Vos, Director 1,256 66,000
Paul M. Wythes, Director 1,150 80,000
-----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Growth Fund
Donald W. Dick, Jr., Director $1,074 $81,000
David K. Fagin, Director 1,114 65,000
Hanne M. Merriman, Director 1,114 65,000
Hubert D. Vos, Director 1,114 66,000
Paul M. Wythes, Director 1,074 80,000
-----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Income Fund
Donald W. Dick, Jr., Director $1,080 $81,000
David K. Fagin, Director 1,121 65,000
Hanne M. Merriman, Director 1,121 65,000
Hubert D. Vos, Director 1,121 66,000
Paul M. Wythes, Director 1,080 80,000
-----------------------------------------------------------------------------------------------------------------------------------
Prime Reserve Fund
Calvin W. Burnett, Ph.D., $65
Director $6,312 ,000
81,
Anthony W. Deering, Director 3,109 000
F. Pierce Linaweaver, Director 6,312 66,000
John G. Schreiber, Director 6,312 65,500
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Fund
Calvin W. Burnett, Ph.D., $65
Director $1,611 ,000
81,
Anthony W. Deering, Director 1,396 000
F. Pierce Linaweaver, Director 1,611 66,000
John G. Schreiber, Director 1,611 65,500
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term U.S. Government Fund
Calvin W. Burnett, Ph.D., $65
Director $1,479 ,000
81,
Anthony W. Deering, Director 1,340 000
F. Pierce Linaweaver, Director 1,479 66,000
John G. Schreiber, Director 1,479 65,500
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Intermediate Fund
Calvin W. Burnett, Ph.D., $65
Director $1,567 ,000
81,
Anthony W. Deering, Director 1,370 000
F. Pierce Linaweaver, Director 1,567 66,000
John G. Schreiber, Director 1,567 65,500
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Long-Term Fund
Calvin W. Burnett, Ph.D., $65
Director $1,960 ,000
81,
Anthony W. Deering, Director 1,520 000
F. Pierce Linaweaver, Director 1,960 66,000
John G. Schreiber, Director 1,960 65,500
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Money Fund
Calvin W. Burnett, Ph.D., $65
Director $1,762 ,000
81,
Anthony W. Deering, Director 1,446 000
F. Pierce Linaweaver, Director 1,762 66,000
John G. Schreiber, Director 1,762 65,500
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
46
<PAGE>
(a) Amounts in this column are based on accrued compensation from June 1,
1998 to May 31, 1999.
(b) Amounts in this column are based on compensation received from January
1, 1999 to December 31, 1998. The T. Rowe Price complex included 88 funds
as of December 31, 1998.
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 beneficially owned more
than 5% of the outstanding shares of the fund:
Corporate Income Fund: Walnut Street Partners, P.O. Box 6829 c/o Curt Walmer,
850 N. Wyomissing Blvd., Ste. 200, Wyomissing, Pennsylvania 19610-1764;
GNMA, 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;
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.
47
<PAGE>
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, T. Rowe Price provides the fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the fund in accordance with
the fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services, T.
Rowe Price provides the fund with certain corporate administrative services,
including: maintaining the fund's corporate existence and corporate records;
registering and qualifying fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the fund; maintaining
liaison with the agents employed by the fund such as the fund's custodian and
transfer agent; assisting the fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors/trustees, and committee members of the fund without cost to the
fund.
The Management Agreement also provides that T. Rowe Price, its
directors/trustees, officers, employees, and certain other persons performing
specific functions for the fund will only be liable to the fund for losses
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
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:
<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:
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Corporate Income Fund 0.15%
GNMA Fund 0.15
High Yield Fund 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 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 71,000 (a) (a)
GNMA 5,388,000 $ 4,928,000 $ 4,398,000
High Yield 10,598,000 9,797,000 8,206,000
New Income 9,740,000 9,047,000 7,984,000
Personal Strategy Balanced 2,479,000 1,685,000 897,000
Personal Strategy Growth 1,010,000 514,000 92,000
Personal Strategy Income 897,000 206,000 22,000
Prime Reserve 18,779,000 17,281,000 16,431,000
Prime Reserve Fund-PLUS Class 15,000 (a) --
Short-Term Bond 1,423,000 1,478,000 1,795,000
Short-Term U.S. Government 457,000 317,000 250,000
U.S. Treasury Intermediate 931,000 724,000 694,000
U.S. Treasury Long-Term 1,150,000 687,000 276,000
U.S. Treasury Money 2,890,000 2,668,000 2,585,000
------------------------------- --------------------------------
</TABLE>
(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.
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 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.
49
<PAGE>
<TABLE>
<CAPTION>
Fund Limitation Period Expense Ratio Reimbursement
---- ----------------- Limitation Date
---------- ----
<S> <S> <C> <C>
Prime Reserve Fund- May 1, 1999 -April
PLUS Class (a) 30, 2000 1.00% April 30, 2002
June 1, 1999 - May
Corporate Income(b) 31, 2001 0.80 May 31, 2003
High Yield March 31,
Fund-Advisor Class 2000-December 31, 2001 December 31, 2003
Personal Strategy June 1, 1998 - May
Growth(c) 31, 2000 1.10 May 31, 2002
Personal Strategy June 1, 1998 -May 31,
Income(d) 2000 0.90 May 31, 2002
Short-Term U.S. June 1, 1998 -May 31, 0.70 May 31, 2002
Government(e) 2000
-----------------------------------------------------------------------------------
</TABLE>
(a) The Prime Reserve Fund-PLUS Class operated under a 1.00% limitation
that expired April 30, 1999. The reimbursement period for this
limitation extends through April 30, 2000.
(b) The Corporate Income Fund operated under a 0.80% limitation that
expired May 31, 1999. The reimbursement period for this limitation
extends through May 31, 2001.
(c) The Personal Strategy Growth Fund previously operated under a 1.10%
limitation that expired May 31, 1998. The reimbursement period for
this limitation extends through May 31, 2000.
(d) The Personal Strategy Income Fund previously operated under a 0.95%
limitation that expired May 31, 1998. The reimbursement period for
this limitation extends through May 31, 2000.
(e) The Short-Term U.S. Government Fund previously operated under a 0.70%
limitation that expired May 31, 1998. The reimbursement period for
this limitation extends through May 31, 2000.
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.
Corporate Income Fund
Pursuant to the current expense limitation, $171,000 of management fees were
not accrued by the fund for the year ended May 31, 1999. Additionally,
$149,000 of unaccrued fees and expenses related to a prior period are subject
to reimbursement through May 31, 2000.
U.S. Treasury Long-Term Fund
The fund operated under a 0.80% limitation that expired May 31, 1999. The
reimbursement period for this limitation extends through May 31, 2001.
Personal Strategy Balanced Fund
Pursuant to the previous expense limitation, $62,000 of unaccrued 1997
management fees were repaid during the year ended May 31, 1999.
Personal Strategy Growth Fund
Pursuant to the expense limitation, $77,000 of management fees were not
accrued by the fund for the year ended May 31, 1999. Additionally, $287,000
of unaccrued management fees related to a previous expense limitation are
subject to reimbursement through May 31, 2000.
Personal Strategy Income Fund
Pursuant to the expense limitation, $10,000 of management fees were not
accrued by the fund for the year ended May 31, 1999. Additionally, $238,000
of unaccrued management fees related to a previous expense limitation are
subject to reimbursement through May 31, 2000.
50
<PAGE>
Short-Term U.S. Government Fund
Pursuant to the current expense limitation, $92,000 of management fees were
not accrued by the fund for the year ended May 31, 1998. Additionally,
$266,000 of unaccrued management fees remain subject to reimbursement through
May 31, 2000.
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 the 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.
The funds paid the expenses shown in the following table for the fiscal year
ended May 31, 1999, to T. Rowe Price and its affiliates.
<TABLE>
<CAPTION>
Transfer Agent and Retirement
Fund Shareholder Services Subaccounting Accounting Services
---- -------------------- Services -------------------
--------
<S> <C> <C> <C>
Corporate Income $ 88,000 $ 14,000 $ 73,000
GNMA 1,757,000 235,000 122,875
Government Reserve
Investment -- -- 61,708
High Yield 2,401,000 194,000 168,000
New Income 2,604,000 1,523,000 110,116
Personal Strategy
Balanced 153,000 1,070,000 74,000
Personal Strategy
Growth 164,000 386,000 73,000
Personal Strategy
Income 76,000 394,000 73,000
Prime Reserve 5,247,000 4,665,000 93,000
Prime Reserve
Fund-PLUS Class 7,000 -- --
Reserve Investment 9,566 -- 61,708
Short-Term Bond 352,000 260,000 123,000
Short-Term U.S.
Government 152,000 14,000 103,000
U.S. Treasury
Intermediate 213,000 137,000 62,417
U.S. Treasury
Long-Term 575,000 36,000 62,417
U.S. Treasury Money 633,835 542,245 61,708
------------------------
</TABLE>
51
<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>
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
U.S. Treasury Long-Term Fund 3,075.49
</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.
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.
52
<PAGE>
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' 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 Directors/Trustees 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 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/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
53
<PAGE>
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's investment adviser (T. Rowe Price) has a written Code of Ethics
which requires all Access Persons to obtain prior clearance before engaging
in personal securities transactions. In addition, all employees must report
their personal securities transactions within 10 days of their execution.
Access Persons will not be permitted to effect transactions in a security: if
there are pending client orders in the security; the security has been
purchased or sold by a client within seven calendar days; the security is
being considered for purchase for a client; or the security is subject to
internal trading restrictions. In addition, Access Persons are prohibited
from profiting from short-term trading (e.g., purchases and sales involving
the same security within 60 days). Any person becoming an Access Person must
file a statement of personal securities holdings within 10 days of this date.
All Access Persons are required to file an annual statement with respect to
their personal securities holdings. Any material violation of the Code of
Ethics is reported to the Board of the fund. The Board also reviews the
administration of the Code of Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
The fund's purchases and sales of fixed income portfolio securities are
normally done on a principal basis and do not involve the payment of a
commission although they may involve the designation of selling concessions.
That part of the discussion below relating solely to brokerage commissions
would not normally apply to the fund (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.
54
<PAGE>
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.
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
55
<PAGE>
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.
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
56
<PAGE>
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.
Other
For the fiscal years ended May 31, 1999, 1998, and 1997, the fund's engaged
in portfolio transactions involving broker-dealers in the following amounts:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 148,017,000 $ 151,154,000 $ 176,025,000
GNMA 1,928,467,000 3,404,198,000 3,521,560,000
Government Reserve
Investment 125,867,962,000 46,218,342,000 --
High Yield 3,133,849,000 5,081,624,000 7,709,749,000
New Income 3,883,982,000 7,287,233,000 9,166,858,000
Personal Strategy
Balanced 443,414,000 589,959,000 796,969,000
Personal Strategy Growth 177,166,000 225,909,000 354,770,000
Personal Strategy Income 263,137,000 188,714,000 350,204,000
Prime Reserve 32,055,326,000 64,296,588,000 84,827,266,000
Reserve Investment 82,675,097,000 66,138,193,000 --
Short-Term Bond 268,240,000 1,113,884,000 3,380,454,000
Short-Term U.S.
Government 355,887,000 332,928,000 640,894,000
U.S. Treasury
Intermediate 343,197,000 507,228,000 806,082,000
U.S. Treasury Long-Term 509,554,000 604,802,000 352,705,000
U.S. Treasury Money 4,583,442,000 5,373,760,000 6,115,390,000
--------------------------- ----------------------------------
</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, 1999, 1998, and 1997.
57
<PAGE>
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,
1999, 1998, and 1997.
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 132,909,000 $ 147,537,000 $ 174,157,000
High Yield 2,667,387,000 3,854,884,000 7,056,968,000
New Income 3,624,940,000 7,223,043,000 9,061,109,000
Personal Strategy Balanced 245,489,000 441,500,000 630,132,000
Personal Strategy Growth 78,262,000 147,604,000 303,598,000
Personal Strategy Income 148,720,000 159,536,000 327,683,000
Short-Term Bond 237,228,000 1,085,314,000 3,372,793,000
---------------------------- --------------------------------
</TABLE>
The following amounts involved trades with brokers acting as agents or
underwriters for the fiscal years ended May 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 15,108,000 $ 3,617,000 $ 1,868,000
High Yield 466,462,000 1,226,740,000 652,781,000
New Income 259,042,000 64,189,000 105,749,000
Personal Strategy Balanced 197,925,000 148,459,000 472,000
Personal Strategy Growth 98,904,000 78,305,000 73,000
Personal Strategy Income 114,417,000 29,178,000 81,000
Short-Term Bond 31,012,000 28,570,000 7,661,000
---------------------------- -------------------------------
</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, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income $ 53,000 $ 79,000 $ 90,000
High Yield 11,755,000 30,944,000 17,280,000
New Income 1,041,000 133,000 74,000
Personal Strategy Balanced 281,000 174,000 75,000
Personal Strategy Growth 82,000 46,000 17,000
Personal Strategy Income 134,000 47,000 18,000
Short-Term Bond 105,000 123,000 23,000
---------------------------- --------------------------------
</TABLE>
58
<PAGE>
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, 1999, 1998, and 1997, are shown below:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income 96% 92% 82%
GNMA 86 98 98
Government Reserve Investment 78 97 N/A
High Yield 95 88 83
New Income 94 95 87
Personal Strategy Balanced 20 21 14
Personal Strategy Growth 29 32 37
Personal Strategy Income 16 39 11
Prime Reserve 78 87 79
Reserve Investment 65 77 N/A
Short-Term Bond 93 85 81
Short-Term U.S. Government 100 95 85
U.S. Treasury Intermediate 100 96 99
U.S. Treasury Long-Term 99 100 100
U.S. Treasury Money 61 57 71
------------------------------- --------------------------------
</TABLE>
The portfolio turnover rates for the following funds for the fiscal years
ended May 31, 1999, 1998, and 1997, are as follows:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Corporate Income 140.8% 146.0% 119.5%
GNMA 86.7 120.6 115.9
High Yield 95.6 129.6 111.3
New Income 94.3 147.3 87.1
Personal Strategy Balanced 34.3 41.5 54.0
Personal Strategy Growth 36.1 33.3 39.6
Personal Strategy Income 48.9 30.9 44.8
Short-Term Bond 51.6 73.0 103.9
Short-Term U.S. Government 145.3 107.5 82.9
U.S. Treasury Intermediate 61.2 112.8 57.9
U.S. Treasury Long-Term 74.1 80.8 67.6
---------------------------- --------------------------------
</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.
59
<PAGE>
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.
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:
60
<PAGE>
(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.
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 Director.
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.
61
<PAGE>
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 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.
To the extent the fund invests in foreign securities, the following would
apply:
62
<PAGE>
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.
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 November 30, 1999, were 6.49%
and 5.69%, 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.
63
<PAGE>
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 November 30, 1999, were 8.13%,
10.22%, 6.58%, 6.26%, 6.10%, and 6.06%, 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 November 30, 1999, for the Prime Reserve, and
U.S. Treasury Money Funds were 5.09% and 4.47%, respectively, and the funds'
compound yield for the same period were 5.21% and 4.57%, respectively.
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
---- 5/31/99 5/31/99 5/31/99 5/31/99 ----
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Corporate Income -1.21% -- -- 24.35% 10/31/95
GNMA 3.88 44.08% 115.75% 174.85 11/26/85
High Yield 2.73 55.93 128.77 303.12 12/31/84
New Income 1.02 38.95 108.83 729.66 08/31/73
Personal Strategy Balanced 8.37 -- -- 104.17 07/29/94
Personal Strategy Growth 10.01 -- -- 128.60 07/29/94
Personal Strategy Income 6.43 -- -- 82.64 07/29/94
Prime Reserve 4.82 27.61 63.65 431.48 01/26/76
Prime Reserve Fund-PLUS Class -- -- -- 2.50 11/01/98
Short-Term Bond 4.23 28.03 80.15 180.43 03/02/84
Short-Term U.S. Government 4.39 31.84 -- 42.70 09/30/91
U.S. Treasury Intermediate 4.28 37.66 -- 99.08 09/29/89
U.S. Treasury Long-Term 3.06 53.60 -- 123.39 09/29/89
U.S. Treasury Money 4.46 26.13 60.03 161.60 06/28/82
------------------------------- -----------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since
Ended Ended Ended Inception Inception
Fund Unaudited Unaudited Unaudited Unaudited Date
---- 11/30/99 11/30/99 11/30/99 11/30/99 ----
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Corporate Income -0.02% -- -- 5.34% 10/31/95
GNMA 0.88 5.10% 7.60% 7.26 11/26/85
High Yield 2.51 9.78 8.95 -- 12/31/84
New Income -0.39 6.77 6.92 8.39 08/31/73
Personal Strategy
Balanced 8.23 15.89 -- 14.74 07/29/94
Personal Strategy
Growth 11.04 18.61 -- 17.35 07/29/94
Personal Strategy
Income 5.04 13.25 -- 12.23 07/29/94
Prime Reserve 4.66 5.06 4.85 7.36 01/26/76
Short-Term Bond 2.27 5.43 5.67 6.85 03/02/84
Short-Term U.S.
Government 2.16 6.04 -- 4.69 09/30/91
U.S. Treasury
Intermediate -2.11 6.66 6.85 -- 09/29/89
U.S. Treasury
Long-Term -7.49 8.80 7.72 -- 09/29/89
U.S. Treasury Money 4.26 4.79 4.62 -- 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.
65
<PAGE>
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
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the fund, brokerage fees could be incurred by the
shareholder in a subsequent sale of such securities.
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 Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications 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
66
<PAGE>
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.
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.
67
<PAGE>
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the fund. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the fund or a
Trustee. The Declaration of Trust provides for indemnification from fund
property for all losses and expenses of any shareholder held personally
liable for the obligations of the fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its
obligations, a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the fund, the shareholders of the fund
paying such liability will be entitled to reimbursement from the general
assets of the fund. The Trustees intend to conduct the operations of the fund
is such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such fund.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The fund's shares (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, 1999. The
report of independent accountants are included in each fund's Annual Report
for the year ended May 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 May 31, 1999, and the unaudited Semiannual Report
for the six months ended November 30, 1999, 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 7 8
Statement of Net Assets, May 31, 1999 9-14 8-10 9-18
Statement of Operations, year ended
May 31, 1999 15 11 19
Statement of Changes in Net Assets, years ended
May 31, 1999 and May 31, 1998 16 12 20
Notes to Financial Statements, May 31, 1999 17-20 13-16 21-22
Report of Independent Accountants 21 17 23
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PERSONAL PERSONAL PERSONAL
STRATEGY STRATEGY STRATEGY
BALANCED GROWTH INCOME
-------- ------ ------
<S> <C> <C> <C>
Financial Highlights 2 2 2
3-2
Portfolio of Investments, May 31, 1999 7 3-26 3-26
Statement of Assets and Liabilities, May 2
31, 1999 8 27 27
Statement of Operations, year ended 2
May 31, 1999 9 28 28
Statement of Changes in Net Assets, years
ended
May 31, 1999 and May 31, 1998 30 29 29
Notes to Financial Statements, May 31,
1999 31-34 30-33 30-34
Report of Independent Accountants 35 34 35
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SHORT-TERM SHORT-TERM U.S.
---------- BOND GOVERNMENT
---- ----------
<S> <C> <C> <C>
Financial Highlights 9 8 9
Statement of Net Assets, May 31,
1999 10-22 9-13 10-13
Statement of Operations, year ended
May 31, 1999 23 14 14
Statement of Changes in Net Assets,
years ended
May 31, 1999 and May 31, 1998 24 15 15
Notes to Financial Statements, May
31, 1999 25-28 16-19 16-19
Report of Independent Accountants 29 20 20
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY U.S. TREASURY U.S. TREASURY
INTERMEDIATE LONG-TERM MONEY
------------ --------- -----
<S> <C> <C> <C>
Financial Highlights 12 13 11
Statement of Net Assets, May 31,
1999 16-18 19-20 14-15
Statement of Operations, year
ended
May 31, 1999 21 21 21
Statement of Changes in Net
Assets, years ended
May 31, 1999 and May 31, 1998 23 24 22
Notes to Financial Statements,
May 31, 1999 25-28 25-28 25-28
Report of Independent
Accountants 29 29 29
</TABLE>
<TABLE>
<CAPTION>
RESERVE GOVERNMENT
INVESTMENT RESERVE
---------- INVESTMENT
----------
<S> <C> <C>
Financial Highlights 1 2
Statement of Net Assets, May 31, 1999 3-5 6
Statement of Operations, period from August 25,
1997 (commencement of operations) to May 31, 1999 7 7
Statement of Changes in Net Assets, period from
August 25, 1997 (commencement of operations)
to May 31, 1999 8 9
Notes to Financial Statements, May 31, 1999 10-12 10-12
Report of Independent Accountants 13 13
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
NEW INCOME
----------
<S> <C>
Financial Highlights 10
Portfolio of Investments, May 31, 1999 11-17
Statement of Assets and Liabilities, May 31, 1999 18
Statement of Operations, year ended
May 31, 1999 19
Statement of Changes in Net Assets, years ended
May 31, 1999 and May 31, 1998 20
Notes to Financial Statements, May 31, 1999 21-24
Report of Independent Accountants 25
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED SEMIANNUAL REPORT REFERENCES:
CORPORATE GNMA PRIME
INCOME ---- RESERVE
------ -------
<S> <C> <C> <C>
Financial Highlights 8 6 8
Statement of Net Assets, November 30, 1999 9-16 7-10 9-18
Statement of Operations, six months ended
November 30, 1999 17 11 19
Statement of Changes in Net Assets, six months
ended November 30, 1999 and year ended
May 31, 1999 18 12 20
Notes to Financial Statements, November 30, 1999 19-22 13-15 21-23
</TABLE>
<TABLE>
<CAPTION>
PERSONAL PERSONAL PERSONAL
STRATEGY STRATEGY STRATEGY
BALANCED GROWTH INCOME
-------- ------ ------
<S> <C> <C> <C>
Financial Highlights 2 2 2
Portfolio of Investments, November 30,
1999 3-27 3-27 3-26
Statement of Assets and Liabilities,
November 30, 1999 28 28 27
Statement of Operations, six months ended
November 30, 1999 29 29 28
Statement of Changes in Net Assets, six
months ended November 30, 1999 and year
ended May 31, 1999 30 30 29
Notes to Financial Statements, November
30, 1999 31-34 31-34 30-33
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SHORT-TERM SHORT-TERM U.S.
---------- BOND GOVERNMENT
---- ----------
<S> <C> <C> <C>
Financial Highlights 10 9 7
Statement of Net Assets, November
30, 1999 11-24 10-15 8-11
Statement of Operations, six months
ended
November 30, 1999 25 16 12
Statement of Changes in Net Assets,
six months ended November 30, 1999
and year ended
May 31, 1999 26 17 13
Notes to Financial Statements,
November 30, 1999 27-30 18-20 14-16
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
U.S. TREASURY U.S. TREASURY U.S. TREASURY
INTERMEDIATE LONG-TERM MONEY
------------ --------- -----
<S> <C> <C> <C>
Financial Highlights 12 13 11
Statement of Net Assets,
November 30, 1999 16-18 19-21 14-15
Statement of Operations, six
months ended
November 30, 1999 22 22 22
Statement of Changes in Net
Assets, six months ended
November 30, 1999 and year ended
May 31, 1999 24 25 23
Notes to Financial Statements,
November 30, 1999 26-29 26-29 26-29
</TABLE>
<TABLE>
<CAPTION>
RESERVE GOVERNMENT
INVESTMENT RESERVE
---------- INVESTMENT
----------
<S> <C> <C>
Financial Highlights 1 2
Statement of Net Assets, November 30, 1999 3-6 7
Statement of Operations, six months ended
November 30, 1999 8 8
Statement of Changes in Net Assets, six months
ended November 30, 1999 and year ended May 31,
1999 9 10
Notes to Financial Statements, November 30, 1999 11-12 11-12
</TABLE>
<TABLE>
<CAPTION>
NEW INCOME
----------
<S> <C>
Financial Highlights 9
Portfolio of Investments, November 30, 1999 10-17
Statement of Assets and Liabilities, November 30, 1999 18
Statement of Operations, six months ended
November 30, 1999 19
Statement of Changes in Net Assets, six months ended
November 30, 1999 and year ended May 31, 1999 20
Notes to Financial Statements, November 30, 1999 21-25
</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
71
<PAGE>
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.
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.
72
<PAGE>
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
Fitch IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other
than through changes in the money rate. The prime feature of a "AAA" bond is
the showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions ad
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.
73
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION FOR
T. ROWE PRICE SHORT-TERM BOND FUND, INC.
----------------------------------------
Acquisition of the assets of
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC. (THE U.S. GOVERNMENT FUND)
T. ROWE PRICE SUMMIT FUNDS, INC. ON BEHALF OF
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND (THE LIMITED-TERM FUND)
By and in exchange for shares of
T. ROWE PRICE SHORT-TERM BOND FUND, INC. (THE SHORT-TERM BOND FUND)
This Statement of Additional Information relates specifically to the proposed
acquisition of substantially all of the assets of the U.S. Government Fund and
Limited-Term Fund by the Short-Term Bond Fund in exchange for shares of the
Short-Term Bond Fund.
This Statement of Additional Information consists of this Cover Page, the
Statement of Additional Information of the Short-Term Bond Fund, U.S. Government
Fund, the Statement of Additional of the Limited-Term Fund, the annual reports
of the Short-Term Bond Fund, U.S. Government Fund, and the Limited-Term Fund and
the semiannual report of the Limited-Term Fund. Each of these documents
described below is attached hereto and incorporated by reference herein.
(1)
Statement of Additional Information, dated October 1, 1999, revised to March 31,
2000 for the Short-Term Bond Fund and the U.S. Government Fund;
(2)
Statement of Additional Information dated March 1, 2000 for the Limited-Term
Fund;
(3)
the annual report, dated April 30, 2000 for the Short-Term Bond Fund and U.S.
Government Fund, and October 31, 1999 for the Limited-Term Fund; and
4) the semiannual report, dated April 1, 2000 for the Limited-Term Fund.
This Statement of Additional Information is not a prospectus; a Proxy
Statement/Prospectus dated September 1, 2000, relating to the above-reference
transaction may be obtained from T. Rowe Price Associates, Inc. This Statement
of Additional Information should be read in conjunction with such Proxy
Statement/Prospectus. The date of this Statement of Additional Information is
September 1, 2000.
0
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is March 1, 2000.
T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market Fund
T. Rowe Price Summit Municipal Intermediate-Term Fund
T. Rowe Price Summit Municipal Income 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,
which may be obtained from T. Rowe Price Investment Services, Inc.
("Investment Services").
Each fund's financial statements for the year ended October 31, 1999, and the
report of independent accountants are included in each fund's Annual Report
and incorporated by reference into this Statement of Additional Information.
If you would like a prospectus or an annual or semiannual shareholder report
for a fund of which you are not a shareholder, please call 1-800-638-5660. A
prospectus with more complete information, including management fees and
expenses, will be sent to you. Please read it carefully.
C09-042 3/1/00
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock 59 Portfolio Management Practices 24
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Code of Ethics 48 Portfolio Transactions 48
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Custodian 47 Pricing of Securities 53
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Distributor for the Funds 47 Principal Holders of Securities 45
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Dividends and 54 Ratings of Commercial Paper 61
Distributions
---------------------------------- ----------------------------------------
Federal Registration of 60 Ratings of Corporate Debt 62
Shares Securities
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Independent Accountants 60 Ratings of Municipal Debt 64
Securities
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Investment Management 46 Ratings of Municipal Notes and 65
Services Variable Rate Securities
---------------------------------- ----------------------------------------
Investment Objectives and 2 Risk Factors for Summit Income 3
Policies Funds
---------------------------------- ----------------------------------------
Investment Performance 58 Risk Factors for Summit 5
Municipal Funds
---------------------------------- ----------------------------------------
Investment Program 8 Services by Outside Parties 48
---------------------------------- ----------------------------------------
Investment Restrictions 39 Tax-Exempt vs. Taxable Yields 57
---------------------------------- ----------------------------------------
Legal Counsel 60 Tax Status 55
---------------------------------- ----------------------------------------
Management of the Funds 42 Yield Information 56
---------------------------------- ----------------------------------------
Net Asset Value Per Share 54
---------------------------------- ----------------------------------------
</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.
2
<PAGE>
RISK FACTORS FOR SUMMIT INCOME FUNDS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the fund.
Cash Reserves Fund
The Money Fund will limit its purchases of portfolio instruments to those
U.S. dollar-denominated securities which the fund's Board of Directors
determines present minimal credit risk, and which are Eligible Securities as
defined in Rule 2a-7 under the 1940 Act. Eligible Securities are generally
securities which have been rated (or whose issuer has been rated or whose
issuer has comparable securities rated) in one of the two highest short-term
rating categories (which may include sub-categories) by nationally recognized
statistical rating organizations or, in the case of any instrument that is
not so rated, is of comparable high quality as determined by T. Rowe Price
pursuant to written guidelines established under the supervision of the
fund's Board of Directors. In addition, the fund may treat variable and
floating rate instruments with demand features as short-term securities
pursuant to Rule 2a-7 under the 1940 Act.
There can be no assurance that the fund will achieve its investment
objectives or be able to maintain its net asset value per share at $1.00. The
price of the fund is not guaranteed or insured, and its yield is not fixed.
While the fund invests in high-grade money market instruments, investment in
the fund is not without risk even if all portfolio instruments are paid in
full at maturity. An increase in interest rates could reduce the value of the
fund's portfolio investments, and a decline in interest rates could increase
the value.
Limited-Term Bond Fund
Because of its investment policy, the fund may or may not be suitable or
appropriate for all investors. The fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. There is risk in all investment. The fund is designed for the
investor who seeks to participate in a diversified portfolio of short- and
intermediate-term investment grade bonds and other debt securities (up to 10%
of which may be below investment grade) which provide a higher rate of income
than a money market fund and less risk of capital fluctuation than a
portfolio of long-term debt securities. The value of the portfolio securities
of the fund will fluctuate based upon market conditions. Although the fund
seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. There can, of course, be no
assurance that the fund will achieve these results.
GNMA Fund
The fund may or may not be suitable or appropriate for all investors. The
fund is designed for investors seeking the highest current income and credit
protection available from investment in securities which are backed by the
full faith and credit of the U.S. government and other securities rated
within the highest two credit categories established by a nationally
recognized public rating agency, or, if unrated, of equivalent quality as
determined by T. Rowe Price. Consistent with a long-term financial investment
approach, investors in the fund should not rely on the fund for their
short-term financial needs. The value of the portfolio securities of the fund
will fluctuate based upon market conditions. Although the fund seeks to
reduce risk by investing in a diversified portfolio, such diversification
does not eliminate all risk. There can, of course, be no assurance that the
fund will achieve these results.
Because they consist of underlying mortgages, GNMA securities may not be an
effective means of "locking in" long-term interest rates due to the need for
the fund to reinvest scheduled and unscheduled principal payments. The
incidence of unscheduled principal prepayments is also likely to increase in
mortgage pools owned by the fund when prevailing mortgage loan rates fall
below the mortgage rates of the securities underlying the individual pool.
The effect of such prepayments in a falling rate environment is to (1) cause
the fund to reinvest principal payments at the then lower prevailing interest
rate, and (2) reduce the potential for capital appreciation beyond the face
amount of the security and adversely affect the return to the fund.
Conversely, in a rising interest rate environment such prepayments can be
reinvested at higher prevailing interest rates which will reduce the
potential effect of capital depreciation to which bonds are subject when
3
<PAGE>
interest rates rise. In addition, prepayments of mortgage securities
purchased at a premium (or discount) will cause such securities to be paid
off at par, resulting in a loss (gain) to the fund. T. Rowe Price will
actively manage the fund's portfolio in an attempt to reduce the risk
associated with investment in mortgage-backed securities.
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 event in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus. When purchasing unrated securities, T. Rowe
Price, under the supervision of the fund's Board of Directors, determines
whether the unrated security is of a quality comparable to that which the
fund is allowed to purchase.
Securities backed by the full faith and credit of the United States (for
example, GNMA and U.S. Treasury securities) are generally considered to be
among the most, if not the most, creditworthy investments available. While
the U.S. government has honored its credit obligations continuously for the
last 200 years, political events in 1995 and 1996, at times, called into
question whether the United States would default on its obligations. Such an
event would be unprecedented and there is no way to predict its results on
the securities markets or the funds. However, it is very likely default by
the U.S. would result in losses to the funds.
Mortgage Securities--All Funds except Cash Reserves Fund
Mortgage-backed securities differ from conventional bonds in that principal
is paid back over the life of the security rather than at maturity. As a
result, the holder of a mortgage-backed security (i.e., the fund) receives
monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. The incidence of unscheduled principal prepayments is also likely
to increase in mortgage pools owned by the fund when prevailing mortgage loan
rates fall below the mortgage rates of the securities underlying the
individual pool. The effect of such prepayments in a falling rate environment
is to (1) cause the fund to reinvest principal payments at the then lower
prevailing interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security. Conversely, the fund may
realize a gain on prepayments of mortgage pools trading at a discount. Such
prepayments will provide an early return of principal which may then be
reinvested at the then higher prevailing interest rate.
The market value of adjustable rate mortgage securities ("ARMs"), like other
U.S. government securities, will generally vary inversely with changes in
market interest rates, declining when interest rates rise and rising when
interest rates decline. Because of their periodic adjustment feature, ARMs
should be more sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage-backed
securities. Thus, while having less risk of a decline during periods of
rapidly rising rates, ARMs may also have less potential for capital
appreciation than other investments of comparable maturities. Interest rate
caps on mortgages underlying ARM securities may prevent income on the ARM
from increasing to prevailing interest rate levels and cause the securities
to decline in value. In addition, to the extent ARMs are
4
<PAGE>
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.
Limited-Term Bond Fund
Special Risks of High-Yield Investing The fund may invest in low-quality
bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low- and
lower-medium-quality bonds involves greater investment risk, to the extent
the fund invests in such bonds, achievement of its investment objective will
be more dependent on T. Rowe Price's credit analysis than would be the case
if the fund were investing in higher-quality bonds. High-yield bonds may be
more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high-yield bond prices
because the advent of such events could lessen the ability of highly
leveraged issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high-yield bonds
may be less liquid than the market for higher-grade bonds, which can
adversely affect the ability of a fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
RISK FACTORS FOR SUMMIT MUNICIPAL FUNDS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the fund.
Municipal Securities
The funds are designed for investors who, because of their tax bracket, can
benefit from investment in municipal bonds whose income is exempt from
federal taxes. The funds are not appropriate for qualified retirement plans
where income is already tax-deferred.
Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the money market and the municipal bond
market, the size of a particular offering, the maturity of the obligations,
and the rating of the issue. Municipal securities with longer maturities tend
to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter
maturities and lower yields. The market prices of municipal securities
usually vary, depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments.
The ability of all the funds to achieve their investment objectives is also
dependent on the continuing ability of the issuers of municipal securities in
which the funds invest to meet their obligations for the payment of interest
and principal when due. The ratings of Moody's, S&P, and Fitch IBCA, Inc.
("Fitch") represent their opinions as to the quality of municipal securities
which they undertake to rate. Ratings are not absolute standards of quality;
consequently, municipal securities with the same maturity, coupon, and rating
may have different yields. There are variations in municipal securities, both
within a particular classification and between classifications, depending on
numerous factors. It should also be pointed out that, unlike other types of
investments, offerings of municipal securities have traditionally not been
subject to regulation by, or registration with, the SEC, although there have
been proposals which would provide for regulation in the future.
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of
creditors, which proceedings could result in material and adverse changes in
the rights of holders of their obligations.
5
<PAGE>
Proposals have been introduced in Congress to restrict or eliminate the
federal income tax exemption for interest on municipal securities, and
similar proposals may be introduced in the future. Proposed "Flat Tax" and
"Value Added Tax" proposals would also have the effect of eliminating the tax
preference for municipal securities. Some of the past proposals would have
applied to interest on municipal securities issued before the date of
enactment, which would have adversely affected their value to a material
degree. If such a proposal were enacted, the availability of municipal
securities for investment by the funds and the value of a fund's portfolio
would be affected and, in such an event, a fund would reevaluate its
investment objectives and policies.
Although the banks and securities dealers with which the fund will transact
business will be banks and securities dealers that T. Rowe Price believes to
be financially sound, there can be no assurance that they will be able to
honor their obligations to the fund with respect to such transactions.
Municipal Bond Insurance All of the funds may purchase insured bonds from
time to time. Municipal bond insurance provides an unconditional and
irrevocable guarantee that the insured bond's principal and interest will be
paid when due. The guarantee is purchased from a private, non-governmental
insurance company.
There are two types of insured securities that may be purchased by the funds:
bonds carrying either (1) new issue insurance; or (2) secondary insurance.
New issue insurance is purchased by the issuer of a bond in order to improve
-------------------
the bond's credit rating. By meeting the insurer's standards and paying an
insurance premium based on the bond's principal value, the issuer is able to
obtain a higher credit rating for the bond. Once purchased, municipal bond
insurance cannot be canceled, and the protection it affords continues as long
as the bonds are outstanding and the insurer remains solvent.
The funds may also purchase bonds that carry secondary insurance purchased by
-------------------
an investor after a bond's original issuance. Such policies insure a security
for the remainder of its term. Generally, the funds expect that portfolio
bonds carrying secondary insurance will have been insured by a prior
investor. However, the funds may, on occasion, purchase secondary insurance
on their own behalf.
Each of the municipal bond insurance companies has established reserves to
cover estimated losses. Both the method of establishing these reserves and
the amount of the reserves vary from company to company. The risk that a
municipal bond insurance company may experience a claim extends over the life
of each insured bond. Municipal bond insurance companies are obligated to pay
a bond's interest and principal when due if the issuing entity defaults on
the insured bond. Although defaults on insured municipal bonds have been low
to date, there is no assurance this low rate will continue in the future. A
higher than expected default rate could deplete loss reserves and adversely
affect the ability of a municipal bond insurer to pay claims to holders of
insured bonds, such as the fund.
Municipal Money Market Fund
The Money Fund will limit its purchases of portfolio instruments to those
U.S. dollar-denominated securities which the fund's Board of Directors
determines present minimal credit risk, and which are Eligible Securities as
defined in Rule 2a-7 under the 1940 Act. Eligible Securities are generally
securities which have been rated (or whose issuer has been rated or whose
issuer has comparable securities rated) in one of the two highest short-term
rating categories (which may include sub-categories) by nationally recognized
statistical rating organizations or, in the case of any instrument that is
not so rated, is of comparable high quality as determined by T. Rowe Price
pursuant to written guidelines established under the supervision of the
fund's Board of Directors. In addition, the fund may treat variable and
floating rate instruments with demand features as short-term securities
pursuant to Rule 2a-7 under the 1940 Act.
There can be no assurance that the fund will achieve its investment
objectives or be able to maintain its net asset value per share at $1.00. The
price of the fund is not guaranteed or insured, and its yield is not fixed.
While the fund invests in high-grade money market instruments, investment in
the fund is not without risk even if all portfolio instruments are paid in
full at maturity. An increase in interest rates could reduce the value of the
fund's portfolio investments, and a decline in interest rates could increase
the value.
6
<PAGE>
The price stability and liquidity of the Money Fund may not be equal to that
of a taxable money market fund which exclusively invests in short-term
taxable money market securities. The taxable money market is a broader and
more liquid market with a greater number of investors, issuers, and market
makers than the short-term municipal securities market. The weighted average
maturity of the fund varies: the shorter the average maturity of a portfolio,
the less its price will be impacted by interest rate fluctuations.
Intermediate and Income Funds
Because of their investment policies, the Intermediate and Income Funds may
not be suitable or appropriate for all investors. The funds are designed for
investors who wish to invest in long-term funds for income, and who would
benefit, because of their tax bracket, from receiving income that is exempt
from federal income taxes. The Intermediate and Income Funds' investment
programs permit the purchase of investment-grade securities that do not meet
the high-quality standards of the Money Fund. Since investors generally
perceive that there are greater risks associated with investment in
lower-quality securities, the yield from such securities normally exceeds
those obtainable from higher-quality securities. In addition, the principal
value of long-term lower-rated securities generally will fluctuate more
widely than higher-quality securities. Lower-quality investments entail a
higher risk of default--that is, the nonpayment of interest and principal by
the issuer than higher-quality investments. The value of the portfolio
securities of the Intermediate and Income Funds will fluctuate based upon
market conditions. Although these funds seek to reduce credit risk by
investing in a diversified portfolio, such diversification does not eliminate
all risk. These funds are also not intended to provide a vehicle for
short-term trading purposes.
Debt Obligations
Yields on short-, intermediate-, and long-term debt securities are dependent
on a variety of factors, including the general conditions of the money and
bond markets, the size of a particular offering, the maturity of the
obligation, and the credit quality and rating of the issue. Debt securities
with longer maturities tend to have higher yields and are generally subject
to potentially greater capital appreciation and depreciation than obligations
with shorter maturities and lower yields. The market prices of debt
securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio debt securities,
and a decline in interest rates will generally increase the value of
portfolio debt securities. The ability of the fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
debt securities in which the fund invests to meet their obligations for the
payment of interest and principal when due. Although the fund seeks to reduce
risk by portfolio diversification, credit analysis, and attention to trends
in the economy, industries and financial markets, such efforts will not
eliminate all risk. There can, of course, be no assurance that the fund will
achieve its investment objective.
After purchase by the fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the fund.
Neither event will require a sale of such security by the fund. However, T.
Rowe Price will consider such event in its determination of whether the fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus. When purchasing unrated securities, T. Rowe
Price, under the supervision of the fund's Board of Directors, determines
whether the unrated security is of a quality comparable to that which the
fund is allowed to purchase.
Special Risks of High-Yield Investing The fund may invest in low-quality
bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low- and
lower-medium-quality bonds involves greater investment risk, to the extent
the fund invests in such bonds, achievement of its investment objective will
be more dependent on T. Rowe Price's credit analysis than would be the case
if the fund were investing in higher-quality bonds. High-yield bonds may be
more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high-yield bond prices
because the advent of such events could lessen the ability of highly
leveraged issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high-yield bonds
may be less liquid than the market for higher-grade bonds,
7
<PAGE>
which can adversely affect the ability of a fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
INVESTMENT PROGRAM
-------------------------------------------------------------------------------
All Summit Income Funds
Types of Securities
Set forth below is additional information about certain of the investments
described in each fund's prospectus.
Adjustable Rate Securities
Generally, the maturity of a security is deemed to be the period remaining
until the date (noted on the face of the instrument) on which the principal
amount must be paid, or in the case of an instrument called for redemption,
the date on which the redemption payment must be made. However, certain
securities may be issued with adjustable interest rates that are reset
periodically by predetermined formulas or indexes in order to minimize
movements in the principal value of the investment in accordance with Rule
2a-7 under the 1940 Act. Such securities may have long-term maturities, but
may be treated as a short-term investment under certain conditions.
Generally, as interest rates decrease or increase, the potential for capital
appreciation or depreciation on these securities is less than for fixed rate
obligations. These securities may take the following forms:
. Variable Rate Securities A variable rate instrument is one whose terms
provide for the adjustment of its interest rate on set dates and which, upon
each adjustment until the final maturity of the instrument or the period
remaining until the principal amount can be recovered through demand, can
reasonably be expected to have a market value which approximates its
amortized cost. A variable rate instrument, the principal amount of which is
scheduled to be paid in 397 calendar days or less, is deemed to have a
maturity equal to the earlier of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A variable rate instrument the
principal amount of which is scheduled to be paid in more than 397 calendar
days and which is subject to a demand feature which entitles the purchaser to
receive the principal amount of the underlying security or securities, either
(i) at any time upon notice of no more than 30 days, or (ii) at specified
intervals not exceeding 397 calendar days and upon no more than 30 days'
notice ("Demand Feature"), is deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or
the period remaining until the principal amount can be recovered through
demand. A government security that is a variable rate security where the
variable rate is readjusted no less frequently than every 762 calendar days
is deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
. Floating Rate Securities A floating rate security provides for the
adjustment of its interest rates whenever a specified interest rate changes
and which, at any time until the final maturity of the instrument or the
period remaining until the principal amount can be recovered through demand,
can reasonably be expected to have a market value that approximates its
amortized cost. A floating rate security, the principal amount of which must
unconditionally be paid in 397 calendar days or less is deemed to have a
maturity of one day. A floating rate security, the principal amount of which
is scheduled to be paid in more than 397 calendar days, that is subject to a
Demand Feature is deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand. A government
security that is a floating rate security is deemed to have a remaining
maturity of one day.
. Put Option Bonds Long-term obligations with maturities longer than one year
may provide purchasers an optional or mandatory tender of the security at par
value at predetermined intervals, often ranging from one month to several
years (e.g., a 30-year bond with a five-year tender period). These
instruments are deemed to have a maturity equal to the period remaining to
the put date.
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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.
Money Market Securities
The money market securities that the funds may invest in are generally
limited to those described below.
. U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
. Commercial Paper and Commercial Notes Short-term promissory notes issued by
corporations primarily to finance short-term credit needs. Certain notes may
have floating or variable rates and may contain options, exercisable by
either the buyer or the seller, that extend or shorten the maturity of the
note.
. Funding Agreements Obligations of indebtedness negotiated privately between
the funds and an insurance company. Often such instruments will have
maturities with unconditional put features, exercisable by the funds,
requiring return of principal within one year or less.
. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
However, the Cash Reserves Fund will only purchase these securities if they
are payable in U.S. dollars.
. Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
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. Supranational Agencies Securities of certain supranational entities, such as
the International Development Bank.
. Determination of Maturity of Money Market Securities The Money Fund may only
purchase securities which at the time of investment have remaining maturities
of 397 calendar days or less. The other funds may also purchase money market
securities. In determining the maturity of money market securities, funds
will follow the provisions of Rule 2a-7 under the 1940 Act.
. First Tier Money Market Securities Defined At least 95% of the Cash Reserves
Fund's total assets will be maintained in first tier money market securities.
First tier money market securities are those which are described as First
Tier Securities under Rule 2a-7 of the 1940 Act. These include any security
with a remaining maturity of 397 days or less that is rated (or that has been
issued by an issuer that is rated with respect to a class of short-term debt
obligations, or any security within that class that is comparable in priority
and security with the security) by any two nationally recognized statistical
rating organizations (NRSROs) (or if only one NRSRO has issued a rating, that
NRSRO) in the highest rating category for short-term debt obligations (within
which there may be sub-categories). First Tier Securities also include
unrated securities comparable in quality to rated securities, as determined
by T. Rowe Price pursuant to written guidelines established in accordance
with Rule 2a-7 under the 1940 Act under the supervision of the fund's Board
of Directors.
Asset-Backed Securities
Each fund may invest a portion of its assets in debt obligations known as
asset-backed securities.
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or
any other affiliated entities and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support."
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
. Methods of Allocating Cash Flows While many asset-backed securities are
issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to
such payments of the remaining class or classes. See "Types of Credit
Support." Second, multiple classes may permit the issuance of
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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 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
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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.
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in accordance with procedures prescribed
by the fund's Board of Directors. If, through the appreciation of illiquid
securities or the depreciation of liquid securities, the fund should be in a
position where more than 15% (10% for Cash Reserves) of the value of its net
assets is invested in illiquid assets, including restricted securities, the
fund will take appropriate steps to protect liquidity.
Notwithstanding the above, the fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price, under the
supervision of the fund's Board of Directors, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
fund's restriction of investing no more than 15% (10% for Cash Reserves) of
its net assets in illiquid securities. A determination of whether a Rule 144A
security is liquid or not is a question of fact. In making this
determination, T. Rowe Price
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will consider the trading markets for the specific security taking into
account the unregistered nature of a Rule 144A security. In addition, T. Rowe
Price could consider the following: (1) frequency of trades and quotes; (2)
number of dealers and potential purchases; (3) dealer undertakings to make a
market; and (4) the nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer). The liquidity of Rule 144A securities would
be monitored and, if as a result of changed conditions it is determined that
a Rule 144A security is no longer liquid, the fund's holdings of illiquid
securities would be reviewed to determine what, if any, steps are required to
assure that the fund does not invest more than 15% (10% for Cash Reserves) of
its net assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of the fund's assets invested
in illiquid securities if qualified institutional buyers are unwilling to
purchase such securities.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.
Mortgage-Related Securities
Limited-Term Bond and GNMA Funds
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 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
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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.
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
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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-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,
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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. The
fund's Board of Directors has delegated to T. Rowe Price the authority to
determine the liquidity of these investments based on the following
guidelines: the type of issuer; type of collateral, including age and
prepayment characteristics; rate of interest on coupon relative to current
market rates and the effect of the rate on the potential for prepayments;
complexity of the issue's structure, including the number of tranches; size
of the issue and the number of dealers who make a market in the IO or PO.
. Adjustable Rate Mortgage Securities ARMs, like fixed rate mortgages, have a
specified maturity date, and the principal amount of the mortgage is repaid
over the life of the mortgage. Unlike fixed rate mortgages, the interest rate
on ARMs is adjusted at regular intervals based on a specified, published
interest rate "index" such as a Treasury rate index. The new rate is
determined by adding a specific interest amount, the "margin," to the
interest rate of the index. Investment in ARM securities allows the fund to
participate in changing interest rate levels through regular adjustments in
the coupons of the underlying mortgages, resulting in more variable current
income and lower price volatility than longer-term fixed rate mortgage
securities. ARM securities are a less effective means of locking in long-term
rates than fixed rate mortgages since the income from adjustable rate
mortgages will increase during periods of rising interest rates and decline
during periods of falling rates.
. Characteristics of Adjustable Rate Mortgage Securities The interest rates
paid on the mortgages underlying ARM securities are reset at regular
intervals by adding an interest rate margin to a specified interest rate
index. There are three main categories of indices: those based on U.S.
Treasury securities such as the constant maturity treasury rate (CMT); those
derived from a calculated measure such as a cost of funds index (COFI)
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or a moving average of mortgage rates; and those based on certain actively
traded or prominent short-term rates such as the LIBOR. Some indices, such as
the one-year constant maturity Treasury rate, closely mirror changes in
interest rate levels. Others, such as COFI, tend to lag behind changes in
market rate levels but reset monthly, thus tending to be somewhat less
volatile. Such a delay in adjusting to changes in interest rates may cause
securities owned by the fund to increase or decrease in value, particularly
during periods between interest adjustment dates.
ARMs will frequently have caps and floors which limit the maximum amount by
which the interest rate to the residential borrower may move up or down,
respectively, each adjustment period and over the life of the loan. Interest
rate caps on ARM securities may cause them to decrease in value in an
increasing interest rate environment. Such caps may also prevent their income
from increasing to levels commensurate with prevailing interest rates.
Conversely, interest rate floors on ARM securities may cause their income to
remain higher than prevailing interest rate levels and result in an increase
in the value of such securities. However, this increase may be tempered by
the acceleration of prepayments.
Mortgage securities generally have a maximum maturity of up to 30 years.
However due to the adjustable rate feature of ARM securities, their prices
are considered to have volatility characteristics which approximate the
average period of time until the next adjustment of the interest rate. As a
result, the principal volatility of ARM securities may be more comparable to
short- and intermediate-term securities than to longer term fixed rate
mortgage securities. Prepayments however, will increase their principal
volatility. See also the discussion of Mortgage-Backed Securities.
. Other Mortgage-Related Securities The fund expects that governmental,
government-related or private entities may create mortgage loan pools
offering pass-through investments in addition to those described above. The
mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may differ from customary
long-term fixed rate mortgages. As new types of mortgage-related securities
are developed and offered to investors, the investment manager will,
consistent with the fund's objective, policies and quality standards,
consider making investments in such new types of securities.
Limited-Term Bond and GNMA 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
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minimum redemption price so that the principal paid at maturity could not be
below a predetermined minimum level if interest rates were to rise
significantly. The purpose of this arrangement, known as a structured
security with an embedded put option, would be to give the fund the desired
European bond exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no guarantee that
the strategy will be successful, and the fund could lose money if, for
example, interest rates do not move as anticipated or credit problems develop
with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party 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).
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All Summit Municipal Funds
Types of Securities
Set forth below is additional information about certain of the investments
described in each fund's prospectus.
Municipal Securities
Subject to the investment objectives and programs described in the prospectus
and the additional investment restrictions described in this Statement of
Additional Information, each fund's portfolio may consist of any combination
of the various types of municipal securities described below or other types
of municipal securities that may be developed. The amount of each fund's
assets invested in any particular type of municipal security can be expected
to vary.
The term "municipal securities" means obligations issued by or on behalf of
states, territories, and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, as
well as certain other persons and entities, the interest from which is exempt
from federal income tax. In determining the tax-exempt status of a municipal
security, the fund relies on the opinion of the issuer's bond counsel at the
time of the issuance of the security. However, it is possible this opinion
could be overturned, and as a result, the interest received by the fund from
such a security might not be exempt from federal income tax.
Municipal securities are classified by maturity as notes, bonds, or
adjustable rate securities.
Municipal Notes
Municipal notes generally are used to provide short-term operating or capital
needs and generally have maturities of one year or less. Municipal notes
include:
. Tax Anticipation Notes Tax anticipation notes are issued to finance working
capital needs of municipalities. Generally, they are issued in anticipation
of various seasonal tax revenue, such as income, property, use and business
taxes, and are payable from these specific future taxes.
. Revenue Anticipation Notes Revenue anticipation notes are issued in
expectation of receipt of revenues, such as sales taxes, toll revenues or
water and sewer charges, that are used to pay off the notes.
. Bond Anticipation Notes Bond anticipation notes are issued to provide
interim financing until long-term financing can be arranged. In most cases,
the long-term bonds then provide the money for the repayment of the notes.
. Tax-Exempt Commercial Paper Tax-exempt commercial paper is a short-term
obligation with a stated maturity of 270 days or less. It is issued by state
and local governments or their agencies to finance seasonal working capital
needs or as short-term financing in anticipation of longer-term financing.
. Municipal Bonds Municipal bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued, have two
principal classifications: general obligation bonds and revenue bonds. Two
additional categories of potential purchases are lease revenue bonds and
pre-refunded/escrowed to maturity bonds. Another type of municipal bond is
referred to as an Industrial Development Bond.
. General Obligation Bonds Issuers of general obligation bonds include states,
counties, cities, towns, and special districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, public buildings, highways and roads,
and general projects not supported by user fees or specifically identified
revenues. The basic security behind general obligation bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments. In many cases voter approval is required before an issuer may
sell this type of bond.
. Revenue Bonds The principal security for a revenue bond is generally the net
revenues derived from a particular facility, or enterprise, or in some cases,
the proceeds of a special charge or other pledged revenue source. Revenue
bonds are issued to finance a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges, and tunnels; port
and airport facilities; colleges and universities; and
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hospitals. Revenue bonds are sometimes used to finance various privately
operated facilities provided they meet certain tests established for
tax-exempt status.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a mortgage or debt service reserve fund.
Some authorities provide further security in the form of the state's ability
(without obligation) to make up deficiencies in the debt service reserve
fund. Revenue bonds usually do not require prior voter approval before they
may be issued.
. Lease Revenue Bonds Municipal borrowers may also finance capital
improvements or purchases with tax-exempt leases. The security for a lease is
generally the borrower's pledge to make annual appropriations for lease
payments. The lease payment is treated as an operating expense subject to
appropriation risk and not a full faith and credit obligation of the issuer.
Lease revenue bonds are generally considered less secure than a general
obligation or revenue bond and often do not include a debt service reserve
fund. To the extent the fund's Board determines such securities are illiquid,
they will be subject to the fund's limit on illiquid securities. There have
also been certain legal challenges to the use of lease revenue bonds in
various states.
The liquidity of such securities will be determined based on a variety of
factors which may include, among others: (1) the frequency of trades and
quotes for the obligation; (2) the number of dealers willing to purchase or
sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; (4) the
nature of the marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer; and
(5) the rating assigned to the obligation by an established rating agency or
T. Rowe Price.
. Pre-refunded/Escrowed to Maturity Bonds Certain municipal bonds have been
refunded with a later bond issue from the same issuer. The proceeds from the
later issue are used to defease the original issue. In many cases the
original issue cannot be redeemed or repaid until the first call date or
original maturity date. In these cases, the refunding bond proceeds typically
are used to buy U.S. Treasury securities that are held in an escrow account
until the original call date or maturity date. The original bonds then become
"pre-refunded" or "escrowed to maturity" and are considered as high-quality
investments. While still tax-exempt, the security is the proceeds of the
escrow account. To the extent permitted by the SEC and the Internal Revenue
Service, a fund's investment in such securities refunded with U.S. Treasury
securities will, for purposes of diversification rules applicable to the
fund, be considered as an investment in U.S. Treasury securities.
. Private Activity Bonds Under current tax law all municipal debt is divided
broadly into two groups: governmental purpose bonds and private activity
bonds. Governmental purpose bonds are issued to finance traditional public
purpose projects such as public buildings and roads. Private activity bonds
may be issued by a state or local government or public authority but
principally benefit private users and are considered taxable unless a
specific exemption is provided.
The tax code currently provides exemptions for certain private activity bonds
such as not-for-profit hospital bonds, small-issue industrial development
revenue bonds and mortgage subsidy bonds, which may still be issued as
tax-exempt bonds. Some, but not all, private activity bonds are subject to
alternative minimum tax.
. Industrial Development Bonds Industrial development bonds are considered
Municipal Bonds if the interest paid is exempt from federal income tax. They
are issued by or on behalf of public authorities to raise money to finance
various privately operated facilities for business and manufacturing,
housing, sports, and pollution control. These bonds are also used to finance
public facilities such as airports, mass transit systems, ports, and parking.
The payment of the principal and interest on such bonds is dependent solely
on the ability of the facility's user to meet its financial obligations and
the pledge, if any, of real and personal property so financed as security for
such payment.
Adjustable Rate Securities
Generally, the maturity of a security is deemed to be the period remaining
until the date (noted on the face of the instrument) on which the principal
amount must be paid, or in the case of an instrument called for redemption,
the date on which the redemption payment must be made. However, certain
securities may be issued with adjustable interest rates that are reset
periodically by predetermined formulas or indexes in order
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to minimize movements in the principal value of the investment in accordance
with Rule 2a-7 under the 1940 Act. Such securities may have long-term
maturities, but may be treated as a short-term investment under certain
conditions. Generally, as interest rates decrease or increase, the potential
for capital appreciation or depreciation on these securities is less than for
fixed rate obligations. These securities may take the following forms:
. Variable Rate Securities A variable rate instrument is one whose terms
provide for the adjustment of its interest rate on set dates and which, upon
each adjustment until the final maturity of the instrument or the period
remaining until the principal amount can be recovered through demand, can
reasonably be expected to have a market value which approximates its
amortized cost. A variable rate instrument, the principal amount of which is
scheduled to be paid in 397 calendar days or less, is deemed to have a
maturity equal to the earlier of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand. A variable rate instrument the
principal amount of which is scheduled to be paid in more than 397 calendar
days and which is subject to a demand feature which entitles the purchaser to
receive the principal amount of the underlying security or securities, either
(i) at any time upon notice of no more than 30 days, or (ii) at specified
intervals not exceeding 397 calendar days and upon no more than 30 days'
notice ("Demand Feature"), is deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or
the period remaining until the principal amount can be recovered through
demand. A government security that is a variable rate security where the
variable rate is readjusted no less frequently than every 762 calendar days
is deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
. Floating Rate Securities A floating rate security provides for the
adjustment of its interest rates whenever a specified interest rate changes
and which, at any time until the final maturity of the instrument or the
period remaining until the principal amount can be recovered through demand,
can reasonably be expected to have a market value that approximates its
amortized cost. A floating rate security, the principal amount of which must
unconditionally be paid in 397 calendar days or less is deemed to have a
maturity of one day. A floating rate security, the principal amount of which
is scheduled to be paid in more than 397 calendar days, that is subject to a
Demand Feature is deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand. A government
security that is a floating rate security is deemed to have a remaining
maturity of one day.
. Put Option Bonds Long-term obligations with maturities longer than one year
may provide purchasers an optional or mandatory tender of the security at par
value at predetermined intervals, often ranging from one month to several
years (e.g., a 30-year bond with a five-year tender period). These
instruments are deemed to have a maturity equal to the period remaining to
the put date.
. Participation Interests The funds may purchase from third parties
participation interests in all or part of specific holdings of municipal
securities. The purchase may take different forms: in the case of short-term
securities, the participation may be backed by a liquidity facility that
allows the interest to be sold back to the third party (such as a trust,
broker or bank) for a predetermined price of par at stated intervals. The
seller may receive a fee from the funds in connection with the arrangement.
In the case of longer-term bonds, the funds may purchase interests in a pool
of municipal bonds or a single municipal bond or lease without the right to
sell the interest back to the third party.
The funds will not purchase participation interests unless a satisfactory
opinion of counsel or ruling of the Internal Revenue Service has been issued
that the interest earned from the municipal securities on which the funds
hold participation interests is exempt from federal income tax to the funds.
However, there is no guarantee the IRS would treat such interest income as
tax-exempt.
When-Issued Securities
New issues of municipal securities are often offered on a when-issued basis;
that is, delivery and payment for the securities normally takes place 15 to
45 days or more after the date of the commitment to purchase. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A fund will only
make a commitment to purchase such securities with the
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intention of actually acquiring the securities. However, a fund may sell
these securities before the settlement date if it is deemed advisable as a
matter of investment strategy. Each fund will maintain cash, high-grade
marketable debt securities or other suitable cover with its custodian bank
equal in value to commitments for when-issued securities. Such securities
either will mature or, if necessary, be sold on or before the settlement
date. Securities purchased on a when-issued basis and the securities held in
a fund's portfolio are subject to changes in market value based upon the
public perception of the creditworthiness of the issuer and changes in the
level of interest rates (which will generally result in similar changes in
value, i.e., both experiencing appreciation when interest rates decline and
depreciation when interest rates rise). Therefore, to the extent a fund
remains fully invested or almost fully invested at the same time that it has
purchased securities on a when-issued basis, there will be greater
fluctuations in its net asset value than if it solely set aside cash to pay
for when-issued securities. In the case of the Money Fund, this could
increase the possibility that the market value of the fund's assets could
vary from $1.00 per share. In addition, there will be a greater potential for
the realization of capital gains, which are not exempt from federal income
tax. When the time comes to pay for when-issued securities, a fund will meet
its obligations from then-available cash flow, sale of securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or less than the
payment obligation). The policies described in this paragraph are not
fundamental and may be changed by a fund upon notice to its shareholders.
Investment in Taxable Money Market Securities
Although the funds expect to be solely invested in municipal securities, for
temporary defensive purposes they may elect to invest in the taxable money
market securities listed next (without limitation) when such action is deemed
to be in the best interests of shareholders. The interest earned on these
money market securities is not exempt from federal income tax and may be
taxable to shareholders as ordinary income.
. U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
. Commercial Paper and Commercial Notes Short-term promissory notes issued by
corporations primarily to finance short-term credit needs. Certain notes may
have floating or variable rates and may contain options, exercisable by
either the buyer or the seller, that extend or shorten the maturity of the
note.
. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
. Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
. Supranational Agencies Securities of certain supranational entities, such as
the International Development Bank.
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. Determination of Maturity of Money Market Securities The Money Fund may only
purchase securities which at the time of investment have remaining maturities
of 397 calendar days or less. The other funds may also purchase money market
securities. In determining the maturity of money market securities, funds
will follow the provisions of Rule 2a-7 under the 1940 Act.
Intermediate and Income Funds
. Residual Interest Bonds are a type of high-risk derivative. The funds may
purchase municipal bond issues that are structured as two-part, residual
interest bond and variable rate security offerings. The issuer is obligated
only to pay a fixed amount of tax-free income that is to be divided among the
holders of the two securities. The interest rate for the holders of the
variable rate securities will be determined by an index or auction process
held approximately every seven to 35 days while the bondholders will receive
all interest paid by the issuer minus the amount given to the variable rate
security holders and a nominal auction fee. Therefore, the coupon of the
residual interest bonds, and thus the income received, will move inversely
with respect to short-term, seven- to 35-day tax-exempt interest rates. There
is no assurance that the auction will be successful and that the variable
rate security will provide short-term liquidity. The issuer is not obligated
to provide such liquidity. In general, these securities offer a significant
yield advantage over standard municipal securities, due to the uncertainty of
the shape of the yield curve (i.e., short-term versus long-term rates) and
consequent income flows.
Unlike many adjustable rate securities, residual interest bonds are not
necessarily expected to trade at par and in fact present significant market
risks. In certain market environments, residual interest bonds may carry
substantial premiums or be at deep discounts. This is a relatively new
product in the municipal market with limited liquidity to date.
. Embedded Interest Rate Swaps and Caps In a fixed rate, long-term municipal
bond with an interest rate swap attached to it, the bondholder usually
receives the bond's fixed coupon payment as well as a variable rate payment
that represents the difference between a fixed rate for the term of the swap
(which is typically shorter than the bond it is attached to) and a variable
rate, short-term municipal index. The bondholder receives excess income when
short-term rates remain below the fixed interest rate swap rate. If
short-term rates rise above the fixed income swap rate, the bondholder's
income is reduced. At the end of the interest rate swap term, the bond
reverts to a single fixed coupon payment. Embedded interest rate swaps
enhance yields, but also increase interest rate risk.
An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates. Both instruments may be volatile and of limited liquidity, and their
use may adversely affect the fund's total return.
The funds may invest in other types of derivative instruments as they become
available.
For the purpose of the funds' investment restrictions, the identification of
the "issuer" of municipal securities which are not general obligation bonds
is made by the funds' investment manager, T. Rowe Price, on the basis of the
characteristics of the obligation as described above, the most significant of
which is the source of funds for the payment of principal and interest on
such securities.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.
Intermediate and Income Funds
Forwards
The funds may purchase bonds on a when-issued basis with longer than standard
settlement dates, in some cases exceeding one to two years. In such cases,
the funds must execute a receipt evidencing the obligation to purchase the
bond on the specified issue date, and must segregate cash internally to meet
that forward commitment. Municipal "forwards" typically carry a substantial
yield premium to compensate the buyer for the risks associated with a long
when-issued period, including: shifts in market interest rates that could
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materially impact the principal value of the bond, deterioration in the
credit quality of the issuer, loss of alternative investment options during
the when-issued period, changes in tax law or issuer actions that would
affect the exempt interest status of the bonds and prevent delivery, failure
of the issuer to complete various steps required to issue the bonds, and
limited liquidity for the buyer to sell the escrow receipts during the
when-issued period.
PORTFOLIO MANAGEMENT PRACTICES
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All Funds
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional investors or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent, marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The fund has a right to call each loan and obtain the securities,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation of any important vote. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms deemed
by T. Rowe Price to be of good standing and will not be made unless, in the
judgment of T. Rowe Price, the consideration to be earned from such loans
would justify the risk.
Interfund Borrowing and Lending
The fund is a party to an exemptive order received from the SEC on December
8, 1998, amended on November 23, 1999, that permits it to borrow money from
and/or lend money to other funds in the T. Rowe Price complex ("Price
Funds"). All loans are set at an interest rate between the rate charged on
overnight repurchase agreements and short-term bank loans. All loans are
subject to numerous conditions designed to ensure fair and equitable
treatment of all participating funds. The program is subject to the oversight
and periodic review of the Boards of Directors of the Price Funds.
Repurchase Agreements
Each fund may enter into repurchase agreements through which investors (such
as the fund) purchases a security (the "underlying security") from a
well-established securities dealer or a bank which is a member of the Federal
Reserve System. Any such dealer or bank will be on T. Rowe Price's approved
list. At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will
be treated as illiquid securities. Each fund will only enter into repurchase
agreements where (i) (A) Cash Reserves Fund--the underlying securities are
------------------
either U.S. government securities or securities that, at the time the
repurchase agreement is entered into, are rated in the highest rating
category by the requisite number of NRSROs (as required by Rule 2a-7 under
the 1940 Act) and otherwise are of the type (excluding maturity limitations)
which the fund's investment guidelines would allow it to purchase directly
(however, the underlying securities will either be U.S. government securities
or securities which, at the time the repurchase agreement is entered into,
are rated in the highest rating category by public rating agencies), (B)
Limited-Term and GNMA Funds--the underlying securities are of the type
---------------------------
(excluding maturity limitations) which each fund's investment guidelines
would allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry
transfer to the account of the custodian
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or a bank acting as agent. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, a fund could experience both delays in
liquidating the underlying security and losses, including: (a) possible
decline in the value of the underlying security during the period while the
fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
Reverse Repurchase Agreements
Although the fund has no current intention of engaging in reverse repurchase
agreements, the fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a fund is the seller
of, rather than the investor in, securities, and agrees to repurchase them at
an agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the fund, subject to
Investment Restriction (1). (See "Investment Restrictions.")
Limited-Term Bond and GNMA Funds
Money Market Reserves
It is expected that the fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price 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.
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.
Limited-Term Bond and GNMA Funds
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
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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
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
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transactions at favorable prices. If the fund cannot enter into such a
transaction, it may be required to hold a security or currency that it might
otherwise have sold. When the fund writes a covered call option, it runs the
risk of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price, as well as the risk of
being required to hold on to securities or currencies that are depreciating
in value. This could result in higher transaction costs. The fund will pay
transaction costs in connection with the writing of options to close out
previously written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may
be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the fund may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the fund.
The fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options
The fund may write American or European style covered put options and
purchase options to close out options previously written by the fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at
the exercise price during the option period (American style) or at the
expiration of the option (European style). So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to make payment to the
exercise price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related risks and
rewards, is substantially identical to that of call options.
The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.)
The fund would generally write covered put options in circumstances where T.
Rowe Price wishes to purchase the underlying security or currency for the
fund's portfolio at a price lower than the current market price of the
security or currency. In such event the fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the fund. In addition, the
fund, because it does not own the specific securities or 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.
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The fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options
The fund may purchase American or European style put options. As the holder
of a put option, the fund has the right to sell the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The fund may
enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided next.
The fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The fund may also purchase put options at a time when the fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the fund when purchasing
a put option will be recorded as an asset of the fund. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed (close of New York Stock Exchange), or, in the absence of such sale,
the latest bid price. This asset will be terminated upon expiration of the
option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
Purchasing Call Options
The fund may purchase American or European style call options. As the holder
of a call option, the fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase call options
for the purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The fund may also purchase call
options in order to acquire the underlying securities or currencies. Examples
of such uses of call options are provided 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
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rather than the underlying security or currency itself, the fund is partially
protected from any unexpected decline in the market price of the underlying
security or currency and in such event could allow the call option to expire,
incurring a loss only to the extent of the premium paid for the option.
The fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the fund would look to a clearing
corporation to exercise exchange-traded options, if the fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the fund as well as loss
of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the fund writes
a dealer option, it generally will be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the fund originally wrote the option. While the fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the fund, there can be no assurance that the fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the fund may be unable to
liquidate a dealer option. With respect to options written by the fund, the
inability to enter into a closing transaction may result in material losses
to the fund. For example, since the fund must maintain a secured position
with respect to any call option on a security it writes, the fund may not
sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair a fund's ability to
sell portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The fund may treat the cover used for written Over-the-Counter ("OTC")
options as liquid if the dealer agrees that the fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
Intermediate and Income Funds
The funds have no current intention of investing in options on securities,
although they reserve the right to do so. Appropriate disclosure would be
added to the funds' prospectus and Statement of Additional Information when
and if the funds decide to invest in options.
Interest Rate Transactions
Limited-Term Bond and GNMA Funds
The funds may enter into various interest rate transactions such as interest
rate swaps and the purchase or sale of interest rate caps and floors, to
preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic securities, or to structure transactions
designed for other non-speculative purposes.
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Interest rate swaps involve the exchange by the funds with third parties of
its respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor. In circumstances in which T. Rowe
Price anticipates that interest rates will decline, the funds might, for
example, enter into an interest rate swap as the floating rate payor. In the
case where the funds purchase such an interest rate swap, if the floating
rate payments fell below the level of the fixed rate payment set in the swap
agreement, the funds counterparties would pay the funds' amounts equal to
interest computed at the difference between the fixed and floating rates over
the national principal amount. Such payments would offset or partially offset
the decrease in the payments the funds would receive in respect of floating
rate assets being hedged. In the case of purchasing an interest rate floor,
if interest rates declined below the floor rate, the funds would receive
payments from the counterparties which would wholly or partially offset the
decrease in the payments they would receive in respect of the financial
instruments being hedged.
The funds will usually enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the funds receiving or paying,
as the case may be, only the net amount of the two payments. The net amount
of the excess, if any, of the funds' obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in an
account by the funds' custodian. If the funds enter into an interest rate
swap on other than a net basis, the funds would maintain an account in the
full amount accrued on a daily basis of the funds' obligations with respect
to the swap. To the extent the funds sells (i.e., writes) caps and floors, it
will maintain in an account cash or high-quality liquid debt securities
having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the funds' obligations with respect to any caps
or floors. The funds will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of
the counterparty thereto is rated at least A by S&P. T. Rowe Price will
monitor the creditworthiness of counterparties on an ongoing basis. If there
is a default by the other parties to such a transaction, the fund will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. T. Rowe Price has determined that,
as a result, the swap market has become relatively liquid. The funds may
enter into interest rate swaps only with respect to positions held in its
portfolio. Interest rate swaps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the funds are contractually obligated to make. If the other
parties to interest rate swaps default, the funds' risk of loss consists of
the net amount of interest payments that the funds are contractually entitled
to receive. Since interest rate swaps are individually negotiated, the funds
expect to achieve an acceptable degree of correlation between its right to
receive interest on loan interests and its right and obligation to receive
and pay interest pursuant to interest rate swaps.
The aggregate purchase price of caps and floor held by the funds may not
exceed 10% of the funds' total assets. The funds may sell (i.e., write) caps
and floors without limitation, subject to the account coverage requirement
described above.
Futures Contracts
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The fund may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
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Limited-Term Bond and GNMA Funds
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.
Intermediate and Income Funds
The fund may enter into futures contracts. Interest rate futures contracts
may be used as a hedge against changes in prevailing levels of interest rates
in order to establish more definitely the effective return on securities held
or intended to be acquired by the fund. The fund could sell interest rate
futures as an offset against the effect of expected increases in interest
rates and purchase such futures as an offset against the effect of expected
declines in interest rates. Futures can also be used as an efficient means of
regulating a fund's exposure to the market.
The fund will enter into futures contracts which are traded on national
futures exchanges and are standardized as to maturity date and underlying
financial instrument. A public market exists in futures contracts covering
various taxable fixed income securities as well as municipal bonds. Futures
exchanges and trading in the United States are regulated under the Commodity
Exchange Act by the CFTC. Although techniques other than the sale and
purchase of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low cost means
of implementing the fund's objectives in these areas.
All Funds (other than the Money Funds)
Regulatory Limitations
If the fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors without a shareholder vote and does not limit the
percentage of the fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a fund's
assets to cover or identified accounts could impede portfolio management or
the fund's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the fund would comply with such new
restrictions.
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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.
As an example of an offsetting transaction in which the underlying instrument
is not delivered, the contractual obligations arising from the sale of one
contract of September Treasury bills on an exchange may be fulfilled at any
time before delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one contract of
September Treasury bills on the same exchange. In such instance, the
difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction
costs, represents the profit or loss to the fund.
Intermediate and Income Funds
It is possible that the fund's hedging activities will occur primarily
through the use of municipal bond index futures contracts since the
uniqueness of that index contract should better correlate with the fund's
portfolio and thereby be more effective. However, there may be times when it
is deemed in the best interest of shareholders to engage in the use of
Treasury bond futures, and the fund reserves the right to use Treasury bond
futures at any time. Use of these futures could occur, as an example, when
both the Treasury bond contract and municipal bond index futures contract are
correlating well with municipal bond prices, but the Treasury bond contract
is trading at a more advantageous price making the hedge less expensive with
the Treasury bond contract than would be obtained with the municipal bond
index futures contract. The fund's
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activity in futures contracts generally will be limited to municipal bond
index futures contracts and Treasury bond and note contracts.
All Funds (other than the Money Funds)
Special Risks of Transactions in Futures Contracts
. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Margin deposits required on futures trading are low. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit, if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
. Liquidity The fund may elect to close some or all of its futures positions
at any time prior to their expiration. The fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The fund may close its positions by taking opposite positions which would
operate to terminate the fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the fund, and the fund would realize
a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the fund's underlying
instruments sought to be hedged.
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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.
Limited-Term Bond and GNMA Funds
Options on Futures Contracts
The fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the fund and other T. Rowe Price funds. Such aggregated orders would be
allocated among the funds and the other T. Rowe Price funds in a fair and
nondiscriminatory manner.
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Intermediate and Income Funds
Options on Futures Contracts
The fund might trade in municipal bond index option futures or similar
options on futures developed in the future. In addition, the fund may also
trade in options on futures contracts on U.S. government securities and any
U.S. government securities futures index contract which might be developed.
In the opinion of T. Rowe Price, there is a high degree of correlation in the
interest rate, and price movements of U.S. government securities and
municipal securities. However, the U.S. government securities market and
municipal securities markets are independent and may not move in tandem at
any point in time.
The fund may purchase put options on futures contracts to hedge its portfolio
of municipal securities against the risk of rising interest rates, and the
consequent decline in the prices of the municipal securities it owns. The
funds will also write call options on futures contracts as a hedge against a
modest decline in prices of the municipal securities held in the fund's
portfolio. If the futures price at expiration of a written call option is
below the exercise price, the fund will retain the full amount of the option
premium, thereby partially hedging against any decline that may have occurred
in the fund's holdings of debt securities. If the futures price when the
option is exercised is above the exercise price, however, the fund will incur
a loss, which may be wholly or partially offset by the increase of the value
of the securities in the fund's portfolio which were being hedged.
Writing a put option on a futures contract serves as a partial hedge against
an increase in the value of securities the fund intends to acquire. If the
futures price at expiration of the option is above the exercise price, the
fund will retain the full amount of the option premium which provides a
partial hedge against any increase that may have occurred in the price of the
debt securities the fund intends to acquire. If the futures price when the
option is exercised is below the exercise price, however, the fund will incur
a loss, which may be wholly or partially offset by the decrease in the price
of the securities the fund intends to acquire.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
From time to time a single order to purchase or sell futures contracts (or
options thereon) may be made on behalf of the fund and other T. Rowe Price
funds. Such aggregated orders would be allocated among the fund and the other
T. Rowe Price funds in a fair and non-discriminatory manner.
All Funds (other than the Money Funds)
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. In addition, where the fund seeks to
close out an option position by writing or buying an offsetting option
covering the same index, underlying instrument or contract and having the
same exercise price and expiration date, its ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of
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an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (6) one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers'
orders.
In the event no such market exists for a particular contract in which the
fund maintains a position, in the case of a written option, the fund would
have to wait to sell the underlying securities or futures positions until the
option expires or is exercised. The fund would be required to maintain margin
deposits on payments until the contract is closed. Options on futures are
treated for accounting purposes in the same way as the analogous option on
securities are treated.
In addition, the correlation between movements in the price of options on
futures contracts and movements in the price of the securities hedged can
only be approximate. This risk is significantly increased when an option on a
U.S. government securities future or an option on some type of index future
is used as a proxy for hedging a portfolio consisting of other types of
securities. Another risk is that the movements in the price of options on
futures contract and the value of the call increases by more than the
increase in the value of the securities held as cover, the fund may realize a
loss on the call which is not completely offset by the appreciation in the
price of the securities held as cover and the premium received for writing
the call.
The successful use of options on futures contracts requires special expertise
and techniques different from those involved in portfolio securities
transactions. A decision of whether, when and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or interest rate trends. During periods
when municipal securities market prices are appreciating, the fund may
experience poorer overall performance than if it had not entered into any
options on futures contracts.
General Considerations Transactions by the fund in options on futures will be
subject to limitations established by each of the exchanges, boards of trade
or other trading facilities governing the maximum number of options in each
class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written on
the same or different exchanges, boards of trade or other trading facilities
or are held or written in one or more accounts or through one or more
brokers. Thus, the number of contracts which the fund may write or purchase
may be affected by contracts written or purchased by other investment
advisory clients of T. Rowe Price. An exchange, board of trade or other
trading facility may order the liquidations of positions found to be in
excess of these limits, and it may impose certain other sanctions.
Additional Futures and Options Contracts
Although the fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
Limited-Term Bond Fund
Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or
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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 T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the fund may enter into a forward contract where the amount
of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under normal circumstances, consideration of
the prospect for currency parties will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, T. Rowe Price believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best
interests of the fund will be served.
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
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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
Limited-Term Bond and GNMA Funds
The discussion herein may refer to transactions in which the GNMA Fund does
not engage. The fund's prospectus sets forth the types of transactions
permissible for the fund.
The fund may enter into certain options, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will
be treated as Section 1256 contracts or straddles.
Transactions that are considered Section 1256 contracts will be considered to
have been closed at the end of the fund's fiscal year and any gains or losses
will be recognized for tax purposes at that time. Such gains or losses from
the normal closing or settlement of such transactions will be characterized
as 60% long-term capital gain (taxable at a maximum rate of 20%) or loss and
40% short-term capital gain or loss regardless of the holding period of the
instrument (ordinary income or loss for foreign exchange contracts). The fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar-denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the--
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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.
Intermediate and Income Funds
Although the fund invests almost exclusively in securities that generate
income that is exempt from federal income taxes, the fund may enter into
certain option, futures, and foreign exchange contracts, including options
and futures on currencies, which will be treated as Section 1256 contracts or
straddles that are not exempt from such taxes. Therefore, use of the
investment techniques described above could result in taxable income to
shareholders of the fund.
Transactions which are considered Section 1256 contracts will be considered
to have been closed at the end of the fund's fiscal year and any gains or
losses will be recognized for tax purposes at that time. Gains or losses
recognized from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, without regard to the holding period of the contract.
The fund will be required to distribute net gains on such transactions to
shareholders even though it may not have closed the transaction and received
cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar-denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.
In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the fund.
All Funds
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
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
39
<PAGE>
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;
(2) Commodities Purchase or sell physical commodities; except that the funds
(other than the Municipal Money Market and Cash Reserves Funds) may enter
into futures contracts and options thereon;
(3) Industry Concentration Purchase the securities of any issuer if, as a
result, more than 25% of the value of the fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry provided that for the Cash Reserves Fund
this policy does not apply to securities of the banking industry
including, but not limited to, certificates of deposit and bankers'
acceptances;
(4) Loans Make loans, although the fund may (i) lend portfolio securities and
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly distributed or privately placed
debt securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of its total assets,
more than 5% of the value of the fund's total assets would be invested in
the securities of a single issuer, except securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of the fund's total
assets, more than 10% of the outstanding voting securities of any issuer
would be held by the fund (other than obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities);
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
1940 Act;
(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the fund may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
program; or
40
<PAGE>
All Summit Municipal Funds
(10) Equity Securities Purchase equity securities, or securities convertible
into equity securities.
NOTES
The following Notes should be read in connection with the above-described
fundamental policies. The Notes are not fundamental policies.
With respect to investment restriction (1), the Cash Reserves and the
Municipal Money Market Funds have no current intention of engaging in any
borrowing transactions.
With respect to investment restriction (2), the fund does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction. Bonds which
are refunded with escrowed U.S. government securities or subject to
certain types of guarantees are not subject to the industry limitation of
25%.
All Summit Municipal Funds
For purposes of investment restriction (5), the fund will treat bonds
which are refunded with escrowed U.S. government securities as U.S.
government securities.
All Funds
Operating Policies
As a matter of operating policy, the fund may not:
(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the fund's net asset value;
(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% (10% for Cash Reserves and Municipal Money Market Funds) of its
net assets would be invested in such securities;
(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; (ii)
securities of the Reserve Investment or Government Reserve Investment
Funds; or (iii) in the case of the Money Funds, only securities of other
money market funds;
(6) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging or hypothecating may not exceed
33/1//\\/3/\\% of the fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the fund would be invested in such
programs;
41
<PAGE>
(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;
(11) Warrants Invest in warrants if, as a result thereof, more than 10% (for
the Summit Income Funds) or 2% (for the Summit Municipal Funds) of the
value of the net assets of the fund would be invested in warrants.
NOTES
With respect to investment restriction (5), the funds have no current
intention of purchasing the securities of other investment companies.
Duplicate fees could result from any such purchases.
All Funds
Notwithstanding anything in the above fundamental and operating restrictions
to the contrary, the fund may invest all of its assets in a single investment
company or a series thereof in connection with a "master-feeder" arrangement.
Such an investment would be made where the fund (a "Feeder"), and one or more
other funds with the same investment objective and program as the fund,
sought to accomplish its investment objective and program by investing all of
its assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as the
fund. The fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
MANAGEMENT OF THE FUNDS
-------------------------------------------------------------------------------
The officers and directors of the fund are listed below. Unless otherwise
noted, the address of each is 100 East Pratt Street, Baltimore, Maryland
21202. Except as indicated, each has been an employee of T. Rowe Price for
more than five years. In the list below, the fund's directors who are
considered "interested persons" of T. Rowe Price as defined under Section
2(a)(19) of the 1940 Act are noted with an asterisk (*). These directors are
referred to as inside directors by virtue of their officership, directorship,
and/or employment with T. Rowe Price.
All Funds
Independent Directors/(a)/
CALVIN W. BURNETT, PH.D., 3/16/32, President, Coppin State College; formerly:
Director, Maryland Chamber of Commerce and Provident Bank of Maryland;
formerly: President, Baltimore Area Council Boy Scouts of America; Vice
President and Board of Directors, The Walters Art Gallery; Address: 2500 West
North Avenue, Baltimore, Maryland 21216
ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, President, and
Chief Executive Officer, The Rouse Company, real estate developers, Columbia,
Maryland; Address: 10275 Little Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, 8/22/34, President, F. Pierce Linaweaver & Associates,
Inc.; Consulting Environmental & Civil Engineers; formerly (1987-1991)
Executive Vice President, EA Engineering, Science, and Technology, Inc., and
President, EA Engineering, Inc., Baltimore, Maryland; Address: Green Spring
Station, 2360 West Joppa Road, Suite 224, Lutherville, Maryland 21093
JOHN G. SCHREIBER, 10/21/46, Owner/President, Schreiber Investments, Inc., a
real estate investment company; Director, AMLI Residential Properties Trust
and Urban Shopping Centers, Inc.; Partner, Blackstone Real Estate Partners,
L.P.; Director and formerly Executive Vice President, JMB Realty Corporation,
a national real estate investment manager and developer; Address: 1115 East
Illinois Road, Lake Forest, Illinois 60045
(a) Unless otherwise indicated, the Independent Directors have been at their
respective companies for at least five years.
42
<PAGE>
Inside Directors/Officers
* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board-Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, 6/25/43, Director and Vice President-Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation
* M. DAVID TESTA, 4/22/44, Director-Chairman of the Board and Director,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, Price-Fleming and
T. Rowe Price Retirement Plan Services, Inc.; Director and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
PATRICIA B. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
CARMEN F. DEYESU, 8/1/41, Treasurer-Vice President, T. Rowe Price, T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company
INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price
All Summit Income Funds
EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price,
Price-Fleming, and T. Rowe Price Trust Company
CONNICE A. BAVELY, 3/5/51, Executive Vice President-Vice President and Senior
Portfolio Manager, T. Rowe Price; formerly founding partner and Senior Vice
President of Atlantic Asset Management Partners, LLC; Special Partner and
Portfolio Manager at Weiss Peck and Greer
PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President-Vice President, T. Rowe
Price
DEBORAH L. BOYER, 1/2/68, Vice President-Assistant Vice President, T. Rowe
Price; formerly Assistant Vice President and Government Bond Trader for First
Chicago NBD Corporation
STEVEN G. BROOKS, 8/5/54, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
Price
ROBERT P. CAMPBELL, 1/31/56, Vice President-Vice President, T. Rowe Price and
Price-Fleming
PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
Chartered Financial Analyst
DEBRA R. DIES, 5/12/71, Vice President-Credit Analyst, T. Rowe Price;
formerly employed at J.P. Morgan Securities
CHARLES B. HILL, 9/22/61, Vice President-Vice President, T. Rowe Price
ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price;
formerly Senior Vice President and Director of Research at Aubrey G. Lanston
& Co., Inc.
JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price
CHERYL A. MICKEL, 1/11/67, Vice President-Assistant Vice President, T. Rowe
Price
EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
43
<PAGE>
JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price
THEODORE E. ROBSON, 2/10/65, Vice President-Assistant Vice President, T. Rowe
Price
ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
VIRGINIA A. STIRLING, 9/5/51, Vice President-Vice President, T. Rowe Price
SUSAN G. TROLL, 8/27/66, Vice President-Vice President and Analyst, T. Rowe
Price; formerly Vice President at Merrill Lynch Asset Management; Certified
Public Accountant
MARK J. VASELKIV, 7/22/58, Vice President-Vice President, T. Rowe Price
All Summit Municipal Funds
MARY J. MILLER, 7/19/55, President-Managing Director, T. Rowe Price
PATRICE BERCHTENBREITER ELY, 1/13/53, Executive Vice President-Vice
President, T. Rowe Price
CHARLES B. HILL, 9/22/61, Executive Vice President-Vice President, T. Rowe
Price
JANET G. ALBRIGHT, 3/31/57, Vice President-Vice President, T. Rowe Price
JEREMY N. BAKER, 2/27/68, Vice President-Employee, T. Rowe Price
PATRICIA S. DEFORD, 9/29/57, Vice President-Vice President, T. Rowe Price
JOSEPH K. LYNAGH, 6/9/58, Vice President-Assistant Vice President, T. Rowe
Price
KONSTANTINE B. MALLAS, 5/26/63, Vice President-Vice President, T. Rowe Price
HUGH D. MCGUIRK, 7/6/60, Vice President-Vice President, T. Rowe Price
JULIE A. SALSBERY, 4/29/70, Vice President-Assistant Vice President and Fixed
Income Trader, T. Rowe Price; (1997) formerly assistant portfolio
manager/trader at Wainwright Asset Management
EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe Price
WILLIAM F. SNIDER, 9/16/69, Vice President-Vice President, T. Rowe Price
C. STEPHEN WOLFE II, 4/5/59, Vice President-Vice President, T. Rowe Price
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>
Cash Reserves Fund
Calvin W. Burnett, Ph.D., Director $3,505 $65,000
Anthony W. Deering, Director 2,141 81,000
F. Pierce Linaweaver, Director 3,510 66,000
John G. Schreiber, Director 3,505 65,000
-------------------------------------------------------------------------------------------------------------------------
Limited-Term Bond Fund
$
Calvin W. Burnett, Ph.D., Director 1,333 $65,000
Anthony W. Deering, Director 1,272 81,000
F. Pierce Linaweaver, Director 1,333 66,000
John G. Schreiber, Director 1,332 65,000
-------------------------------------------------------------------------------------------------------------------------
GNMA Fund
Calvin W. Burnett, Ph.D., Director $1,340 $65,000
Anthony W. Deering, Director 1,267 81,000
F. Pierce Linaweaver, Director 1,340 66,000
John G. Schreiber, Director 1,340 65,000
-------------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund
Calvin W. Burnett, Ph.D., Director $1,468 $65,000
Anthony W. Deering, Director 1,311 81,000
F. Pierce Linaweaver, Director 1,468 66,000
John G. Schreiber, Director 1,469 65,000
-------------------------------------------------------------------------------------------------------------------------
Municipal Intermediate-Term Fund
Calvin W. Burnett, Ph.D., Director $1,372 $65,000
Anthony W. Deering, Director 1,279 81,000
F. Pierce Linaweaver, Director 1,372 66,000
John G. Schreiber, Director 1,372 65,000
-------------------------------------------------------------------------------------------------------------------------
Municipal Income Fund
Calvin W. Burnett, Ph.D., Director $1,360 $65,000
Anthony W. Deering, Director 1,276 81,000
F. Pierce Linaweaver, Director 1,360 66,000
John G. Schreiber, Director 1,360 65,000
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<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 December 31, 1999, the following shareholders beneficially owned more
than 5% of the outstanding shares of the fund:
Summit Limited-Term Bond Fund: Maryland Higher Education Investment Program,
217 E. Redwood St., Ste. 2050, Baltimore, Maryland 21202-3316;
45
<PAGE>
Summit GNMA Fund: Walnut Street Partners, P.O. Box 6829, c/o Curt Walmer, 850
N. Wyomissing Blvd., Ste. 200, Wyomissing, Pennsylvania 19610-1764;
Summit Municipal Income Fund: US Clearing Corp., FBO 146-20689-15, 26
Broadway, New York, New York 10004-1703.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, T. Rowe Price provides the fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the fund in accordance with
the fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services, T.
Rowe Price provides the fund with certain corporate administrative services,
including: maintaining the fund's corporate existence and corporate records;
registering and qualifying fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the fund; maintaining
liaison with the agents employed by the fund such as the fund's custodian and
transfer agent; assisting the fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors, and committee members of the fund without cost to the fund.
The Management Agreement also provides that T. Rowe Price, its directors,
officers, employees, and certain other persons performing specific functions
for the fund will only be liable to the fund for losses resulting from
willful misfeasance, bad faith, gross negligence, or reckless disregard of
duty.
Management Fee
Each fund pays T. Rowe Price an annual all-inclusive fee (the "Fee") as
follows:
<TABLE>
<CAPTION>
<S> <C>
Cash Reserves 0.45%
Limited-Term Bond 0.55
GNMA 0.60
Municipal Money Market 0.45
Municipal Intermediate 0.50
Municipal Income 0.50
</TABLE>
The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is the sum of the Daily Fee accruals for
each month. The Daily Fee accrual for any particular day is calculated by
multiplying the fraction of one (1) over the number of calendar days in the
year by the appropriate Fee and multiplying this product by the net assets of
the fund for that day, as determined in accordance with the funds' prospectus
as of the close of business on the previous business day on which the fund
was open for business.
The Management Agreement between each fund and T. Rowe Price provides that T.
Rowe Price will pay all expenses of each fund's operations, except interest,
taxes, brokerage commissions, and other charges incident to the purchase,
sale or lending of the fund's portfolio securities, directors' fees and
expenses (including counsel fees and expenses) and such non-recurring or
extraordinary expenses that may arise, including the costs of actions, suits
or proceedings to which the fund is a party and the expenses the fund may
incur as a result of its obligation to provide indemnification to its
officers, directors and agents. However, the Board of Directors for the funds
reserves the right to impose additional fees against shareholder accounts to
defray expenses which would otherwise be paid by T. Rowe Price under the
management agreement. The Board does not anticipate levying such charges;
such a fee, if charged, may be retained by the fund or paid to T. Rowe Price.
46
<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>
Cash Reserves $7,978,000 $5,366,000 $4,707,000
Limited-Term Bond 91,000 10,000 149,000
GNMA 130,000 47,000 161,000
Municipal Money Market 564,000 485,000 520,000
Municipal Intermediate 230,000 127,000 185,000
Municipal Income 166,000 47,000 103,000
</TABLE>
DISTRIBUTOR FOR THE FUNDS
-------------------------------------------------------------------------------
Investment Services, a Maryland corporation formed in 1980 as a wholly owned
subsidiary of T. Rowe Price, serves as the fund's distributor. Investment
Services is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers,
Inc. The offering of the fund's shares is continuous.
Investment Services is located at the same address as the fund and T. Rowe
Price-100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
fund will pay all fees and expenses in connection with: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling 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.
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the fund's
securities and cash, but it does not participate in the fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation, or any central depository system allowed by federal law. In
addition, the Summit Municipal Funds are authorized to maintain certain of
its securities, in particular, variable rate demand note, in uncertificated
form, in the proprietary deposit systems of various dealers in municipal
securities. State Street Bank and the Limited-Term Fund have entered into a
Custodian Agreement with The Chase Manhattan Bank, N.A., London, pursuant to
which portfolio securities which are purchased outside the United States are
maintained in the custody of various foreign branches of The Chase Manhattan
Bank and such other custodians, including foreign banks and foreign
securities depositories as are approved by the fund's Board of Directors in
accordance with regulations under the 1940 Act. The Bank's main office is at
225 Franklin Street, Boston, Massachusetts 02110. The address for The Chase
Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
2HD, England.
47
<PAGE>
All Funds
SERVICES BY OUTSIDE PARTIES
-------------------------------------------------------------------------------
The shares of some fund shareholders are held in omnibus accounts maintained
by various third parties, including retirement plan sponsors, insurance
companies, banks and broker-dealers. The fund has adopted an administrative
services program ("AFP") that authorizes the fund to make payments to these
third parties. The payments are made for transfer agent, recordkeeping and
other administrative services provided by, or on behalf of, the third parties
with respect to such shareholders and the omnibus accounts.
CODE OF ETHICS
-------------------------------------------------------------------------------
The fund's investment adviser (T. Rowe Price) has a written Code of Ethics
which requires all Access Persons to obtain prior clearance before engaging
in personal securities transactions. In addition, all employees must report
their personal securities transactions within 10 days of their execution.
Access Persons will not be permitted to effect transactions in a security: if
there are pending client orders in the security; the security has been
purchased or sold by a client within seven calendar days; the security is
being considered for purchase for a client; or the security is subject to
internal trading restrictions. In addition, Access Persons are prohibited
from profiting from short-term trading (e.g., purchases and sales involving
the same security within 60 days). Any person becoming an Access Person must
file a statement of personal securities holdings within 10 days of this date.
All Access Persons are required to file an annual statement with respect to
their personal securities holdings. Any material violation of the Code of
Ethics is reported to the Board of the fund. The Board also reviews the
administration of the Code of Ethics on an annual basis.
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
The fund's purchases and sales of fixed income portfolio securities are
normally done on a principal basis and do not involve the payment of a
commission although they may involve the designation of selling concessions.
That part of the discussion below relating solely to brokerage commissions
would not normally apply to the fund. However, it is included because T. Rowe
Price does manage a significant number of common stock portfolios which do
engage in agency transactions and pay commissions and because some research
and services resulting from the payment of such commissions may benefit the
fund.
How Brokers and Dealers Are Selected
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a primary
market-maker acting as principal for the securities on a net basis, with no
brokerage commission being paid by the client although the price usually
includes an undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the bid and asked
prices. Securities may also be purchased from underwriters at prices which
include underwriting fees.
With respect to equity and fixed income securities, T. Rowe Price may effect
principal transactions on behalf of the fund with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in fixed price offerings.
48
<PAGE>
How Evaluations Are Made of the Overall Reasonableness of Brokerage Commissions
Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates; (b) rates which
other institutional investors are paying, based on available public
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business
done with a particular firm over a period of time; and (g) the extent to
which the broker or dealer has capital at risk in the transaction.
Descriptions of Research Services Received From Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently
provided by brokers and dealers. T. Rowe Price pays cash for certain research
services received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash. While receipt
of research services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could be materially
increased if it attempted to generate such additional information through its
own staff. To the extent that research services of value are provided by
brokers or dealers, T. Rowe Price may be relieved of expenses which it might
otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in return for
products or services other than brokerage or research services. In accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934,
T. Rowe Price may from time to time receive services and products which serve
both research and non-research functions. In such event, T. Rowe Price makes
a good faith determination of the anticipated research and non-research use
of the product or service and allocates brokerage only with respect to the
research component.
Commissions to Brokers Who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would
have charged for effecting the same transaction, if the adviser determines in
good faith that the commission paid is reasonable in relation to the value of
the brokerage and research services provided. The determination may be viewed
in terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the
total brokerage and research services provided by 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.
49
<PAGE>
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of business
to any broker or dealer over any specific time period. Historically, the
majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion
of its discretionary client brokerage business where special needs do not
exist, or where the business may be allocated among several brokers or
dealers which are able to meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations but
can, and often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above. In no case
is a broker or dealer excluded from receiving business from T. Rowe Price
because it has not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the fund.
From time to time, orders for clients may be placed through a computerized
transaction network.
The fund does not allocate business to any broker-dealer on the basis of its
sales of the fund's shares. However, this does not mean that broker-dealers
who purchase fund shares for their clients will not receive business from the
fund.
Some of T. Rowe Price's other clients have investment objectives and programs
similar to those of the fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution
which generally results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of transactions at
various prices on a given day, each participating client's proportionate
share of such order reflects the average price paid or received with respect
to the total order. T. Rowe Price has established a general investment policy
that it will ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price funds) if, as a result
of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.
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.
50
<PAGE>
Limited-Term Bond Fund
Transactions With Related Brokers and Dealers
As provided in the Investment Management Agreement between the fund and T.
Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions
and the allocation of portfolio brokerage and principal business. It is
expected that, from time to time, T. Rowe Price 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 fund has authorized T. Rowe Price to utilize
certain affiliates of RF and JF in the capacity of broker in connection with
the execution of the fund's portfolio transactions. Other affiliates of RF
and JF also may be used. Although it does not believe that the fund's use of
these brokers would be subject to Section 17(e) of the 1940 Act, the Board of
Directors of the fund has agreed that the procedures set forth in Rule 17e-1
under that Act will be followed when using such brokers.
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.
Other
The funds engaged in portfolio transactions involving broker-dealers in the
following amounts for the fiscal years ended October 31, 1999, 1998, and 1997
are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $12,801,643,000 $13,039,528,000 $10,202,905,000
Limited-Term Bond 50,160,000 40,310,000 226,508,000
GNMA 114,383,000 76,167,000 194,894,000
Municipal Money Market 797,210,000 758,579,000 549,381,000
Municipal Intermediate 161,189,000 142,492,000 126,762,000
Municipal Income 253,977,000 176,797,000 61,353,000
</TABLE>
51
<PAGE>
The following amounts consisted of principal transactions as to which the
funds have no knowledge of the profits or losses realized by the respective
broker-dealers for the fiscal years ended October 31, 1999, 1998, and 1997
are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $12,801,643,000 $13,039,528,000 $10,202,905,000
Limited-Term Bond 44,893,000 37,838,000 225,918,000
GNMA 114,383,000 76,167,000 194,894,000
Municipal Money Market -- 750,702,000 549,381,000
Municipal Intermediate 149,721,000 128,977,000 114,808,000
Municipal Income 214,219,000 142,293,000 50,664,000
</TABLE>
The following amounts involved trades with brokers acting as agents or
underwriters for the fiscal years ended October 31, 1999, 1998, and 1997 are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves -- -- --
Limited-Term Bond $ 5,267,000 $ 2,472,000 $ 590,000
GNMA -- -- --
Municipal Money Market -- 7,877,000 --
Municipal Intermediate 11,468,000 13,515,000 11,954,000
Municipal Income 39,758,000 34,504,000 10,689,000
</TABLE>
The following amounts involved trades with brokers acting as agents or
underwriters, in which such brokers received total commissions, including
discounts received in connection with underwritings for the fiscal years
ended October 31, 1999, 1998, and 1997 are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves -- -- --
Limited-Term Bond $ 12,000 $ 12,000 $ 2,000
GNMA -- -- --
Municipal Money Market -- -- --
Municipal Intermediate 47,000 87,000 29,000
Municipal Income 198,000 199,000 50,000
</TABLE>
The percentage of total portfolio transactions placed with firms which
provided research, statistical, or other services to T. Rowe Price in
connection with the management of the fund, or in some cases, to the fund for
the fiscal years ended October 31, 1999, 1998, and 1997 are:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves 87% 87% 83%
Limited-Term Bond 80 88 59
GNMA 96 98 65
Municipal Money Market -- -- --
Municipal Intermediate -- -- --
Municipal Income -- -- --
</TABLE>
52
<PAGE>
The portfolio turnover rates for the fund (if applicable) for the fiscal
years ended October 31, 1999, 1998, and 1997 were:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
Limited-Term Bond 42.2% 52.0% 74.5%
GNMA 89.9 83.8 111.8
Municipal Intermediate 38.5 22.2 53.8
Municipal Income 79.7 48.1 35.7
</TABLE>
PRICING OF SECURITIES
-------------------------------------------------------------------------------
All Funds except Cash Reserves and Municipal Money Market Funds
Fixed income securities are generally traded in the over-the-counter market.
Investments in securities with remaining maturities of one year or more are
stated at fair value using a bid-side valuation as furnished by dealers who
make markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity,
and type, as well as prices quoted by dealers who make markets in such
securities. Investments in mutual funds are valued at the closing net asset
value per share of the mutual fund on the day of valuation. (For the
Limited-Term and GNMA Funds) Domestic securities with remaining maturities
less than one year are stated at fair value which is determined by using a
matrix system that establishes a value for each security based on bid-side
money market yields.
There are a number of pricing services available, and the Board of Directors,
on the basis of an ongoing evaluation of these services, may use or may
discontinue the use of any pricing service in whole or part.
Securities or other assets for which the above valuation procedures are
deemed not to reflect fair value will be appraised at prices deemed best to
reflect their fair value. Such determinations will be made in good faith by
or under the supervision of officers of each fund as authorized by the Board
of Directors.
Limited-Term Bond Fund
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.
Cash Reserves and Municipal Money Market Funds
Securities are valued at amortized cost.
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;
53
<PAGE>
(c) The fund must limit its purchase of portfolio instruments, including
repurchase agreements, to those U.S. dollar-denominated instruments which
the fund's Board of Directors determines present minimal credit risks,
and which are eligible securities as defined by Rule 2a-7; and
(d) The Board of Directors must determine that (i) it is in the best interest
of the fund and its shareholders to maintain a stable net asset value per
share under the amortized cost method; and (ii) the fund will continue to
use the amortized cost method only so long as the Board of Directors
believes that it fairly reflects the market based net asset value per
share.
Although the fund believes that it will be able to maintain its net asset
value at $1.00 per share under most conditions, there can be no absolute
assurance that it will be able to do so on a continuous basis. If the fund's
net asset value per share declined, or was expected to decline, below $1.00
(rounded to the nearest one cent), the Board of Directors of the fund might
temporarily reduce or suspend dividend payments in an effort to maintain the
net asset value at $1.00 per share. As a result of such reduction or
suspension of dividends, an investor would receive less income during a given
period than if such a reduction or suspension had not taken place. Such
action could result in an investor receiving no dividend for the period
during which he holds his shares and in his receiving, upon redemption, a
price per share lower than that which he paid. On the other hand, if the
fund's net asset value per share were to increase, or were anticipated to
increase above $1.00 (rounded to the nearest one cent), the Board of
Directors of the fund might supplement dividends in an effort to maintain the
net asset value at $1.00 per share.
NET ASSET VALUE PER SHARE
-------------------------------------------------------------------------------
The purchase and redemption price of the fund's shares is equal to the fund's
net asset value per share or share price. The fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the fund is normally
calculated as of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the fund may by order permit such
a suspension for the protection of the fund's shareholders; provided that
applicable rules and regulations of the SEC (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c),
or (d) exist.
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.
54
<PAGE>
TAX STATUS
-------------------------------------------------------------------------------
The fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.
All Summit Income Funds
A portion of the dividends paid by certain funds may be eligible for the
dividends-received deduction applicable to corporate shareholders. For tax
purposes, it does not make any difference whether dividends and capital gain
distributions are paid in cash or in additional shares. Each fund must
declare 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.
All Summit Municipal Funds
Generally, dividends paid by the funds are not eligible for the
dividends-received deduction applicable to corporate shareholders. For tax
purposes, it does not make any difference whether dividends and capital gain
distributions are paid in cash or in additional shares. Each fund must
declare by its year-end dividends equal to at least 90% of net tax-exempt
income (as of its year-end) to permit pass-through of tax-exempt income to
shareholders. Each fund must also declare by December 31, 98% of capital
gains (as of October 31) in order to avoid a federal excise tax, and
distribute within 12 months 100% of taxable income, if any, and capital gains
(as of its tax year-end) to avoid federal income tax.
All Funds
At the time of your purchase, the fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held
by the fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, the fund is permitted to carry
forward its net realized capital losses, if any, for eight years and realize
net capital gains up to the amount of such losses without being required to
pay taxes on, or distribute, such gains.
If, in any taxable year, the fund should not qualify as a regulated
investment company under the code: (i) the fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
fund's distributions to the extent made out of the fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
Limited-Term Bond Fund
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.
To the extent the Limited-Term Bond Fund invests in foreign securities, the
following would apply:
55
<PAGE>
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.
YIELD INFORMATION
-------------------------------------------------------------------------------
Cash Reserves and Municipal Money Market Funds
The fund's current and historical yield for a period is calculated by
dividing the net change in value of an account (including all dividends
accrued and dividends reinvested in additional shares) by the account value
at the beginning of the period to obtain the base period return. This base
period return is divided by the number of days in the period, then multiplied
by 365 to arrive at the annualized yield for that period. The fund's
annualized compound yield for such period is compounded by dividing the base
period return by the number of days in the period, and compounding that
figure over 365 days.
Limited-Term Bond, Municipal Intermediate-Term, and Municipal Income Funds
An income factor is calculated for each security in the portfolio based upon
the security's market value at the beginning of the period and yield as
determined in conformity with regulations of the SEC. The income factors are
then totaled for all securities in the portfolio. Next, expenses of the fund
for the period, net of expected reimbursements, are deducted from the income
to arrive at net income, which is then converted to a per share amount by
dividing net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset value on the
last day of the period to produce a monthly yield which is then annualized.
If applicable, a taxable-equivalent yield is calculated by dividing this
yield by one minus the effective federal, state, and/or city or local income
tax rates. Quoted yield factors are for comparison purposes only, and are not
intended to indicate future performance or forecast the dividend per share of
the fund.
GNMA Fund
In conformity with regulations of the SEC, an income factor is calculated for
each security in the portfolio based upon the security's coupon rate. The
income factors are then adjusted for any gains or losses which have resulted
from prepayments of principal during the period. The income factors are then
totaled for all securities in the portfolio. Next, expenses of the fund for
the period, net of expected reimbursements, are deducted from the income to
arrive at net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset value on the
last day of the period to produce a monthly yield which is then annualized.
Quoted yield factors are for comparison purposes only, and are not intended
to indicate future performance or forecast the dividend per share of the
fund.
56
<PAGE>
The yield of each fund calculated under the above-described methods for the
month ended October 31, 1999, was:
<TABLE>
<CAPTION>
Fund Yield
---- -----
<S> <C>
Cash Reserves 5.24% (7-day yield)
Limited-Term Bond 6.37
GNMA 6.42
Municipal Money Market 3.10 (7-day yield)
Municipal Intermediate 4.67
Municipal Income 5.07
</TABLE>
The taxable equivalent yields for the municipal funds for the same period
based on federal income tax brackets of 28% and 31% are shown below:
<TABLE>
<CAPTION>
Federal Income Tax Bracket
Fund -28%-------------------31%
---- --- ---
<S> <C> <C>
Municipal Money Market 4.07% 4.25%
Municipal Intermediate 5.44 5.68
Municipal Income 6.13 6.39
</TABLE>
All Summit Municipal Funds
TAX-EXEMPT VS. TAXABLE YIELDS
-------------------------------------------------------------------------------
From time to time, a fund may also illustrate the effect of tax-equivalent
yields using information such as that set forth below:
<TABLE>
<CAPTION>
Your Taxable Income(2000)(a) A Tax-Exempt Yield Of:(c)
2% 3% 4% 5% 6%
Federal Tax Is Equivalent to a
Joint Return Single Return Rates(b) Taxable Yield of:
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$
2
6,251
-$
$43,851-$105,950 63,550 28.0% 2.78 4.17 5.56 6.94 8.33
105,951-161,450 63,551-132,600 31.0 2.90 4.35 5.80 7.25 8.70
161,451-288,350 132,601-288,350 36.0 3.13 4.69 6.25 7.81 9.38
2
8
288,351 and above 8,351 39.6 3.31 4.97 6.62 8.28 9.93
and above
-----------------------------------------------------------------------------------------------
A Tax-Exempt Yield Of:
Your Taxable Income(2000)(a)
1
7 8 9 0
% % % %
Federal Tax Is Equivalent to a
Joint Return Single Return Rates(b) Taxable Yield of:
-----------------------------------------------------------------------------------------------
$
2
6,251
-$
$43,851-$105,950 63,550 28.0% 9.72 11.11 12.50 13.89
105,951-161,450 63,551-132,600 31.0 10.14 11.59 13.04 14.49
161,451-288,350 132,601-288,350 36.0 10.94 12.50 14.06 15.63
2
8
288,351 and above 8,351 39.6 11.59 13.25 14.90 16.56
and above
-----------------------------------------------------------------------------------------------
</TABLE>
(a) Net amount subject to federal income tax after deductions and
exemptions.
(b) Marginal rates may vary depending on family size and nature and amount of
itemized deductions.
57
<PAGE>
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. 3 Yrs. 5 Yrs. % Since Inception
Fund ----- ------ ------ ------- ---------
---- Ended Ended Ended Inception Date
----- ----- ----- --------- ----
10/31/99 10/31/99 10/31/99 10/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
Cash Reserves 4.87% 16.37% 29.41% 34.07% 10/29/93
Limited-Term Bond 1.06 16.46 31.88 30.94 10/29/93
GNMA 1.39 18.55 44.33 41.92 10/29/93
Municipal Money Market 2.90 9.85 17.46 20.22 10/29/93
Municipal Intermediate -0.96 14.10 33.96 34.20 10/29/93
Municipal Income -3.58 15.58 41.88 35.67 10/29/93
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 3 Yrs. 5 Yrs. % Since Inception
Fund ----- ------ ------ ------- ---------
---- Ended Ended Ended Inception Date
----- ----- ----- --------- ----
10/31/99 10/31/99 10/31/99 10/31/99
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
Cash Reserves 4.87% 5.18% 5.29% 5.00% 10/29/93
Limited-Term Bond 1.06 5.21 5.69 4.59 10/29/93
GNMA 1.39 5.84 7.61 6.00 10/29/93
Municipal Money Market 2.90 3.18 3.27 3.11 10/29/93
Municipal Intermediate -0.96 4.50 6.02 5.02 10/29/93
Municipal Income -3.58 4.95 7.25 5.21 10/29/93
-----------------------------------------------------------------------------
</TABLE>
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the fund's
total return performance, ranking, or any other measure of the fund's
performance may be compared to any one or combination of the following: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities comparable to those in which the fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the fund or the general economic, business, investment, or
financial environment in which the fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and other
persons may be used to illustrate aspects of the fund's performance; (4) the
effect of tax-deferred compounding on the fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product,
58
<PAGE>
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.
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the fund, brokerage fees could be incurred by the
shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
CAPITAL STOCK
-------------------------------------------------------------------------------
The fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. The Board of Directors may
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the fund has authorized to issue
without shareholder approval.
Except to the extent that the fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class
vote unless and to the extent that such a right might be construed to exist
under Maryland law. The Charter contains no provision entitling the holders
of the present class of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics attaching to
any class of shares, including the present class of capital stock, 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
59
<PAGE>
proposal, without any additional right to vote as a class by the holders of
the capital stock or of another affected class or classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the fund, a special meeting of
shareholders of the fund shall be called by the Secretary of the fund on the
written request of shareholders entitled to cast at least 10% of all the
votes of the fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of the fund to the extent required by
Section 16(c) of the 1940 Act.
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The fund's shares are registered for sale under the 1933 Act. Registration of
the fund's shares is not required under any state law, but the fund is
required to make certain filings with and pay fees to the states in order to
sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is The Chrysler Building,
405 Lexington Avenue, New York, New York 10174, is legal counsel to the fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the funds.
The financial statements of the funds for the year ended October 31, 1999,
and the report of independent accountants are included in each fund's Annual
Report for the year ended October 31, 1999. A copy of each Annual Report
accompanies this Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in each Annual
Report for the year ended October 31, 1999, are incorporated into this
Statement of Additional Information by reference:
60
<PAGE>
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CASH LIMITED-TERM
RESERVES ----
-------- BOND
----
<S> <C> <C>
Financial Highlights 14 15
Statement of Net Assets, October 31, 1999 17-24 25-30
Statement of Operations, year ended October 31, 1999 35 35
Statement of Changes in Net Assets, years ended
October 31, 1999 and October 31, 1998 36 37
Notes to Financial Statements, October 31, 1999 39-42 39-42
Report of Independent Accountants 43 43
</TABLE>
<TABLE>
<CAPTION>
GNMA
----
<S> <C>
Financial Highlights 16
Portfolio of Investments 31-33
Statement of Assets and Liabilities, October 31, 1999 34
Statement of Operations, year ended October 31, 1999 35
Statement of Changes in Net Assets, years ended
October 31, 1999 and October 31, 1998 38
Notes to Financial Statements, October 31, 1999 39-42
Report of Independent Accountants 43
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET INTERMEDIATE INCOME
------------ ------------ ------
<S> <C> <C> <C>
Financial Highlights 16 17 18
Statement of Net Assets, October 31,
1999 19-29 30-39 40-51
Statement of Operations, year ended
October 31, 1999 52 52 52
Statement of Changes in Net Assets,
years ended
October 31, 1999 and October 31, 1998 53 53 53
Notes to Financial Statements, October
31, 1999 54-57 54-57 54-57
Report of Independent Accountants 58 58 58
</TABLE>
RATINGS OF COMMERCIAL PAPER
-------------------------------------------------------------------------------
All Summit Income Funds
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
61
<PAGE>
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.
All Summit Municipal Funds
Moody's Investors Service, Inc. P-1 superior capacity for repayment. P-2
strong capacity for repayment. P-3 acceptable capacity for repayment of
short-term promissory obligations.
Standard & Poor's Corporation A-1 highest category, degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation. A-2 satisfactory capacity to pay principal and interest. A-3
adequate capacity for timely payment, but are vulnerable to adverse effects
of changes in circumstances than higher-rated issues. B and C speculative
capacity to pay principal and interest.
Fitch IBCA, Inc. F-1+ exceptionally strong credit quality, strongest degree
of assurance for timely payment. F-1 very strong credit quality. F-2 good
credit quality, having a satisfactory degree of assurance for timely payment.
F-3 fair credit quality, assurance for timely payment is adequate but adverse
changes could cause the securities to be rated below investment grade. F-5
weak credit quality, having characteristics suggesting a minimal degree of
assurance for timely payment.
All Summit Income Funds
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.
62
<PAGE>
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of attaining investment standing.
Standard & Poor's Corporation
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
Fitch IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other
than through changes in the money rate. The prime feature of a "AAA" bond is
the showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions ad
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.
63
<PAGE>
All Summit Municipal Funds
RATINGS OF MUNICIPAL DEBT SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally know as high-grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations.
Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of attaining investment standing.
Standard & Poor's Corporation
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
64
<PAGE>
Fitch IBCA, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other
than through changes in the money rate. The prime feature of a "AAA" bond is
the showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions ad
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.
RATINGS OF MUNICIPAL NOTES AND VARIABLE RATE SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Service, Inc. VMIG1/MIG-1 the best quality. VMIG2/MIG-2
high quality, with margins of protection ample though not so large as in the
preceding group. VMIG3/MIG-3 favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the preceding grades.
Market access for refinancing, in particular, is likely to be less well
established. VMIG4/MIG-4 adequate quality but there is specific risk.
Standard & Poor's Corporation SP-1 very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation. SP-2
satisfactory capacity to pay interest and principal. SP-3 speculative
capacity to pay principal and interest.
Fitch IBCA, Inc. F-1+ exceptionally strong credit quality, strongest degree
of assurance for timely payment. F-1 very strong credit quality. F-2 good
credit quality, having a satisfactory degree of assurance for timely payment.
F-3 fair credit quality, assurance for timely payment is adequate but adverse
changes could cause the securities to be rated below investment grade. F-5
weak credit quality, having characteristics suggesting a minimal degree of
assurance for timely payment.
65
<PAGE>
-----------------------------------------------------------------
ANNUAL REPORT
-----------------------------------------------------------------
Annual Report
Short-Term U.S. Government Fund
May 31, 2000
T. Rowe Price
Report Highlights
----------------------------------------------------------------
Short-Term U.S. Government Fund
o The Federal Reserve raised interest rates repeatedly throughout the past
year, crimping returns on short-term bonds.
o Your fund posted modest returns in line with its benchmarks for the year, but
lagged in the past six months.
o Selected mortgage-backed, asset-backed, and corporate securities offer
attractive yields and high credit quality.
o The Fed seems to be achieving its goal of slowing the economy, but another
rate hike may still be on the horizon.
UPDATES AVAILABLE
For updates on T. Rowe Price funds following the end of each calendar quarter,
please see our Web site at www.troweprice.com.
Fellow Shareholders
Bond prices fell and interest rates rose during the past year due to persistent
strength in the U.S. economy, revived global growth, and mounting cost
pressures. The Federal Reserve raised its target for the key federal funds rate
six times over the past 12 months in an effort to slow U.S. growth and forestall
potential inflation. Bond funds-especially those with a short-term
focus-struggled to make headway in this environment. The Short-Term U.S.
Government Fund posted a modest total return comparable to its benchmarks in the
12 months ended May 31.
<PAGE>
MARKET ENVIRONMENT
Interest Rate Levels
------------------------------------------------------------------
2-Year 5-Year 1-Year
Treasury Note Treasury Note Treasury Bill
5/31/99 5.35 5.51 4.93
5.61 5.76 5.11
5.59 5.75 5.07
8/99 5.61 5.71 5.19
5.66 5.81 5.24
5.92 6.09 5.51
11/99 5.96 6.03 5.65
6.22 6.33 5.95
6.48 6.63 6.17
2/00 6.54 6.59 6.22
6.57 6.42 6.30
6.53 6.42 6.19
5/31/00 6.77 6.65 6.28
The past year was volatile for the financial markets, which had to contend with
a number of unusual factors including the white-hot economy and the Fed's
aggressive efforts to cool it off. Robust demand for goods and services in the
U.S. combined with a recovery of demand overseas raised concern within the Fed
and elsewhere that the domestic economy could overheat and revive inflation. In
the first quarter of 2000, GDP grew at an annual rate of 5.4%, while the jobless
rate, currently at 4.1%, hovered near 30-year lows. Foreign demand for U.S.
exports grew 8% in the first quarter compared with the year-earlier period,
while forecasts for growth outside the U.S. are at their highest levels in
years. To date, inflation has risen only modestly from the extremely low levels
registered in large part due to the overseas economic and financial crises of
1997-98. The consumer price index rose 3.1% in May compared with May 1999.
Excluding the volatile food and energy components, core CPI rose just 2.4% for
the month compared with the year-earlier period.
The Fed increased the federal funds rate 1.75 percentage points, to 6.5%, during
the year-above the peak target set during the Fed's last tightening cycle, which
ended in 1995. With the economy showing few signs of deceleration after five
quarter-point rate hikes, the central bank increased rates a half point on May
16. Short-term bonds invariably suffer when the Fed increases interest costs.
Data released in late May and early June, however, did suggest a slowing
economy, and investors began to feel that the Fed was nearing the end of its
rate-hike program.
<PAGE>
Against this backdrop, Treasury issuance plunged, and in fact, the Treasury
Department began a $30 billion debt repurchase program in early 2000. Several
years of greater-than-expected federal budget surpluses had made it possible to
reduce the supply of Treasury debt. As a result, the 30-year Treasury bond yield
peaked in mid-January at about 6.75%, well before any letup to Fed rate hikes
was in sight. The yield fell as low as 5.69% in early April, as market
participants feared a shortage of long-term Treasuries. By the end of the
period, the 30-year Treasury bond yielded 6.00%, up only modestly from the 5.80%
level on May 31, 1999. Yields on short-term Treasuries rose far more during the
year, with the 1-year Treasury bill yield rising 1.35 percentage points to
6.28%, as shown in the chart on page 1. The Treasury yield curve inverted as a
result, with short-term securities yielding more than long-term bonds. (The
yield curve is a line plotting the yields on bonds from short to long
maturities.) Two-year Treasury note yields increased 1.42 percentage points to
6.77%, higher even than 5-year yields. These developments were not positive for
short-term debt funds since bond prices fall as yields rise. For the first time
in recent history, the Treasury yield curve inversion occurred in response to a
reduction in outstanding Treasury debt, rather than to concerns about economic
slowing as is normally the case.
Mortgage performance was mixed: rates rose during the period but eased off after
reaching two-year highs in February. Mortgage- and asset-backed securities were
the top-performing sectors outside of Treasuries over the past year and six
months.
PERFORMANCE AND STRATEGY REVIEW
Performance Comparison
------------------------------------------------------------------
Periods Ended 5/31/00 6 Months 12 Months
------------------------------------------------------------------
Short-Term
U.S. Government Fund 1.35% 3.23%
Salomon Smith Barney 2-Year
Treasury Note Index 1.63 3.26
Lipper Average of Short
U.S. Government Funds 1.98 3.49
In a difficult environment for short-term bonds, your fund posted modest total
returns for the 6- and 12-month periods ended May 31, 2000. Results were
comparable to the benchmarks for the year, but fell short for the six months.
Your returns were provided entirely by dividend income over both periods. As a
result of rising interest rates, the fund's share price declined $0.11 during
the year, from $4.60 to $4.49 at the end of the period. Rising dividend income
per share of $0.26 (up a penny from the year ended May 31,
<PAGE>
1999) overcame the decline in net asset value. The fund's six-month dividend
yield rose to 5.87% from 5.51% on November 30.
Although we entered the latest six-month period with a duration we consider
neutral versus our peers (2.2 years), we reduced duration even further as the
period progressed. (Duration is a measure of a bond fund's sensitivity to
interest rates; for example, a duration of two years means the fund's share
price will rise or fall about 2% for each one-percentage-point fall or rise in
interest rates.) Unfortunately, we did not move quickly enough to reduce
interest rate sensitivity, and this hurt performance.
The silver lining in an environment of sharply rising short-term interest rates,
of course, is rising income for shareholders. During the past six months, we
positioned the portfolio in high-quality instruments that offer attractive yield
advantages over Treasuries and reliable payment streams. Meanwhile, we
significantly reduced the fund's allocation to Treasuries during the period, as
reflected in the decline of U.S. government obligations from 25% to 16% as of
May 31, shown in the table on page 6. Exposure to mortgage-backed securities
remained steady at 50%, and within that sector we are focused on collateralized
mortgage obligations (CMOs) that are protected against prepayment risk. (CMOs
are securities backed by pools of mortgages. When homeowners refinance, they pay
off their existing mortgages and replace them with lower interest mortgages. In
substantial numbers, homeowner refinancing, or prepayment, can hurt the value of
mortgage-backed securities by reducing their yields. Certain types of CMOs are
structured so that their payment streams are buffered against prepayments.) In
addition, we also emphasized securities backed by commercial mortgages, which
are less interest rate sensitive than residential mortgages.
The fund's exposure to asset-backed securities also rose during the past six
months, to 18% from 11%. Structured securities backed by credit card debt and
automobile loans offer top-quality credit ratings (AAA) and yet have yields well
in excess of AAA corporate short-term debt. These instruments also have high
liquidity, meaning they can be bought and sold easily with minimal impact on
their prices. We also own some floating-rate securities backed by credit cards.
The floating-rate feature causes these instruments to increase their coupon
payments when interest rates rise, thus increasing their total returns.
Going forward, we plan to retain our defensive duration posture as we feel the
Fed will probably increase rates at least once more before year-end. We continue
to look for added value in the mortgage, corporate, and asset-backed sectors and
to focus on highly liquid securities.
<PAGE>
OUTLOOK
The economic environment may continue to provide some surprises for fixed-income
investors, but we believe the Fed is well on its way toward successfully
orchestrating a soft landing. Economic data released in late May and early June
suggest that GDP is set to slow in the second quarter, after growing at an
amazingly fast clip the previous three quarters, and that upward pressure on
wages and other costs appears to be peaking. Unemployment even rose two-tenths
of a percentage point in May, albeit from historic lows. A slowdown in the
economy does not necessarily signal lower rates soon. Even a 4% annualized GDP
growth rate would be high by historical standards, and lower rates could quickly
reignite stock market exuberance and fuel economic activity. With this in mind,
we continue to focus on sector and security selection while remaining cautious
on the overall direction of interest rates.
We expect economic growth to moderate and inflation to remain stable. The
combination of sound fiscal policy, as reflected in the federal budget surplus,
and effective monetary policy suggests reduced upward pressure on interest rates
going forward. At current levels, selected short-term mortgage- and asset-backed
securities offer highly attractive yields and the prospect of strong total
returns with limited risk in the years ahead.
Thank you for investing with T. Rowe Price.
Respectfully submitted,
/s/Connice A. Bavely
Connice A. Bavely
President and Chairman of the Investment Advisory Committee
June 23, 2000
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
Portfolio Highlights
------------------------------------------------------------------
Key Statistics
11/30/99 5/31/00
Price Per Share $ 4.56 $ 4.49
Dividends Per Share
For 6 months 0.12 0.13
For 12 months 0.25 0.26
Dividend Yield *
For 6 months 5.51% 5.87%
For 12 months 5.59 5.81
30-Day Standardized Yield 5.69 6.48
<PAGE>
Weighted Average Maturity (years) 2.6 2.3
Weighted Average Effective Duration (years) 2.2 1.7
Weighted Average Quality ** AAA AAA-
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset value per share at the end of the period.
** Based on T. Rowe Price research.
Sector Diversification
Percent of Percent of
Net Assets Net Assets
11/30/99 5/31/00
Mortgage-Backed Securities 50% 50%
Asset-Backed Securities 11 18
U.S. Government Obligations 25 16
Short-Term Obligations 7 10
Corporate Bonds and Notes 7 6
Other Assets Less Liabilities -- --
Total 100% 100%
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
Performance Comparison
------------------------------------------------------------------
This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
SHORT-TERM U.S. GOVERNMENT FUND
------------------------------------------------------------------
Salomon Smith Barney
2-Year Treasury Short-Term Fund
Note Index U.S. Government Fund
9/30/91 10,000 10,000
5/92 10,562 10,440
5/93 11,325 10,682
5/94 11,554 10,823
5/95 12,426 11,488
5/96 13,035 11,983
5/97 13,896 12,810
5/98 14,843 13,670
5/99 15,493 14,270
5/00 15,998 14,731
<PAGE>
Average Annual Compound Total Return
------------------------------------------------------------------
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Periods Since Inception
Ended 5/31/00 1 Year 3 Years 5 Years Inception Date
Short-Term U.S.
Government Fund 3.23% 4.77% 5.10% 4.57% 9/30/91
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
Financial Highlights For a share outstanding throughout
each period
------------------------------------------------------------------
Year
Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
NET ASSET VALUE
Beginning of
period $ 4.60 $ 4.65 $ 4.62 $ 4.59 $ 4.67
Investment activities
Net investment
income(loss) 0.26* 0.25* 0.27* 0.28* 0.28*
Net realized
and unrealized
gain (loss) (0.11) (0.05) 0.03 0.03 (0.08)
Total from
investment
activities 0.15 0.20 0.30 0.31 0.20
Distributions
Net investment
income (0.26) (0.25) (0.27) (0.27) (0.27)
Tax return
of capital -- -- -- (0.01) (0.01)
Total
distributions (0.26) (0.25) (0.27) (0.28) (0.28)
<PAGE>
NET ASSET VALUE
End of period $ 4.49 $ 4.60 $ 4.65 $ 4.62 $ 4.59
-----------------------------------------------------------------
Ratios/Supplemental Data
Total return
(diamond) 3.23%* 4.39%* 6.71%* 6.90%* 4.31%*
Ratio of total expenses
to average net
assets 0.70%* 0.70%* 0.70% 0.70% 0.70%*
Ratio of net investment
income (loss) to average
net assets 5.60%* 5.42%* 5.88%* 6.05%* 5.93%*
Portfolio turnover
rate 54.7% 145.3% 107.5% 82.9% 152.8%
Net assets,
end of period
(in thousands) $123,499 $134,227 $109,863 $ 92,697 $ 98,529
(diamond) 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.
* Excludes expenses in excess of a 0.70% voluntary expense limitation in
effect through 5/31/00.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
May 31, 2000
Statement of Net Assets Par/Shares Value
------------------------------------------------------------------
In thousands
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 45.1%
U.S. Government Agency ARM 1.7%
Federal National Mortgage Assn.
5.875%, 8/1/17 $ 42 $ 41
6.125%, 11/1/17 55 54
6.149%, 3/1/19 7 7
<PAGE>
6.151%, 5/1/17 - 5/1/31 854 830
6.21%, 3/1/18 22 21
6.217%, 12/1/16 - 7/1/27 479 464
6.227%, 5/1/24 86 83
6.244%, 3/1/20 63 62
6.25%, 6/1 - 7/1/18 118 115
6.252%, 12/1/17 - 11/1/20 280 272
6.817%, 10/1/14 9 9
7.93%, 11/1/21 121 121
2,079
U.S. Government Agency Obligations 34.8%
Federal Home Loan Mortgage
7.75%, 8/15/21 1,847 1,837
5 year balloon
6.50%, 9/1/02 2,302 2,262
7.00%, 9/1/01 1,230 1,221
7 year balloon
6.50%, 8/1 - 12/1/03 1,483 1,435
7.00%, 8/1/01 600 596
REMIC
5.60%, 1/15/08 2,000 1,960
5.75%, 6/15/10 1,877 1,840
5.85%, 11/15/17 48 48
Federal National Mortgage Assn
6.00%, 7/1/13 - 11/18/17 7,193 6,896
7 year balloon
7.00%, 6/1 - 9/1/03 3,080 3,007
7.50%, 8/1/01 88 88
<PAGE>
Federal National Mortgage Assn.
REMIC
5.75%, 6/25/06 $ 212 $ 211
6.00%, 10/18/14 - 5/18/17 6,000 5,843
6.10%, 8/25/21 1,205 1,180
6.50%, 6/18/11 5,000 4,814
7.00%, 4/18/22 4,000 3,961
Principal Only, 9/25/00 - 10/25/03 5,193 4,503
Inverse Floater, VR, 6.243%, 10/25/21 1,359 1,264
42,966
U.S. Government Guaranteed Obligations 8.6%
Government National Mortgage Assn.
I
7.00%, 9/15/12 1,919 1,871
11.50%, 3/15/10 - 12/15/15 1,321 1,450
REMIC
6.00%, 10/16/25 5,000 4,733
9.00%, 7/20/23 2,585 2,592
10,646
Total U.S. Government Mortgage-Backed
Securities (Cost $57,667) 55,691
NON-GOVERNMENT ASSET-BACKED
SECURITIES 22.6%
Auto-Backed 7.7%
BMW Vehicle Owner Trust,
6.54%, 4/25/04 1,250 1,226
CIT RV Trust, 6.35%, 4/15/11 1,500 1,487
Ford Credit Auto Owner Trust,
6.40%, 10/15/02 1,300 1,287
<PAGE>
MMCA Automobile Trust,
6.80%, 8/15/03 1,500 1,494
Nissan Auto Receivables,
7.17%, 8/15/04 1,000 994
Onyx Acceptance Auto Trust,
6.76%, 5/15/04 2,000 1,970
WFS Financial Owner Trust,
7.41%, 9/20/07 1,000 990
9,448
Commercial Mortgage Backed 2.2%
GMAC Commercial Mortgage Securities,
6.15%, 5/15/35 1,804 1,714
Prudential Securities, 6.074%, 1/15/08 1,108 1,039
2,753
Credit Card-Backed 5.1%
Circuit City Credit Card Master Trust,
6.753%, 2/15/06 $ 1,500 $ 1,500
Prime Credit Card Master Trust,
6.75%, 11/15/05 2,000 1,977
Wachovia Credit Card Master Trust,
6.673%, 8/15/06 1,300 1,298
World Financial Network Credit Master Trust,
6.8525%, 7/15/06 1,500 1,499
6,274
Home Equity Loans-Backed 2.5%
EQCC Home Equity Loan Trust,
6.159%, 4/15/08 2,020 1,924
Saxon Asset Securities Trust,
6.73%, 2/25/27 1,207 1,164
3,088
Miscellaneous Receivables 1.1%
<PAGE>
Puget Sound Energy Conservation,
6.23%, 7/11/02 1,410 1,386
1,386
Receivables-Backed 3.1%
Advanta Equipment Receivables,
7.56%, 2/15/07 840 836
Case Equipment Loan Trust,
5.77%, 8/15/05 1,500 1,441
Heller Equipment Asset Trust,
6.65%, 3/14/04 1,500 1,485
3,762
Stranded Asset 0.8%
Peco Energy Transition Trust,
6.4475%, 3/1/06 1,000 998
998
Whole Loans Backed 0.1%
Ryland Mercury Savings Trust,
6.114%, 10/25/18 181 180
180
Total Asset-Backed Securities (Cost $28,204) 27,889
U.S. GOVERNMENT OBLIGATIONS/AGENCIES 16.1%
U.S. Government Guaranteed Obligations 2.3%
Federal Home Loan Mortgage, Deb.,
5.50%, 5/15/02 3,000 2,902
2,902
U.S. Treasury Obligations 13.8%
U.S. Treasury Inflation-Indexed Notes,
3.625%, 7/15/02 8,010 7,941
U.S. Treasury Notes
5.75%, 11/30/02 1,350 1,320
<PAGE>
6.625%, 4/30/02 7,750 7,729
16,990
Total U.S. Government Obligations/Agencies
(Cost $20,158) 19,892
CORPORATE BONDS AND NOTES 5.5%
Finance and Credit 1.3%
Associates Corp., MTN,
6.90%, 7/29/02 $ 1,600 $ 1,578
1,578
Investment Dealers 1.0%
Merrill Lynch, 8.00%, 2/1/02 1,220 1,225
1,225
Retail 1.6%
Wal-Mart Stores, Sr. Notes,
6.15%, 8/10/01 2,000 1,974
1,974
Telephone 1.6%
Southwestern Bell Telephone,
6.375%, 4/1/01 2,000 1,982
1,982
Total Corporate Bonds and Notes (Cost $6,880) 6,759
SHORT-TERM INVESTMENTS 10.3%
Certificates of Deposit 2.4%
Bank of Montreal, 6.38%, 6/8/00 1,000 1,000
National Westminster Bank,
7.26%, 5/9/01 1,000 999
<PAGE>
Norddeutsche Landesbank,
7.30%, 5/11/01 1,000 999
2,998
Commercial Paper 0.8%
Santander Finance, 6.34%, 6/5/00 1,000 999
999
Money Market Funds 7.1%
Government Reserve Investment Fund,
6.08% # 8,770 8,770
8,770
Total Short-Term Investments (Cost $12,769) 12,767
Total Investments in Securities
99.6% of Net Assets (Cost $125,678) $ 122,998
Other Assets Less Liabilities 501
NET ASSETS $ 123,499
----------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $ (562)
Accumulated net realized gain/loss -
net of distributions (13,038)
Net unrealized gain (loss) (2,680)
Paid-in-capital applicable to 27,491,527
shares of $0.01 par value capital stock
outstanding; 1,000,000,000 shares authorized 139,779
NET ASSETS $ 123,499
----------
NET ASSET VALUE PER SHARE $ 4.49
----------
# Seven-day yield
ARM Adjustable Rate Mortgage
<PAGE>
Inverse Floater Inverse floating rate note; interest rate is
inversely tied to a published index - rate shown
reflects current rate as of 5/31/00.
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
VR Variable Rate
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
Statement of Operations
------------------------------------------------------------------
In thousands
Year
Ended
5/31/00
Investment Income (Loss)
Interest income $ 8,175
Expenses
Investment management 474
Shareholder servicing 216
Custody and accounting 133
Prospectus and shareholder reports 41
Registration 18
Legal and audit 17
Directors 6
Miscellaneous 4
Total expenses 909
Expenses paid indirectly (3)
Net expenses 906
Net investment income (Loss) 7,269
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities (1,922)
Change in net unrealized gain or loss on securities (1,273)
Net realized and unrealized gain (loss) (3,195)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 4,074
<PAGE>
----------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
Statement of Changes in Net Assets
------------------------------------------------------------------
In thousands
Year
Ended
5/31/00 5/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 7,269 $ 7,073
Net realized gain (loss) (1,922) (280)
Change in net unrealized gain or loss (1,273) (1,543)
Increase (decrease) in
net assets from operations 4,074 5,250
Distributions to shareholders
Net investment income (7,269) (7,016)
Capital share transactions *
Shares sold 60,745 84,077
Distributions reinvested 6,392 6,135
Shares redeemed (74,670) (64,082)
Increase (decrease) in net
assets from capital
share transactions (7,533) 26,130
Net Assets
Increase (decrease) during period (10,728) 24,364
Beginning of period 134,227 109,863
End of period $ 123,499 $ 134,227
-----------------------
*Share information
Shares sold 13,382 17,920
Distributions reinvested 1,407 1,311
Shares redeemed (16,451) (13,684)
<PAGE>
Increase (decrease) in
shares outstanding (1,662) 5,547
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
May 31, 2000
Notes to Financial Statements
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Short-Term U.S. Government Fund, Inc. (the fund) is registered
under the Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on September 30, 1991. The fund
seeks the highest current income consistent with minimal share price fluctuation
by investing primarily in a diversified portfolio of short-term U.S.
government-backed securities.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities with original 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 original
maturities of 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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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.
Premiums and Discounts Premiums and discounts on debt securities, other than
mortgage-backed securities (MBS), are amortized for both financial reporting and
tax purposes. Premiums and discounts on all MBS are recognized upon disposition
or
<PAGE>
principal repayment as gain or loss for financial reporting purposes. For tax
purposes, premiums and discounts on MBS acquired on or before June 8, 1997, are
recognized upon disposition or principal repayment as ordinary income. For MBS
acquired after June 8, 1997, premiums are recognized as gain or loss; discounts
are recognized as gain or loss, except to the extent of accrued market discount.
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 the 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
and may differ from those determined in accordance with generally accepted
accounting principles. Expenses paid indirectly reflect credits earned on daily
uninvested cash balances at the custodian and are used to reduce the fund's
custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $29,505,000 and $14,444,000, respectively, for
the year ended May 31, 2000. Purchases and sales of U.S. government securities
aggregated $35,233,000 and $67,913,000, respectively, for the year ended May 31,
2000.
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. As of May 31, 2000, the fund has capital loss carryforwards for
federal income tax purposes of $12,047,000, of which $5,229,000 expires in 2001,
$978,000 in 2002, and $5,840,000 thereafter through 2008. The fund intends to
retain gains realized in future periods that may be offset by available capital
loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders to
reflect the tax character of certain transactions, primarily the expiration of
capital loss carryforwards, the following reclassifications were made during the
year ended May 31, 2000. The results of operations and net assets were not
affected by the increases/(decreases) to these accounts.
------------------------------------------------------------------
Undistributed net realized gain $12,085,000
Paid-in-capital (12,085,000)
At May 31, 2000, the cost of investments for federal income tax purposes was
substantially the same as for financial reporting and
<PAGE>
totaled $125,678,000. Net unrealized loss aggregated $2,680,000 at period-end,
of which $110,000 related to appreciated investments and $2,790,000 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,
of which $39,000 was payable at May 31, 2000. The fee is computed daily and paid
monthly, and consists 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 0.295% for assets in excess of $120 billion. At
May 31, 2000, and for the year then ended, the effective annual group fee rate
was 0.32%. The fund pays a pro-rata share of the group fee based on the ratio of
its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through May 31, 2000, which would cause the fund's
ratio of total expenses to average net assets to exceed 0.70%. Thereafter,
through May 31, 2002, 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 ratio of total
expenses to average net assets to exceed 0.70%. Pursuant to this agreement,
$69,000 of management fees were not accrued by the fund for the year ended May
31, 2000, and $92,000 of management fees remain unaccrued from a prior period.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. is the fund's
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc. provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $275,000 for the year ended May
31, 2000, of which $28,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available
<PAGE>
to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the fund for the year ended May 31,
2000, totaled $592,000 and are reflected as interest income in the accompanying
Statement of Operations.
T. Rowe Price Short-Term U.S. Government Fund
------------------------------------------------------------------
Report of Independent Accountants
------------------------------------------------------------------
To the Board of Directors and Shareholders of
T. Rowe Price Short-Term U.S. Government 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 financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price Short-Term U.S. Government Fund, Inc. (the "Fund") at May 31,
2000, and the results of its operations, the changes in its net assets and the
financial highlights for each of the fiscal periods presented, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (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 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 audits, which included confirmation
of securities at May 31, 2000 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 19, 2000
T. Rowe Price Shareholder Services
------------------------------------------------------------------
Investment Services And Information
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10
p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
<PAGE>
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access (registered trademark) and
the T. Rowe Price Web site on the Internet. Address: www.troweprice.com
BROKERAGE SERVICES*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over full-service commission rates.**
INVESTMENT INFORMATION
Combined Statement Overview of all your accounts with T. Rowe Price.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
* T. Rowe Price Brokerage is a division of T. Rowe Price Investment
Services, Inc., Member NASD/SIPC.
** Based on a September 1999 survey for representative-assisted stock trades.
Services vary by firm, and commissions may vary depending on size of order.
<PAGE>
For fund and account information
or to conduct transactions,
24 hours, 7 days a week
By touch-tone telephone
Tele*Access 1-800-638-2587
By Account Access on the Internet
www.troweprice.com/access
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132
To open a brokerage account
or obtain information, call:
1-800-638-5660
Internet address:
www.troweprice.com
Plan Account Lines for retirement
plan participants:
The appropriate 800 number appears
on your retirement account statement.
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
Walk-In Investor Centers:
For directions, call 1-800-225-5132
or visit our Web site
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
Boston Area
386 Washington Street
Wellesley
<PAGE>
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
T. Rowe Price, Invest With Confidence
T. Rowe Price Investment Services, Inc., Distributor.
F69-050 5/31/00
<PAGE>
Annual Report
Summit Income Funds
October 31, 1999
T. Rowe Price
REPORT HIGHLIGHTS
------------------------------------------------------------------
Summit Income Funds
o Interest rates rose during the six months ended October 31, 1999, aiding
money market results but hurting bonds.
o Summit Cash Reserves Fund achieved solid performance as low expenses helped
its yield exceed that of its peer group average.
o Income helped Summit Limited-Term Bond Fund exceed its peer group's average
returns despite weakness in some corporate holdings.
o Mortgage-backed securities struggled, leading to lackluster returns for the
Summit GNMA Fund.
o We are focusing on providing attractive yields while maintaining liquidity
in our portfolios as we approach year-end.
Fellow Shareholders
The U.S. economy continued its remarkable run of strong, steady growth
during the six and 12 months ended October 31, 1999, and signs of inflation were
modest. Nonetheless, the Federal Reserve raised the federal funds target rate
twice, and interest rates overall rose significantly. Money market funds largely
benefited, while bond funds posted comparatively weak results. The performance
of the Summit Funds reflected these trends.
MARKET ENVIRONMENT
There was little doubt during either the past six or 12 months that the U.S.
economy was on solid footing. Annual GDP data have painted an attractive
picture, with growth rates fluctuating between 3.5% and 4.5% for nearly three
years now. Moreover, the consumer and producer price indices (CPI and PPI), the
most commonly reported inflation figures, have generally appeared subdued.
During the past spring and summer, however, economic data hinted at an increase
in inflationary pressure. Persistently low unemployment figures suggested
uncomfortably tight labor markets, and the prices of raw materials and
intermediate goods (so-called
<PAGE>
"pipeline" prices) showed signs of increasing. Although price increases for
finished goods and services remained in check, the engines of that
inflation-including strong consumer spending fueled by rising stock markets and
home prices, improved productivity, and faster information flow due to the
Internet-have remained in high gear.
Interest Rate Levels
------------------------------------------------------------------
Current 5-Year 90-day
Coupon Treasury Treasury
GNMA Note Bill
10/31/98 6.25 4.22 4.21
6.25 4.62 4.58
6.26 4.59 4.55
1/99 6.22 4.56 4.47
6.70 5.11 4.65
6.65 5.12 4.47
4/99 6.68 5.15 4.51
7.05 5.51 4.65
7.27 5.76 4.77
7/99 7.61 5.75 4.71
7.77 5.71 4.97
7.48 5.81 4.88
10/31/99 7.51 6.09 5.13
The Fed had largely been staying on the sidelines, concerned that a U.S.
rate hike would put untenable pressure on fragile foreign economies in the wake
of the 1998 global currency and liquidity crisis. However, an improving outlook
overseas combined with evidence of inflationary pressure prompted a change in
direction. The Fed first adopted a tightening bias in its monetary policy, then
raised the federal funds target rate in June and August, by a total of one-half
a percentage point. After the conclusion of the period, the Fed raised rates by
another 0.25%. As of this writing, the target rate has returned to its level of
August 1998, just before the Fed cut rates three-quarters of a percent to
alleviate the global financial crisis.
The market largely anticipated these moves, pushing rates on intermediate
and long bonds higher throughout the year. For example, five-year Treasury note
yields climbed 187 basis points to 6.09% by October 31 from one year earlier
(100 basis points equal one percentage point). Short-term rates did not climb as
rapidly for the year as a whole-the yield on 90-day Treasury bills rose less
than 100 basis points over the same period-but made up ground on other segments
of the bond market toward the end of the period. Yields on money market funds
benefited from the increase in short-term rates.
<PAGE>
Rates rose among mortgage-backed securities as well. Thirty-year mortgage
rates, for example, rose from 6.93% to 7.96% in the six months ended October 31,
and reached a two-year high of 8.15% in August. During that time, the spread
(difference) between mortgage and Treasury rates also widened by 15 basis
points. Current coupon GNMAs now yield 148 basis points more than 10-year
Treasuries, although they were yielding as much as 182 basis points more in
August. This attractive yield advantage helped the overall sector outperform
intermediate and long Treasuries by a modest degree.
The rising interest rate environment was not the only challenge the bond
markets faced. In the past several months, Wall Street broker-dealers have cut
back their bond market activities in advance of year-end by reducing bond
inventories and committing less capital to market-making (that is, buying and
selling existing issues for clients). As a result, liquidity declined
significantly after midyear and is likely to stay somewhat thin through
year-end. Reduced liquidity exaggerated volatility in the markets, especially in
response to negative surprises, and made it more difficult for money managers to
trade efficiently. The trend also created supply and demand imbalances that hurt
issues with relatively high yields, including corporate and mortgage-backed
bonds. However, mortgages improved after August and now are among the more
liquid bonds in the marketplace.
SUMMIT CASH RESERVES FUND
Performance Comparison
------------------------------------------------------------------
Periods Ended 10/31/99 6 Months 12 Months
------------------------------------------------------------------
Cash Reserves Fund 2.40% 4.87%
Lipper Money Market
Funds Average 2.21 4.41
Your fund posted good 6- and 12-month returns of 2.40% and 4.87%,
respectively. These results surpassed the 2.21% and 4.41% gains for the Lipper
Money Market Funds Average by a notable margin. The fund once again benefited
from a yield advantage over its average competitor, the result of its low
expenses as well as an investment focus on income. At 0.45% per year, fund
expenses are lower than 91% of the 294 funds in its Lipper category.
Rising interest rates during the period prompted a modest shift in our
investment strategy. Earlier in the fiscal year, rates had been relatively low
and the fund's dividend yield had been slipping as a result. As we noted in the
last shareholder report, our strategy at the time was to capture the higher
yields at the longer end of the money market universe by maintaining an average
maturity
<PAGE>
10 to 15 days longer than our average peer. With rates rising, however, the
dividend yield has been climbing during the last six months. We therefore
reduced the portfolio's weighted average maturity from 74 days on April 30,
1999, to a more neutral 62 days on October 31, 1999. As long as the Fed is
likely to continue raising interest rates, we will preserve an average maturity
that is generally equal to or shorter than the average money market fund.
We made only minor changes to the portfolio's sector positioning. The only
change of significance was to increase our stake in asset-backed securities. We
are attracted to these holdings because they are extremely high-quality, liquid
securities that are securely collateralized by receivables or other assets. They
add to the fund's diversification, and we expect they will provide added
protection and flexibility as we prepare to pass through the year-end.
We increased fund exposure to floating rate notes from 15% of assets at the
end of April to 32% at the end of October. Issuance of these securities
increased dramatically during the middle of the year as they became a popular
form of Year 2000 financing. The increased supply forced issuers to price their
offerings somewhat more attractively than in the last couple of years to attract
buyers. Floating rate issues are designed so that their coupons track rate
changes relatively quickly-a benefit to shareholders when rates are rising.
SUMMIT LIMITED-TERM BOND FUND
Performance Comparison
------------------------------------------------------------------
Periods Ended 10/31/99 6 Months 12 Months
------------------------------------------------------------------
Limited-Term Bond Fund 0.42% 1.06%
Lipper Short Intermediate
Investment-Grade
Debt Funds Average 0.38 1.44
Your fund's 0.42% six-month total return edged ahead of the 0.38% move for
the Lipper peer group average. Although the return was modest and outperformance
was slight, it represented a recovery from a somewhat weaker relative result in
the first half of the year, when above average interest rate sensitivity caused
the fund to lag its peers. Those results are reflected in the 1.06% 12-month
return, which stayed behind Lipper. Because rising interest rates caused a
decline in the fund's share price for both periods, gains came entirely from
income. Low expenses-the 0.55% expense ratio is firmly in the least costly
quartile of the 83-fund
<PAGE>
Lipper peer group-once again helped the fund achieve a relatively generous
income stream.
Because of the rising interest rate environment, we gradually reduced fund
duration during the six-month period from 3.2 years to 3.0 years. (Duration is a
measure of interest rate sensitivity where higher numbers reflect a greater
potential negative response to a rise in rates, and vice versa.) The fund
remains somewhat more rate sensitive than its average peer, but longer durations
are generally associated with better yields, and we feel that this duration
level reflects an appropriate balance between the costs of rate sensitivity and
the benefits of better yields. Although rates rose sharply during the past six
months, they have yet to show up as increases in the fund's dividend payment.
Dividend income tends to lag a rise in market rates, and, assuming rates do not
again fall sharply, we anticipate higher distributions in the coming period.
As explained in the last report, we trimmed exposure to corporate bonds from
56% to 44% earlier in the year. This move proved beneficial: corporate
securities (and lower-rated securities in particular) underperformed throughout
most of the summer because of poor market liquidity and the lack of Wall Street
sponsorship. During August and September we saw an opportunity to take advantage
of values created by the liquidity crunch and began to rebuild our corporate
position, raising it to 47% of assets. Among the bonds we added were Johnson &
Johnson, Wal-Mart, and US West. As a result of these moves, holdings in
Treasuries declined while, within the corporate sector, consumer issues
increased from 11% to 13% and the media and telecom issues rose from 3% to 4%.
Quality diversification reflected our renewed interest in corporates. The
percentage of assets in AAA securities declined from 44% to 38% during the
period, while AA and A holdings both climbed. Nonetheless, average portfolio
credit quality did not change, remaining at a solid AA.
Quality Diversification pie
------------------------------------------------------------------
Summit Limited-Term Bond Fund
AAA AA A BBB BB
38 16 23 21 2
Not all of the fund's investments worked out favorably. In particular, some
of our corporate holdings weakened as their issuers encountered problems. In
August, we purchased the debt of Rite-Aid, but the firm's surprise downward
earnings revisions and management upheaval disappointed investors, drew SEC
attention, and resulted in rating agency downgrades to below investment
<PAGE>
grade. We continue to hold these bonds because we think the market has become
overly pessimistic in its evaluation. Rite-Aid has a viable business as the
nation's third-largest drug store chain, and new management is taking aggressive
action to restore the company's financial health. Other holdings have come under
pressure and may weigh down returns in the coming months. These include Waste
Management/USA Waste Services (at 1.25% of assets) and Raytheon (at 0.89% of
assets), both of which experienced earnings difficulties associated with recent
merger activity.
Although these investments increased price volatility in recent months, we
are not giving up on them. They contribute significantly to an attractive
dividend yield that we believe will benefit shareholders over the long term.
SUMMIT GNMA FUND
Performance Comparison
------------------------------------------------------------------
Periods Ended 10/31/99 6 Months 12 Months
------------------------------------------------------------------
GNMA Fund -0.32% 1.39%
Lipper GNMA Funds Average -0.18 1.48
A difficult market environment overall proved challenging to your fund
during the past six months. Our -0.32% total return for the period fell slightly
behind the -0.18% result of the Lipper GNMA Funds Average, and accounted for a
modestly lagging 12-month performance as well. Healthy dividend distributions,
aided by low expenses, helped compensate for a $0.34 decline in the fund's share
price between April 30 and October 31. The fund's 0.60% expense ratio is in the
lowest quartile of the 48 funds in its Lipper peer group.
Your fund's returns reflected the continually rising interest rate
environment of the last six months. In addition, the mortgage market (along with
other relatively high-yielding investments) faced an additional challenge of
supply and demand. The liquidity crunch described in the Market Environment
section limited the number of buyers, especially in August, when it temporarily
appeared that no one was interested in buying or holding these issues.
This was especially true of many of the kinds of "structured" products we
hold in the portfolio. While we have reduced our holdings in recent months, we
have for many quarters kept a stake in these securities, which include
collateralized mortgage obligations (CMOs), project loans, construction loans,
and jumbos, because they help protect performance against fluctuating
prepayments during unsettled interest rate environments.
<PAGE>
(Prepayments can negatively affect total return when homeowners refinance their
high-rate mortgages, causing premium-priced mortgage-backed bonds to be cashed
out at par. In that case, the premium and the higher yield are lost.) These
holdings aided returns during the first half of the fiscal year. However, even
though the securities we held remained fundamentally solid, they were hard hit
and difficult to sell when liquidity disappeared from the market and helped pull
down our relative performance. Fortunately, the liquidity crunch improved
significantly as the period was coming to a close. Still, although we continue
to like structured products as an investment tool, we took incremental steps to
improve the portfolio's liquidity by reducing our exposure where possible.
Rising rates and falling prepayments caused the fund's duration to climb
from 4.0 years to 5.0 years during the past six months, although it remained
neutral compared with our Lipper benchmark. Mortgage durations typically go up
when interest rates rise because the likelihood of refinancing declines. As
always, the credit quality of the portfolio remained very high.
OUTLOOK
Interest rates could move higher in coming months because of persistent
strength in the domestic economy and economic recovery overseas. The Fed is
keeping a close eye on inflationary pressures, particularly in the labor
markets. However, the Fed is also interested in maintaining liquid and orderly
markets as we approach the end of the year and the transition to 2000, which
could serve to moderate future rate increases. These crosscurrents do not argue
for an aggressive posture regarding interest rates. At present, we are focusing
on the higher yields available in the marketplace and on maintaining liquidity
and flexibility in our portfolios.
Respectfully submitted,
Edward A. Wiese
President
November 19, 1999
<PAGE>
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Portfolio Highlights
------------------------------------------------------------------
KEY STATISTICS
4/30/99 10/31/99
Summit Cash Reserves Fund
------------------------------------------------------------------
Price Per Share $ 1.00 $ 1.00
Dividends Per Share
For 6 months 0.024 0.024
For 12 months 0.050 0.048
Dividend Yield (7-Day Compound) * 4.70% 5.24%
Weighted Average Maturity (days) 74 62
Weighted Average Quality ** First Tier First Tier
Summit Limited-Term Bond Fund
Price Per Share $ 4.59 $ 4.48
Dividends Per Share
For 6 months 0.13 0.13
For 12 months 0.27 0.26
Dividend Yield *
For 6 months 5.71% 5.81%
For 12 months 5.91 5.92
30-Day Standardized Yield 5.53 6.37
Weighted Average Maturity (years) 3.9 3.7
Weighted Average Effective Duration (years) 3.2 3.0
Weighted Average Quality *** AA AA
(continued on next page)
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Portfolio Highlights
------------------------------------------------------------------
<PAGE>
KEY STATISTICS
4/30/99 10/31/99
Summit GNMA Fund
------------------------------------------------------------------
Price Per Share $ 9.73 $ 9.39
Dividends Per Share
For 6 months 0.31 0.31
For 12 months 0.63 0.61
Dividend Yield *
For 6 months 6.44% 6.62%
For 12 months 6.58 6.75
30-Day Standardized Yield 5.98 6.42
Weighted Average Maturity (years) 7.5 9.1
Weighted Average Effective Duration (years) 4.0 5.0
Weighted Average Quality *** AAA AAA
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset values per share at the end of the period.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if unrated,
are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Portfolio Highlights
------------------------------------------------------------------
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
4/30/99 10/31/99
Summit Cash Reserves Fund
------------------------------------------------------------------
U.S. Negotiable Bank Notes 7% 9%
Certificates of Deposit 28 26
Domestic Negotiable CDs 4 5
Eurodollar Negotiable CDs 14 13
<PAGE>
U.S. Dollar Denominated
Foreign Negotiable CD 10 8
Commercial Paper and Medium-Term Notes 59 61
Asset-Backed 19 26
Banking 13 13
Insurance 4 4
Auto and Related 1 3
Petroleum 4 2
All Other 18 13
Foreign Government and Municipalities 1 --
Funding Agreements 4 3
Other Assets Less Liabilities 1 1
------------------------------------------------------------------
Total 100% 100%
Fixed Rate Obligations 85 68
Floating Rate Instruments 15 32
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Portfolio Highlights
------------------------------------------------------------------
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
4/30/99 10/31/99
Summit Limited-Term Bond Fund
------------------------------------------------------------------
Corporate Bonds and Notes 44% 47%
Consumer Products and Services 11 13
Banking and Finance 9 10
Industrial 9 9
Utilities 8 8
<PAGE>
Media and Communications 3 4
All Other 4 3
Asset-Backed Securities 12 12
Mortgage-Backed Securities 17 18
U.S. Government Obligations 22 18
U.S. Treasuries 14 10
Government Agency Obligations 8 8
Money Market Funds* 5 5
Other Assets Less Liabilities -- --
------------------------------------------------------------------
Total 100% 100%
Summit GNMA Fund
------------------------------------------------------------------
GNMA 91% 92%
U.S. Government Agencies 8 3
Asset-Backed Securities 3 3
Agency-Backed STRIPS 1 1
Money Market Funds* 8 3
Other Assets Less Liabilities -11 -2
------------------------------------------------------------------
Total 100% 100%
*See note at end of financial statements.
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Performance Comparison
------------------------------------------------------------------
These charts show the value of a hypothetical $25,000 investment in the
funds over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not
<PAGE>
include expenses, which are deducted from fund returns as well as mutual fund
averages and indexes.
SEC charts - SUMMIT CASH RESERVES FUND
------------------------------------------------------------------
Lipper
Money Market Summit Cash
Funds Average Reserves Fund
10/29/93 25.000 25.000
10/94 25.823 25.901
10/95 27.203 27.372
10/96 28.545 28.803
10/97 29.965 30.337
10/98 31.480 31.961
10/99 32.910 33.518
SEC charts - SUMMIT LIMITED-TERM BOND FUND
------------------------------------------------------------------
Merrill Lynch Lipper Short
1-5 Year Intermediate
Corporate and Investment- Summit
Government Grade Debt Limited-Term
Bond Index Funds Average Bond Fund
10/29/93 25.000 25.000 25.000
10/94 24.987 24.485 24.822
10/95 27.606 27.109 26.649
10/96 29.240 28.613 28.109
10/97 31.266 30.531 30.002
10/98 33.905 32.639 32.393
10/99 34.665 33.153 32.735
SEC charts - SUMMIT GNMA FUND
------------------------------------------------------------------
Lipper
Salomon GNMA Summit
GNMA Funds GNMA
Index Average Fund
10/29/93 25.000 25.000 25.000
10/94 24.648 24.250 24.583
10/95 28.322 27.715 28.375
10/96 30.357 29.321 29.928
10/97 33.103 31.831 32.673
10/98 35.457 34.036 34.991
10/99 36.589 34.597 35.479
<PAGE>
Average Annual Compound Total Return
------------------------------------------------------------------
This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Periods
Ended Since Inception
10/31/99 1 Year 3 Years 5 Years Inception Date
------------------------------------------------------------------
Summit Cash
Reserves Fund 4.87% 5.18% 5.29% 5.00% 10/29/93
Summit Limited
-Term Bond 1.06 5.21 5.69 4.59 10/29/93
Summit GNMA
Fund 1.39 5.84 7.61 6.00 10/29/93
Investment return represents past performance and will vary. Shares of the
bond funds may be worth more or less at redemption than at original purchase.
Investments in the money fund are not insured or guaranteed by the FDIC or any
other government agency. Although it seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
fund.
T. Rowe Price Summit Cash Reserves Fund
------------------------------------------------------------------
Financial Highlights For a share outstanding throughout
each period
------------------------------------------------------------------
Year
Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
NET ASSET VALUE
Beginning of
period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment activities
Net investment
income 0.048 0.052 0.052 0.051 0.055
Distributions
Net investment
income (0.048) (0.052) (0.052) (0.051) (0.055)
NET ASSET VALUE
End of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------------------------------------------------------------
<PAGE>
Ratios/Supplemental Data
Total return
(diamond) 4.87% 5.35% 5.33% 5.23% 5.68%
Ratio of total expenses
to average net
assets 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of net investment
income to average
net assets 4.78% 5.24% 5.18% 5.09% 5.55%
Net assets, end of period
(in millions) $2,441 $1,885 $ 1,303 $ 742 $ 433
(diamond) 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.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Limited-Term Bond Fund
------------------------------------------------------------------
Financial Highlights For a share outstanding throughout
each period
------------------------------------------------------------------
Year
Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
NET ASSET VALUE
Beginning of
period $ 4.69 $ 4.61 $ 4.60 $ 4.65 $ 4.64
Investment activities
Net investment
income 0.26 0.28 0.29 0.30 0.32
Net realized and
unrealized gain
(loss) (0.21) 0.08 0.01 (0.05) 0.01
Total from
investment
activities 0.05 0.36 0.30 0.25 0.33
Distributions
Net investment
income (0.26) (0.28) (0.28) (0.29) (0.31)
Tax return
of capital -- -- (0.01) (0.01) (0.01)
<PAGE>
Total
distributions (0.26) (0.28) (0.29) (0.30) (0.32)
NET ASSET VALUE
End of period $ 4.48 $ 4.69 $ 4.61 $ 4.60 $ 4.65
-----------------------------------------------------------------
Ratios/Supplemental Data
Total return
(diamond) 1.06% 7.97% 6.73% 5.48% 7.36%
Ratio of total expenses
to average net
assets 0.55% 0.55% 0.55% 0.55% 0.55%
Ratio of net investment
income to average
net assets 5.65% 5.96% 6.28% 6.43% 6.85%
Portfolio
turnover rate 42.2% 52.0% 74.5% 116.1% 84.3%
Net assets, end of period
(in thousands) $ 52,992 $ 40,904 $ 29,620 $ 25,984 $ 27,004
(diamond) 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.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit GNMA Fund
------------------------------------------------------------------
Financial Highlights
------------------------------------------------------------------
For a share outstanding throughout each period
Year
Ended
10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
NET ASSET VALUE
Beginning of
period $ 9.87 $ 9.83 $ 9.65 $ 9.81 $ 9.15
<PAGE>
Investment activities
Net investment
income 0.61 0.64 0.67 0.67 0.70
Net realized and
unrealized gain
(loss) (0.48) 0.04 0.18 (0.16) 0.66
Total from
investment
activities 0.13 0.68 0.85 0.51 1.36
Distributions
Net investment
income (0.61) (0.64) (0.64) (0.62) (0.67)
Tax return
of capital -- -- (0.03) (0.05) (0.03)
Total
distributions (0.61) (0.64) (0.67) (0.67) (0.70)
NET ASSET VALUE
End of period $ 9.39 $ 9.87 $ 9.83 $ 9.65 $ 9.81
------------------------------------------------------------------
Ratios/Supplemental Data
Total return
(diamond) 1.39% 7.10% 9.17% 5.47% 15.43%
Ratio of total expenses
to average net
assets 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net investment
income to average
net assets 6.41% 6.47% 6.91% 6.99% 7.40%
Portfolio
turnover rate 89.9% 83.8% 111.8% 136.1% 173.8%
Net assets,
end of period
(in thousands) $63,843 $ 46,571 $ 29,530 $ 24,718 $ 22,777
(diamond) 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.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Summit Cash Reserves Fund
------------------------------------------------------------------
October 31, 1999
Statement of Net Assets Par Value
------------------------------------------------------------------
In thousands
BANK NOTES 9.4%
Comerica Bank, VR
5.358%, 11/15/99 $ 15,000 $ 14,995
5.42%, 11/1/99 8,000 7,997
FCC National Bank
5.05%, 12/24/99 28,750 28,750
5.80%, 2/25/00 12,000 11,993
First Tennessee Bank, VR,
5.368%, 11/17/99 20,000 19,994
First Union National Bank,
VR, 5.498%, 11/23/99 20,000 20,000
Kansallis-Osake-Pankki,
6.375%, 8/15/00 10,000 10,034
Key Bank North America,
VR, 5.453%, 5/26/00 15,000 14,995
National City Bank,
VR, 5.429%, 9/29/00 25,000 24,982
Southtrust Bank,
VR, 5.43%, 10/4/00 15,000 14,990
U.S. Bank, VR,
5.358%, 11/17/99 25,000 24,990
Wachovia Bank
5.01%, 11/19/99 10,000 10,000
VR, 5.371%, 11/5/99 20,000 20,000
Westpac Banking, VR,
5.435%, 11/4/99 5,000 4,997
Total Bank Notes (Cost $228,717) 228,717
<PAGE>
CERTIFICATES OF DEPOSIT 25.6%
ABBEY National
(London)
5.30%, 12/21/99 14,000 14,000
5.44%, 12/31/99 29,000 29,001
ABN AMRO
4.99%, 11/18/99 25,000 25,000
(London), 4.95%, 11/12/99 9,000 8,999
Banco Bilbao Vizcaya,
5.60%, 6/12/00 19,900 19,895
Bank of Austria,
5.01%, 12/22/99 10,000 10,000
Barclays Bank PLC
(London)
5.01%, 12/30/99 10,000 9,994
5.26%, 12/20/99 25,000 25,001
Bayerische Landesbank Girozentrale
(London) 4.96%, 11/17/99 9,000 9,000
Canadian Imperial Bank of Commerce,
5.27%, 3/3/00 500 498
Commerzbank
5.085%, 2/16/00 $ 500 $ 498
5.90%, 8/9/00 10,000 9,992
Credit Agricole Indosuez
VR
5.39%, 11/1/99 20,000 19,981
5.44%, 12/14/99 15,000 15,000
Credit Communal De Belgique, VR,
5.496%, 11/29/99 20,000 19,992
Dresdner Bank AG, VR,
5.379%, 11/23/99 20,000 19,994
First National Bank of Maryland, VR,
5.363%, 11/18/99 15,000 14,997
<PAGE>
First Union National Bank, VR,
5.566%, 11/29/99 4,000 4,000
Fleet National Bank, VR,
5.374%, 11/8/99 15,000 14,999
Halifax
5.02%, 11/18/99 10,000 10,000
5.14%, 12/6/99 44,000 44,004
Huntington National Bank,
6.26%, 10/27/00 10,000 9,996
Internationale Nederlanden Bank, N.V.,
4.975%, 11/10/99 22,000 21,999
Lloyds Bank,
5.42%, 12/29/99 20,000 20,001
Merita Bank PLC
6.09%, 10/10/00 10,000 9,996
6.16%, 1/28/00 13,000 13,000
National Westminster Bank PLC,
5.29%, 12/27/99 9,900 9,900
Norddeutsche Landesbank
Girozentrale (London)
5.29%, 12/29/99 25,000 25,001
Skandinaviska Enskilda Banken, VR,
5.389%, 11/24/99 10,000 9,998
Societe Generale, VR,
5.363%, 11/16/99 20,000 19,994
Svenska Handelsbanken
5.28%, 3/3/00 500 498
5.30%, 12/30/99 10,000 10,000
UBS AG
5.29%, 5/22/00 500 497
5.51%, 6/5/00 10,000 9,998
6.01%, 8/14/00 10,000 9,996
<PAGE>
Unibank A/S,
5.92%, 8/7/00 10,000 9,997
Union Bank of California,
5.05%, 12/13/99 23,700 23,700
Westdeutsche Landesbank
Girozentrale (London)
5.42%, 11/23/99 30,000 30,000
Wilmington Trust,
6.23%, 10/23/00 $ 20,000 $ 19,987
World Savings Bank,
5.33%, 11/24/99 45,303 45,303
Total Certificates of Deposit (Cost $624,706) 624,706
COMMERCIAL PAPER 43.7%
Albertsons, VR, 4(2),
5.386%, 11/16/99 10,000 9,997
Alliance & Leicester, 4(2),
4.91%, 11/19/99 4,000 3,990
Alpine Securitization Corp., 4(2)
5.37%, 11/10/99 15,942 15,920
6.07%, 1/25/00 4,000 3,943
6.10%, 1/31/00 25,600 25,205
American Express Credit,
5.16%, 12/23/99 1,350 1,340
American Home Products, 4(2),
5.75%, 3/31/00 10,000 9,759
American Petrofina Holding, 4(2),
5.33%, 11/16/99 25,000 24,944
AON
5.38%, 11/4/99 12,000 11,995
5.42%, 11/1/99 13,012 13,012
Asset Securitization Cooperative Corp., 4(2)
5.35%, 11/16/99 17,300 17,261
<PAGE>
VR, 5.543%, 12/20/99 30,000 30,000
AT&T, VR, 4(2),
6.136%, 1/13/00 30,000 29,992
BBL North America, 4(2),
5.35%, 12/6/99 20,000 19,896
Beta Finance Inc., 4(2),
5.78%, 3/20/00 5,000 4,888
Cades, 4.80%, 12/23/99 8,800 8,739
CBA Delaware Finance,
4.93%, 11/10/99 8,000 7,990
Coca Cola, 4(2),
5.33%, 11/9/99 20,000 19,976
Corporate Asset Funding, VR, 4(2),
5.421%, 11/5/99 20,000 20,000
Corporate Receivables Corp., VR, 4(2),
5.426%, 11/15/99 30,000 30,000
Credit Suisse First Boston, 4(2)
4.895%, 11/17/99 10,700 10,677
5.407%, 11/22/99 21,000 21,000
Delaware Funding, 4(2)
5.38%, 12/13/99 5,000 4,968
5.88%, 1/20/00 16,325 16,112
Den Danske Corp.,
5.12%, 12/23/99 10,000 9,926
Dexia CLF Finance, 4(2)
5.35%, 12/15/99 15,000 14,902
5.40%, 12/23/99 2,000 1,984
Enterprise Funding Corp., 4(2)
5.38%, 11/22 - 12/3/99 $ 17,591 $ 17,530
Falcon Asset Securitization, 4(2)
5.38%, 11/8 - 11/12/99 15,685 15,665
5.40%, 11/16 - 11/22/99 53,500 53,354
<PAGE>
6.15%, 1/13/00 15,900 15,702
FCAR Owner Trust,
5.35%, 12/23/99 3,973 3,942
Finova Capital, VR,
5.503%, 11/15/99 10,000 10,000
Generale Funding, LLC, 4(2),
5.145%, 12/27/99 10,000 9,920
Golden Funding Corp., 4(2)
5.40%, 11/19/99 - 3/3/00 19,500 19,448
5.83%, 3/3/00 10,000 9,800
6.04%, 3/27/00 5,544 5,407
Greenwich Funding Corp., 4(2),
5.36%, 11/10/99 15,940 15,919
HVB Finance Delaware,
6.20%, 1/3/00 3,509 3,471
Kitty Hawk Funding Corp., 4(2)
5.77%, 3/20/00 10,000 9,775
5.89%, 1/21/00 1,078 1,064
Knight-Ridder,
5.82%, 2/18/00 9,900 9,726
LG&E Capital Corp., 4(2)
5.75%, 2/29 - 3/30/00 33,500 32,817
Market Street Funding, 4(2),
5.36%, 11/17/99 26,400 26,337
Marsh USA, 4(2)
5.53%, 2/25/00 11,800 11,590
5.75%, 3/24/00 15,000 14,655
Morgan Stanley Dean Witter,
5.93%, 2/3/00 20,000 19,690
Panasonic Finance, 4(2),
5.40%, 11/4/99 300 300
Park Avenue Receivables Corp., 4(2)
5.38%, 11/10 - 11/19/99 40,600 40,510
<PAGE>
5.39%, 11/17/99 1,991 1,986
VR
5.458%, 11/15/99 20,000 20,000
5.56%, 11/22/99 24,750 24,750
Petrofina (Delaware),
5.28%, 11/29/99 4,649 4,630
Preferred Receivables Funding Corp., 4(2)
5.38%, 11/5/99 49,815 49,785
6.02%, 1/31/00 10,000 9,848
Principal Financial Services, 4(2),
5.33%, 11/30/99 $ 7,705 $ 7,672
Repeat Offering Securitisation Entity
6.10%, 1/21/00 3,551 3,502
6.11%, 1/21/00 16,884 16,652
6.14%, 1/24/00 19,750 19,467
4(2), 5.40%, 11/29/99 3,000 2,988
Safeco Credit
5.40%, 11/17/99 8,600 8,580
5.43%, 12/13/99 8,000 7,949
5.85%, 3/21/00 15,000 14,656
Sand Dollar Funding, 4(2)
5.35%, 11/22/99 4,845 4,830
5.37%, 12/1/99 24,500 24,390
Santander Finance (Delaware)
5.38%, 11/1/99 16,708 16,708
5.40%, 11/1/99 1,880 1,880
Societe Generale, North America,
4.94%, 11/23/99 9,000 8,973
UBS Finance (Delaware),
4.89%, 12/13/99 29,500 29,332
<PAGE>
Unifunding, 5.75%, 3/17/00 10,000 9,781
Wal-Mart Stores, 4(2),
5.28%, 12/2/99 500 498
Westpac Capital Corp.,
5.12%, 12/22/99 14,800 14,693
Wisconsin Electric Power,
5.32%, 11/2/99 1,700 1,700
Yale University,
5.35%, 11/2/99 25,350 25,346
Total Commercial Paper (Cost $1,065,634) 1,065,634
MEDIUM-TERM NOTES 18.0%
Abbey National Treasury Services,
5.92%, 8/7/00 20,000 19,994
Associates Manufactured
Housing Pass-Through Trust
VR, (144a), 5.636%, 11/15/99 14,759 14,759
Bear Stearns Companies, VR,
5.519%, 11/10/99 10,000 10,003
Beta Finance, Inc.
6.15%, 10/6/00 20,000 20,000
VR, (144a), 5.398%, 11/17/99 10,000 10,000
Caterpillar Financial Services
8.85%, 8/23/00 1,150 1,176
VR, 5.481%, 11/22/99 7,000 7,000
Chase Manhattan Corp.,
7.75%, 11/1/99 3,380 3,380
Chrysler Financial,
6.625%, 6/26/00 $ 5,000 $ 5,022
Ciesco, VR, (144a)
5.388%, 11/16/99 30,000 29,992
5.428%, 11/17/99 15,000 14,996
<PAGE>
Citicorp, VR,
5.435%, 8/10/00 5,000 4,999
Colgate Palmolive, VR,
5.27%, 11/8/99 10,000 9,992
Countrywide Home Loans
8.43%, 11/16/99 2,500 2,503
VR, 5.559%, 12/30/99 10,000 10,000
DaimlerChrysler North America, VR,
5.31%, 11/1/99 20,000 19,991
Dean Witter Discover, VR,
5.878%, 12/1/99 3,000 3,003
Electronic Data Systems,
6.85%, 5/15/00 4,000 4,016
First Chicago NBD Corp., VR,
5.60%, 11/10/99 13,000 13,007
First Security Auto Owner Trust,
5.015%, 11/14/99 1,031 1,031
Ford Capital BV,
10.125%, 11/15/00 5,900 6,119
Ford Motor Credit, VR
5.435%, 11/18/99 10,000 9,992
5.499%, 10/2/00 10,000 9,991
General Electric Capital, VR,
5.503%, 12/1/99 10,000 9,996
General Motors Acceptance, VR,
6.158%, 1/20/00 16,360 16,355
Goldman Sachs Group, VR
5.407%, 11/8/99 10,000 10,000
5.409%, 11/9 - 11/12/99 15,000 15,000
GTE, 5.546%, 12/13/99 10,000 9,996
Heller Financial
6.42%, 8/25/00 3,400 3,405
6.435%, 8/8/00 1,900 1,903
<PAGE>
VR
5.663%, 12/20/99 7,000 7,000
5.837%, 1/3/00 10,000 10,010
6.466%, 1/13/00 4,000 4,002
IBM, VR, 6.104%, 1/28/00 10,000 9,993
IBM Credit, VR, 5.313%, 11/2/99 5,000 5,000
John Deere Owner Trust,
4.999%, 6/19/00 5,689 5,689
LINCS, Series 1992-2, VR, (144a),
5.426%, 11/18/99 30,000 30,000
National Rural Utilities Finance., VR,
5.40%, 11/2/99 10,000 10,000
Nynex Capital Funding,
9.42%, 6/1/00 1,000 1,022
Paccar Financial,
5.65%, 8/15/00 $ 5,000 $ 4,991
Prudential Funding,
6.84%, 12/30/99 9,800 9,824
Rabobank, Optional Redemption Trust, VR,
5.408%, 11/17/99 3,830 3,830
Strategic Money Market Trust, 1999-B, VR,
5.57%, 12/15/99 20,000 20,000
Wells Fargo & Company,
5.225%, 4/10/00 20,000 19,997
Total Medium-Term Notes (Cost $438,979) 438,979
FUNDING AGREEMENTS 2.5%
Allstate Life Insurance, VR,
5.531%, 11/1/99! 10,000 10,000
Peoples Benefit Life Insurance, VR
5.54%, 11/1/99! 20,000 20,000
5.55%, 11/1/99! 10,000 10,000
<PAGE>
Protective Life Insurance, VR,
5.703%, 12/1/99! 12,000 12,000
Security Life of Denver,
5.52%, 11/1/99! 10,000 10,000
Total Funding Agreements (Cost $62,000) 62,000
Total Investments in Securities
99.2% of Net Assets (Cost $2,420,036) $2,420,036
Other Assets Less Liabilities 20,565
NET ASSETS $2,440,601
----------
Net Assets Consist of:
Accumulated net realized gain/loss
- net of distributions $ 36
Paid-in-capital applicable to 2,440,564,737
shares of $0.0001 par value capital stock
outstanding; 4,000,000,000 shares of the
Corporation authorized 2,440,565
NET ASSETS $2,440,601
----------
NET ASSET VALUE PER SHARE $ 1.00
----------
! Private Placement
VR Variable Rate
4(2) Commercial Paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of 1933, as
amended, and may be sold only to dealers in that program or other "accredited
investors." 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-total of such securities at period-end amounts to
4.09% of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Summit Limited-Term Bond Fund
------------------------------------------------------------------
October 31, 1999
Statement of Net Assets Par/Shares Value
------------------------------------------------------------------
In thousands
CORPORATE BONDS AND NOTES 47.2%
Banking and Finance 9.5%
ABN AMRO Bank (Chicago), N.V.,
Gtd. Sub. Notes
7.25%, 5/31/05 $ 250 $ 249
Banco Generale, Sr. Sub. Notes, (144a),
7.70%, 8/1/02 300 293
Countrywide Home Loans, Sr. Sub Notes,
6.85%, 6/15/04 500 492
General Electric Capital, MTN,
6.15%, 11/5/01 350 348
HSBC Finance Nederland, Sub. Gtd. Notes,
(144a), 7.40%, 4/15/03 270 272
Kansallis-Osake-Pankki (New York),
Sub. Notes, 10.00%, 5/1/02 375 401
Marsh and McLennan, Sr. Notes,
6.625%, 6/15/04 500 493
MBNA, Sub. Notes,
7.25%, 9/15/02 200 199
Mercantile Safe Deposit & Trust,
6.53%, 7/3/00 300 300
Merrill Lynch,
6.81%, 6/13/02 500 501
Morgan Guaranty Trust, Sub. Notes,
7.375%, 2/1/02 250 253
Paine Webber Group,
7.875%, 2/15/03 500 508
Salomon Smith Barney,
7.30%, 5/15/02 300 303
<PAGE>
Union Planters, Sub. Notes,
6.25%, 11/1/03 225 217
Westamerica Bank, Sub. Notes,
6.99%, 9/30/03 250 241
5,070
Building and Real Estate 1.1%
Rouse, 8.00%, 4/30/09 600 565
565
Consumer Products and Services 13.0%
Amvescap, Sr. Notes, (144a),
6.375%, 5/15/03 400 387
Beckman Instruments, Sr. Notes,
7.10%, 3/4/03 500 481
Coca-Cola Femsa,
8.95%, 11/1/06 275 267
Disney, 5.25%, 11/10/03 500 474
Federated Department Stores, Sr. Notes,
8.125%, 10/15/02 500 514
Grand Metropolitan Investment,
Zero Coupon, 1/6/04 750 564
Hospital Corporation of America,
Zero Coupon, 6/1/01 500 437
Johnson & Johnson,
6.625%, 9/1/09 425 420
Nabisco, 6.125%, 2/1/33 300 289
PepsiCo, MTN, 5.75%, 1/2/03 250 244
Philip Morris, 7.25%, 9/15/01 325 323
Rite Aid, (144a), 6.00%, 10/1/03 500 372
Seagram, 6.40%, 12/15/03 500 485
<PAGE>
Sony, 6.125%, 3/4/03 375 368
Viacom, 6.75%, 1/15/03 250 247
Wal-Mart Stores, 6.55%, 8/10/04 750 749
Watson Pharmaceuticals,
7.125%, 5/15/08 $ 275 $ 259
6,880
Energy 0.8%
PDV America, Sr. Notes,
7.875%, 8/1/03 225 208
YPF Sociedad Anonima,
7.25%, 3/15/03 225 219
427
Industrials 9.0%
AlliedSignal, 5.75%, 3/15/01 350 346
Caterpillar Financial Services,
6.875%, 8/1/04 500 500
Delphi Auto Systems,
6.125%, 5/1/04 500 478
Eaton Offshore, Gtd. Notes,
9.00%, 2/15/01 400 413
Hertz, 7.00%, 7/1/04 450 447
Lockheed Martin, 6.75%, 3/15/03 475 464
Parker Hannifin, MTN 5.65%, 9/15/03 500 482
Raytheon, 5.70%, 11/1/03 500 472
Toyota Motor Credit, 5.625%, 11/13/03 500 479
USA Waste Services, Sr. Notes,
6.50%, 12/15/02 375 341
Waste Management, 6.625%, 7/15/02 350 324
4,746
<PAGE>
Media and Communications 3.9%
360 Communications, Sr. Notes,
7.125%, 3/1/03 500 503
Comcast Cable Communications,
6.20%, 11/15/08 400 370
Sprint Capital, 5.70%, 11/15/03 375 360
US West Capital Funding, (144a),
6.875%, 8/15/01 500 500
Worldcom, Sr. Notes, 6.25%, 8/15/03 325 318
2,051
Transportation 2.4%
Delta Air Lines, ETC,
9.60%, 5/26 - 6/1/00 197 201
ERAC USA Finance, (144a)
6.375%, 5/15/03 375 362
Norfolk Southern,
6.95%, 5/1/02 500 500
Northwest Airlines,
8.375%, 3/15/04 250 238
1,301
Utilities 7.5%
CE Electric UK Funding,
Sr. Notes, (144a),
6.853%, 12/30/04 400 388
Cleveland Electric, 7.19%, 7/1/00 250 250
Entergy Mississippi, 6.45%, 4/1/08 375 358
National Rural Utilities,
Cooperative Finance,
5.00%, 10/1/02 500 479
Niagara Mohawk Power
Sr. Disc. Notes, 7.375%, 7/1/03 265 265
Sr. Notes, 7.25%, 10/1/02 284 284
<PAGE>
Pacific Gas & Electric,
1st Mtg. Bonds,
8.75%, 1/1/01 $ 250 $ 256
Public Service Electric & Gas,
Mtg. Bonds,
8.875%, 6/1/03 325 333
Texas NM Power
1st Mtg. Notes, 9.25%, 9/15/00 200 204
Secured Deb., 10.75%, 9/15/03 225 229
United Illuminating,
6.25%, 12/15/02 190 185
Utilicorp United, Sr. Notes,
7.00%, 7/15/04 500 488
Williams Companies,
6.125%, 2/15/12 275 269
3,988
Total Corporate Bonds and Notes (Cost $25,838) 25,028
U.S. GOVERNMENT OBLIGATIONS/
AGENCIES 18.5%
U.S. Government Agency Obligations 8.3%
Federal Home Loan Banks,
5.125%, 9/15/03 3,000 2,870
Federal National Mortgage Assn.
4.625%, 10/15/01 550 536
6.375%, 6/15/09 292 285
7.65%, 10/6/06 500 500
U.S. Department of Housing and
Urban Development, 6.49%, 8/1/07 240 236
4,427
U.S. Treasury Obligations 10.2%
<PAGE>
U.S. Treasury Inflation-Indexed Notes,
3.625%, 7/15/02 522 520
U.S. Treasury Notes
4.25%, 11/15/03 2,495 2,343
6.125%, 8/15/07 600 598
6.375%, 8/15/02 1,250 1,262
6.50%, 10/15/06 650 662
5,385
Total U.S. Government Obligations/Agencies
(Cost $10,090) 9,812
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 14.4%
U.S. Government Agency Obligations 11.9%
Federal Home Loan Mortgage
6.00%, 2/15/08 - 5/15/16 1,500 1,488
6.40%, 1/15/08 500 495
10.75%, 12/1/09 79 85
7 year balloon, 6.50%, 12/1/99 $ 97 $ 97
CMO, 6.92%, 1/25/12 68 68
REMIC
6.00%, 8/15/06 - 1/15/08 1,144 1,127
6.50%, 4/15/21 500 491
Federal National Mortgage Assn.
6.00%, 6/1/13 - 1/1/14 1,379 1,326
7.00%, 4/1/09 227 228
9.00%, 5/1/05 148 152
REMIC
7.50%, 8/25/05 12 12
9.00%, 1/25/08 682 714
6,283
<PAGE>
U.S. Government Guaranteed Obligations 2.5%
Government National Mortgage Assn.
I
8.00%, 5/15/07 752 772
10.00%, 11/15/09 - 10/15/21 293 320
II, 10.00%, 10/20/20 74 81
Midget, I
9.00%, 4/15 - 12/15/01 22 23
10.00%, 1/15/00 - 4/15/01 91 91
10.50%, 1/15/00 - 2/15/01 46 46
1,333
Total U.S. Government Mortgage-Backed
Securities (Cost $7,782) 7,616
ASSET-BACKED SECURITIES 11.7%
Banc One Auto Grantor Trust,
6.27%, 11/20/03 84 85
BMW Vehicle Owner Trust,
6.54%, 4/25/04 500 499
California Infrastructure & Economic
6.25%, 6/25/04 175 174
6.38%, 9/25/08 600 587
6.42%, 9/25/08 450 442
Comed Transitional Funding Trust,
5.44%, 3/25/07 650 613
Fingerhut Master Trust,
6.07%, 2/15/05 375 374
First Security Auto Owner Trust,
6.20%, 10/15/06 500 494
First USA Secured Notes Trust,
6.50%, 1/18/06 500 489
<PAGE>
Harley Davidson Eaglemark
5.94%, 2/15/04 $ 125 $ 124
(144a), 6.35%, 10/15/02 52 52
MMCA Auto Owner Trust,
6.80%, 8/15/03 500 501
Neiman Marcus Credit Master Trust,
7.60%, 6/15/03 500 504
Onyx Acceptance Owner Trust,
5.83%, 3/15/04 500 492
Peco Energy Transport Trust,
5.63%, 3/1/05 300 292
Residential Accredit Loans,
7.25%, 11/25/27 490 480
Total Asset-Backed Securities (Cost $6,337) 6,202
NON-U.S. GOVERNMENT MORTGAGE-
BACKED SECURITIES 3.2%
GMAC Commercial Mortgage Security Trust,
6.15%, 5/15/35 468 451
LB Commercial Conduit Mortgage Trust,
6.41%, 8/15/07 592 574
Prudential Securities,
6.074%, 1/15/08 725 696
Total Non-U.S. Government Mortgage-Backed
Securities (Cost $1,778) 1,721
MUNICIPAL BONDS 0.2%
Taxable Municipal 0.2%
University of Miami, GO,
6.90%, 4/1/04 85 85
Total Municipal Bonds (Cost $85) 85
<PAGE>
COMMON STOCKS 0.0%
Consumer Products and Services 0.0%
Capital Gaming International (16 shares) 0
Total Common Stocks (Cost $0) 0
MONEY MARKET FUNDS 5.1%
Reserve Investment Fund, 5.51% # 2,685 2,685
Total Money Market Funds (Cost $2,685) 2,685
Total Investments in Securities
100.3% of Net Assets (Cost $54,595) $ 53,149
Other Assets Less Liabilities (157)
NET ASSETS $ 52,992
----------
Accumulated net investment income
- net of distributions $ (193)
Accumulated net realized gain/loss
- net of distributions (1,505)
Net unrealized gain (loss) (1,446)
Paid-in-capital applicable to 11,839,296
shares of $0.0001 par value capital stock
outstanding; 4,000,000,000 shares of the
Corporation authorized 56,136
NET ASSETS $ 52,992
----------
NET ASSET VALUE PER SHARE $ 4.48
----------
# Seven-day yield
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
GO General Obligation
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
<PAGE>
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-total of such securities at period-end amounts to 4.96% of
net assets.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit GNMA Fund
------------------------------------------------------------------
October 31, 1999
Par/Shares Value
------------------------------------------------------------------
In thousands
Portfolio of Investments
U.S. GOVERNMENT MORTGAGE-
BACKED SECURITIES 96.0%
U.S. Government Guaranteed Obligations 92.4%
Government National Mortgage Assn.
I
6.00%, 4/15/28 - 5/15/29 $ 4,234 $ 3,930
6.50%, 1/15/24 - 8/15/29 10,390 9,947
7.00%, 4/15/24 - 10/15/29 12,916 12,681
7.50%, 6/15/23 - 7/15/29 11,268 11,318
8.00%, 4/15/17 - 3/15/29 5,644 5,784
8.50%, 6/15/16 - 3/15/27 1,386 1,447
9.00%, 8/15/08 - 8/15/21 697 738
9.50%, 6/15/09 - 7/15/20 238 256
10.00%, 12/15/17 - 3/15/26 1,213 1,326
10.50%, 7/15/15 - 11/15/19 474 526
11.00%, 12/15/09 - 12/15/15 68 75
11.50%, 7/15 - 12/15/15 19 21
II
6.50%, 11/20/28 936 895
<PAGE>
8.00%, 5/20 - 6/20/29 1,214 1,243
8.50%, 6/20/29 419 437
9.00%, 5/20/22 - 3/20/25 168 177
9.50%, 2/20/17 - 12/20/20 110 118
10.00%, 1/20/14 - 3/20/21 106 116
11.00%, 9/20/17 14 16
Construction Loan, I
6.67%, 2/15/01 612 568
6.75%, 7/15/00 - 5/1/29 1,136 1,058
7.00%, 4/15/00 931 890
GPM, I
9.25%, 7/15/16 - 7/15/17 9 9
9.50%, 7/15/09 32 34
10.00%, 8/15/13 2 2
Project Loan, I
6.50%, 3/15/34 344 316
6.70%, 4/15/34 467 439
7.05%, 11/15/38 499 479
7.37%, 8/15/33 397 391
8.00%, 11/15/17 386 398
REMIC, 7.00%, 5/16/24 $ 3,000 $ 2,933
Principal Only, I,
Zero Coupon, 3/16/28 451 313
TBA, I
6.67%, 6/15/38 58 54
7.00%, 12/15/99 52 52
58,984
<PAGE>
U.S. Government Agency Obligations 3.6%
Federal Home Loan Mortgage
REMIC
5.85%, 11/15/17 52 52
6.50%, 8/15/25 1,500 1,422
Federal National Mortgage Assn.
6.50%, 1/1/26 297 285
CMO, Interest Only, 8.50%, 4/1/22 ** 284 52
REMIC, 5.00%, 8/25/22 16 15
Principal Only, Zero Coupon, 10/25/21 515 481
2,307
Total U.S. Government Mortgage-Backed
Securities (Cost $62,741) 61,291
U.S. GOVERNMENT OBLIGATIONS 0.5%
U.S. Treasury Obligations 0.5%
U.S. Treasury Bond Strip,
Zero Coupon, 2/15/16 1,000 345
Total U.S. Government Obligations (Cost $383) 345
ASSET-BACKED SECURITIES 2.9%
Whole Loans-Backed 2.9%
GE Capital Mortgage Services,
6.75%, 8/25/28 1,977 1,827
Prudential Home Mortgage Securities,
6.00%, 10/25/07 5 5
Total Asset-Backed Securities (Cost $1,979) 1,832
MONEY MARKET FUNDS 3.0%
Reserve Investment Fund, 5.51% # 1,934 1,934
Total Money Market Funds (Cost $1,934) 1,934
<PAGE>
Total Investments in Securities
102.4% of Net Assets (Cost $67,037) $ 65,402
Other Assets Less Liabilities (1,559)
NET ASSETS $ 63,843
----------
** For Interest Only securities, par amount represents notional principal,
on which the fund receives interest
# Seven-day yield
CMO Collateralized Mortgage Obligation
GPM Graduated Payment Mortgage
REMIC Real Estate Mortgage Investment Conduit
TBA To be announced security was purchased on a forward commitment basis.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit GNMA Fund
------------------------------------------------------------------
October 31, 1999
Statement of Assets and Liabilities
------------------------------------------------------------------
In thousands
Assets
Investments in securities,
at value (cost $67,037) $ 65,402
Receivable for investment
securities sold 4,939
Other assets 703
Total assets 71,044
Liabilities
Payable for investment securities purchased 6,972
Other liabilities 229
Total liabilities 7,201
NET ASSETS $ 63,843
----------
<PAGE>
Net Assets Consist of:
Accumulated net investment income
- net of distributions $ (244)
Accumulated net realized gain/loss
- net of distributions (504)
Net unrealized gain (loss) (1,635)
Paid-in-capital applicable to 6,801,927
shares of $0.0001 par value capital stock
outstanding; 4,000,000,000 shares of the
Corporation authorized 66,226
NET ASSETS $ 63,843
----------
NET ASSET VALUE PER SHARE $ 9.39
----------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Statement of Operations
------------------------------------------------------------------
In thousands Cash Reserves Limited-Term GNMA
Fund Bond Fund Fund
Year Year Year
Ended Ended Ended
10/31/99 10/31/99 10/31/99
Investment Income
Income
Interest income $ 113,702 $ 3,205 $ 4,000
Expenses
Investment management and
administrative 9,756 284 342
Net investment income 103,946 2,921 3,658
<PAGE>
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
on securities (4) (144) (56)
Change in net unrealized
gain or loss on securities -- (2,174) (2,837)
Net realized and unrealized
gain (loss) (4) (2,318) (2,893)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 103,942 $ 603 $ 765
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Cash Reserves Fund
------------------------------------------------------------------
Statement of Changes in Net Assets
------------------------------------------------------------------
In thousands
Year
Ended
10/31/99 10/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 103,946 $ 79,152
Net realized gain (loss) (4) 27
Increase (decrease) in net
assets from operations 103,942 79,179
Distributions to shareholders
Net investment income (103,946) (79,152)
Capital share transactions *
Shares sold 3,301,638 2,913,215
Distributions reinvested 99,573 75,564
Shares redeemed (2,845,153) (2,407,379)
Increase (decrease) in net
assets from capital
share transactions 556,058 581,400
<PAGE>
Net Assets
Increase (decrease) during period 556,054 581,427
Beginning of period 1,884,547 1,303,120
End of period $2,440,601 $1,884,547
---------- ----------
*Share information
Shares sold 3,301,638 2,913,215
Distributions reinvested 99,573 75,564
Shares redeemed (2,845,153) (2,407,379)
Increase (decrease) in
shares outstanding 556,058 581,400
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Limited-Term Bond Fund
------------------------------------------------------------------
Statement of Changes in Net Assets
------------------------------------------------------------------
In thousands
Year
Ended
10/31/99 10/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 2,921 $ 2,064
Net realized gain (loss) (144) 159
Change in net unrealized
gain or loss (2,174) 485
Increase (decrease) in net
assets from operations 603 2,708
Distributions to shareholders
Net investment income (2,921) (2,064)
Capital share transactions *
Shares sold 28,634 20,167
Distributions reinvested 2,063 1,635
Shares redeemed (16,291) (11,162)
<PAGE>
Increase (decrease) in net
assets from capital
share transactions 14,406 10,640
Net Assets
Increase (decrease) during period 12,088 11,284
Beginning of period 40,904 29,620
End of period $ 52,992 $ 40,904
--------- ---------
*Share information
Shares sold 6,229 4,358
Distributions reinvested 453 353
Shares redeemed (3,572) (2,411)
Increase (decrease) in
shares outstanding 3,110 2,300
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit GNMA Fund
------------------------------------------------------------------
Statement of Changes in Net Assets
------------------------------------------------------------------
In thousands
Year
Ended
10/31/99 10/31/98
Increase (Decrease) in Net Assets
Operations
Net investment income $ 3,658 $ 2,499
Net realized gain (loss) (56) (115)
Change in net unrealized
gain or loss (2,837) 200
Increase (decrease) in net
assets from operations 765 2,584
Distributions to shareholders
Net investment income (3,658) (2,499)
Capital share transactions *
Shares sold 35,537 28,082
<PAGE>
Distributions reinvested 2,630 1,904
Shares redeemed (18,002) (13,030)
Increase (decrease) in net
assets from capital
share transactions 20,165 16,956
Net Assets
Increase (decrease) during period 17,272 17,041
Beginning of period 46,571 29,530
End of period $ 63,843 $ 46,571
--------- ---------
*Share information
Shares sold 3,684 2,838
Distributions reinvested 274 193
Shares redeemed (1,874) (1,317)
Increase (decrease) in
shares outstanding 2,084 1,714
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
October 31, 1999
Notes to Financial Statements
------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Summit Income Funds, Inc. (the corporation) is registered
under the Investment Company Act of 1940. The Summit Cash Reserves Fund (the
Cash Reserves Fund), the Summit Limited-Term Bond Fund (the Limited-Term Bond
Fund), and the Summit GNMA Fund (the GNMA Fund), diversified, open-end
management investment companies, are the three portfolios established by the
corporation and commenced operations on October 29, 1993.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
Valuation Debt securities are generally traded in the over-the-counter
market. Except for securities held by the Cash Reserves Fund, investments in
securities with original maturities
<PAGE>
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 original maturities of 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. Securities held by the Cash Reserves Fund
are valued at amortized cost.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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 that
fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and discounts on debt securities, other
than mortgage-backed securities (MBS), are amortized for both financial
reporting and tax purposes. Premiums and discounts on all MBS are recognized
upon disposition or principal repayment as gain or loss for financial reporting
purposes. For tax purposes, premiums and discounts on MBS acquired on or before
June 8, 1997, are recognized upon disposition or principal repayment as ordinary
income. For MBS acquired after June 8, 1997, premiums are recognized as gain or
loss; discounts are recognized as gain or loss, except to the extent of accrued
market discount.
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 the identified cost basis. Distributions to shareholders are
recorded by each fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
NOTE 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, for the year ended October 31, 1999, were as follows:
<PAGE>
------------------------------------------------------------------
Limited-Term GNMA Fund
Bond Fund
U.S. government securities
Purchases $15,852,000 $71,446,000
Sales 9,663,000 51,826,000
Other securities
Purchases 18,300,000 -
Sales 10,798,000 84,000
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since each fund intends
to continue to qualify as a regulated investment company and distribute all of
its taxable income. The Cash Reserves Fund had capital loss carryforwards for
federal income tax purposes of $4,000, all of which expires in 2007. The
Limited-Term Bond Fund had capital loss carryforwards for federal income tax
purposes of $1,484,000, of which $808,000 expires in 2002, $354,000 in 2003, and
$322,000 thereafter through 2007. The GNMA Fund had capital loss carryforwards
for federal income tax purposes of $405,000, of which $131,000 expires in 2003,
$142,000 in 2004, and $132,000 in 2005. Each fund intends to retain gains
realized in future periods that may be offset by available capital loss
carryforwards.
At October 31, 1999, the costs of investments for the Cash Reserves,
Limited-Term Bond, and GNMA Funds for federal income tax purposes were
substantially the same as for financial reporting and totaled $2,420,036,000,
$54,595,000, and $67,037,000, respectively. For the Cash Reserves Fund,
amortized cost is equivalent to value; and for the Limited-Term Bond and GNMA
Funds, net unrealized gain (loss) on investments was as follows:
------------------------------------------------------------------
Limited-Term GNMA Fund
Bond Fund
Appreciated investments $34,000 $161,000
Depreciated investments (1,480,000) (1,796,000)
Net unrealized gain (loss) $(1,446,000) $(1,635,000)
<PAGE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management and administrative agreement between each fund
and T. Rowe Price Associates, Inc. (the manager) provides for an all-inclusive
annual fee, of which $1,076,000, $18,000, and $53,000 were payable at October
31, 1999 by the Cash Reserves, Limited-Term Bond, and GNMA Funds, respectively.
The fee, computed daily and paid monthly, is equal to 0.45% of average daily net
assets for the Cash Reserves Fund, 0.55% of average daily net assets for the
Limited-Term Bond Fund, and 0.60% of average daily net assets for the GNMA Fund.
Pursuant to the agreement, investment management, shareholder servicing,
transfer agency, accounting, and custody services are provided to each fund, and
interest, taxes, brokerage commissions, and extraordinary expenses are paid
directly by each fund.
Additionally, the Cash Reserves Fund is one of several T. Rowe
Price-sponsored mutual funds (underlying funds) in which the T. Rowe Price
Spectrum Funds (Spectrum) may invest. Spectrum does not invest in the underlying
funds for the purpose of exercising management or control. Expenses associated
with the operation of Spectrum are borne by each underlying fund to the extent
of estimated savings to it and in proportion to the average daily value of its
shares owned by Spectrum, pursuant to special servicing agreements between and
among Spectrum, the underlying funds, T. Rowe Price, and, in the case of T. Rowe
Price Spectrum International, Rowe Price-Fleming International. At October 31,
1999, no Spectrum Funds held outstanding shares of the Cash Reserves Fund. For
the year then ended, the Cash Reserves Fund was allocated $13,000 of Spectrum
expenses.
The Limited-Term Bond and GNMA Funds may invest in the Reserve Investment
Fund and Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by T. Rowe Price Associates,
Inc. The Reserve Funds are offered as cash management options only to mutual
funds and other accounts managed by T. Rowe Price and its affiliates and are not
available to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds to the Limited-Term Bond and the GNMA Funds
for the year ended October 31, 1999, totaled $162,000 and $148,000,
respectively, and are reflected as interest income in the accompanying Statement
of Operations.
<PAGE>
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Report of Independent Accountants
------------------------------------------------------------------
To the Board of Directors of T. Rowe Price Summit Funds, Inc.
and Shareholders of Summit Cash Reserves Fund,
Summit Limited-Term Bond Fund and Summit GNMA Fund
In our opinion, the accompanying statements of net assets (Summit Cash
Reserves Fund and Summit Limited-Term Bond Fund) and the statement of assets and
liabilities, including the portfolio of investments (Summit GNMA Fund), and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Summit Cash Reserves Fund, Summit Limited-Term Bond Fund and Summit GNMA Fund
(comprising T. Rowe Price Summit Funds, Inc., hereafter referred to as the
"Funds") at October 31, 1999, and the results of each of their operations, the
changes in each of their net assets and the financial highlights for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
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 October 31, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
November 17, 1999
T. Rowe Price Shareholder Services
------------------------------------------------------------------
Investment Services And Information
<PAGE>
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10
p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
the T. Rowe Price Web site on the Internet. Address: www.troweprice.com
BROKERAGE SERVICES*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over full-service commission rates.**
INVESTMENT INFORMATION
Combined Statement Overview of all your accounts with T. Rowe Price.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial
markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing,
<PAGE>
Personal Strategy Planner, Retirees Financial Guide, and Retirement Planning
Kit.
* T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services,
Inc., Member NASD/SIPC.
** Based on a September 1999 survey for representative-assisted stock trades.
Services vary by firm, and commissions may vary depending on size of order.
T. Rowe Price Mutual Funds
------------------------------------------------------------------
STOCK FUNDS
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era
New Horizons*
Real Estate
Science & Technology
Small-Cap Stock
Small-Cap Value
Spectrum Growth
Tax-Efficient Growth
Total Equity Market Index
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Growth & Income
<PAGE>
International Stock
Japan
Latin America
New Asia
Spectrum International
BOND FUNDS
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-Free
California Tax-Free Bond
Florida Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term
Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Bond
International Bond
<PAGE>
MONEY MARKET FUNDS
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
BLENDED ASSET FUNDS
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD
VARIABLE ANNUITY
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
* Closed to new investors.
! Investments in the funds are not insured or guaranteed by the FDIC or any
other government agency. Although the funds seek to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
funds.
Please call for a prospectus. Read it carefully before investing.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY. T.
Rowe Price
<PAGE>
refers to the underlying portfolios' investment managers and the distributors,
T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance Agency, Inc.;
and T. Rowe Price Insurance Agency of Texas, Inc. The Security Benefit Group of
Companies and the T. Rowe Price companies are not affiliated. The variable
annuity may not be available in all states. The contract has limitations. Call a
representative for costs and complete details of the coverage.
For fund and account information
or to conduct transactions,
24 hours, 7 days a week
By touch-tone telephone
Tele*Access 1-800-638-2587
By Account Access on the Internet
www.troweprice.com/access
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132
To open a brokerage account
or obtain information, call:
1-800-638-5660
Internet address:
www.troweprice.com
Plan Account Lines for retirement
plan participants:
The appropriate 800 number appears
on your retirement account statement.
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
Walk-In Investor Centers:
For directions, call 1-800-225-5132
or visit our Web site
<PAGE>
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
Boston Area
386 Washington Street
Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills
Tampa
4200 West Cypress Street
10th Floor
Washington, D.C.
900 17th Street N.W.
Farragut Square
T. Rowe Price, Invest With Confidence (registered trademark)
T. Rowe Price Investment Services, Inc., Distributor.
C10-050 10/31/99
<PAGE>
Semiannual Report
Summit Income Funds
April 30, 2000
T. Rowe Price
Report Highlights
Summit Income Funds
o Rising interest rates challenged bonds, though money market issues and
long-term Treasuries performed well.
o Low expenses, as well as sector and maturity strategy, helped the Summit Cash
Reserves Fund increase its dividend.
o Reduced interest rate risk helped the Summit Limited-Term Bond Fund post a
positive return that exceeded its benchmark.
o A focus on liquidity and yield, as well as low expenses, helped the Summit
GNMA Fund post returns ahead of its Lipper group.
o In coming months, we will take a cautious view toward both interest rates and
credit quality.
UPDATES AVAILABLE
For updates on T. Rowe Price funds following the end of each calendar quarter,
please see our Web site at www.troweprice.com.
Fellow Shareholders
Sharply rising interest rates and volatility in the equity markets heavily
influenced bond behavior during the six months ended April 30, 2000. Although
long-term Treasury bonds did better than expected, most fixed-income issues
struggled, leaving money market securities as the most stable performers. The
Summit Income Funds weathered the challenges relatively well, with the Summit
Cash Reserves Fund posting the best results.
MARKET ENVIRONMENT
The past six months have been a roller-coaster ride in the U.S. financial
markets. After a period of broad optimism, in the past three months investors
became concerned about economic overheating and began to seek out safer
investment options. Their concern was
<PAGE>
fueled by recent economic data. First-quarter GDP growth, for example, steamed
ahead at a 5.4% rate; at the same time, consumer demand rose 7%, and business
fixed investment rose 17%. Signs of rising inflation began to creep into labor
costs and basic goods. The Fed clearly indicated that it viewed economic growth
as unsustainable and inflationary. Since beginning its tightening program a year
ago, the Fed has pushed the federal funds rate up 125 basis points to 6% on
April 30 (100 basis points equal one percent). At the time of this writing, the
Fed raised this benchmark an additional 50 basis points.
Line Chart: Interest Rate Levels
Current 5-Year 90-Day
Coupon GNMA Treasury Note Treasury Bill
4/30/99 6.68 5.15 4.51
7.05 5.51 4.65
7.27 5.76 4.77
7/99 7.61 5.75 4.71
7.77 5.71 4.97
7.48 5.81 4.88
10/99 7.51 6.09 5.13
7.64 6.03 5.28
7.83 6.33 5.33
1/00 8.14 6.63 5.59
8.01 6.59 5.81
7.77 6.42 5.88
4/30/00 8 6.42 5.78
For the most part, the bond market weakened in response to the Fed's
tightening program. As indicated in the chart, over the past year yields on both
the five-year Treasury note and 90-day Treasury bill soared by more than a point
and a quarter. GNMA yields rose even more, by 132 basis points. Bond prices
declined commensurately, but there was an anomaly in the Treasury market. After
the beginning of 2000, prices of long-term Treasuries, which are normally very
sensitive to rate increases, actually rose.
The long-term Treasury rally was due partly to investor confidence in the
ability of the Fed to tame inflation, but also to supply-and-demand dynamics.
Flush with higher-than-expected tax receipts, the Treasury has issued fewer
long-term bonds and announced its intention to buy back roughly $30 billion in
longer-dated Treasuries early in 2000. This decline in supply inspired some
panic buying, as institutions that invest in Treasuries
<PAGE>
rushed to stock up before the shortage became critical. It also coincided with a
sharp pullback in the equity markets, which drove many stock investors to seek
comfort in long-term Treasuries. Ultimately, long-term Treasury rates fell even
as shorter-term rates rose, and the yield curve inverted.
Investment-grade corporate bonds produced modestly positive total returns for
the six-month period. Lower-quality bonds struggled, however, as rates rose and
stocks fell. Mortgage rates rose notably for the period as a whole, but eased
off after reaching two-year highs in February. One benefit of the higher yields
on corporate and mortgage-backed bonds is that they now offer a significant
advantage over similar-maturity Treasuries. Outside of the Treasury and
municipal bond markets, mortgages outperformed all other fixed-income sectors.
Summit Cash Reserves Fund
Performance Comparison
------------------------------------------------------------------
Periods Ended 4/30/00 6 Months 12 Months
Cash Reserves Fund 2.79% 5.26%
Lipper Money Market
Funds Average 2.54 4.82
In an environment where any fixed-income investment was fortunate to post
positive returns, money market results looked especially attractive. Your fund
finished the six months with a 2.79% gain, contributing to a 5.26% advance for
the year; both were well ahead of the Lipper Money Market Funds Average. These
results benefited greatly from an increase in dividends per share, which rose
$0.004 from the previous six-month period. Low fund expenses also contributed to
a superior dividend and strong competitive yields.
The fund's weighted average maturity fluctuated considerably during the past
six months in response to conflicting pressures. In October 1999, it stood at a
fairly conservative 62 days as the Fed began to tighten monetary policy. Our
strategy shifted at year-end, however. The approach of Y2K brought about a brief
but sharp reduction in supply and a resulting dip in short-term interest rates.
To avoid excessive reinvestment at these lower rates, we lengthened average
maturity to 70 days by December 31. We subsequently have brought maturity down,
to 46 days by the end of April, mostly by reinvesting proceeds from maturing
securities into shorter investments. This maturity level requires us to reinvest
frequently, which can help yield when interest rates are rising. The fund
continued to maintain a modest "barbell" in its
<PAGE>
maturity structure, dividing its investments between attractively yielding
one-year instruments and one-month instruments whose yields are lower but rising
rapidly.
The portfolio's sector makeup changed somewhat. Our stake in Yankee
CDs--certificates denominated in U.S. dollars but sold by foreign
banks--increased from 8% to 22% of assets. Some aggressive foreign banks were
offering Yankees at attractive rates compared with domestic CDs, and we took
advantage of the opportunity.
On the other hand, holdings in asset-backed securities declined. We
consciously raised our exposure to this sector to 26% by late last year because
we thought it would act as a hedge against any Y2K-related concerns. As we
entered the new millennium uneventfully, we trimmed this sector to 21% to help
improve overall diversification. Our stake in floating-rate notes also declined
in the new year after reaching a high level late last year when a flood of
supply made floater yields very attractive. Indeed, we more than doubled our
position to 32% in October 1999. More recently, floating-rate note issuance has
subsided, minimizing the yield advantage. Thus, as our positions have matured,
we have reinvested in other areas, bringing exposure down to 22% by the end of
April.
SUMMIT LIMITED-TERM BOND FUND
The Fed's aggressive rate hikes had a harsh effect on shorter-term
securities, making it difficult for your fund to make much headway. Nonetheless,
it posted a positive return of 1.44% for the six months and stayed ahead of its
Lipper group average. Twelve-month results of 1.87% also outdistanced the Lipper
benchmark. Dividends per share did not rise but, due to the fund's relatively
modest expenses, remained comparatively high within its peer group. Income
helped compensate for a modest decline in share price from $4.48 to $4.41 during
the six-month period.
Performance Comparison
------------------------------------------------------------------
Periods Ended 4/30/00 6 Months 12 Months
------------------------------------------------------------------
Limited-Term Bond Fund 1.44% 1.87%
Lipper Short Intermediate
Investment-Grade
Debt Funds Average 1.29 1.68
To defend against rising rates, we took steps to reduce the fund's interest
rate exposure. We shortened weighted average maturity from 3.7 years to 3.4
years, and effective duration (a
<PAGE>
measure of sensitivity to movements in interest rates) fell correspondingly from
3.0 to 2.7 years. This effort provided increased protection against principal
loss.
Corporate bonds became a less attractive investment for us after October.
Generally speaking, we believe that cost pressures may begin to threaten
corporate balance sheets because rapid economic growth in the absence of
inflation has resulted in higher production costs without the flexibility to
pass those costs through to consumers. We have already seen corporate profit
margins come under pressure, increasing the likelihood that credit quality will
erode. Corporate bonds-particularly lower-rated high-yield issues-have already
been hurt by deteriorating liquidity and declining prices. Therefore, we reduced
corporate holdings from 47% of assets to 41% mainly by selling underperforming
sectors, such as retail and consumer products, but also by trimming industrials,
utilities, and telecom where risk appeared to have risen modestly. To keep the
fund's yield competitive, the proceeds of these sales were deployed into AAA
rated asset-backed securities, mortgage-backed securities, and Treasuries.
Pie Chart: Quality Diversification
------------------------------------------------------------------
Summit Limited-Term Bond Fund
AAA AA A BBB BB
41 18 24 16 1
Based on net assets as of 4/30/00
Quality diversification reflected our preference for high quality. The
percentage of assets in AAA securities rose from 38% to 41% of assets, while AA
and A holdings both climbed. Our stake in BBB rated issues fell from 21% to
16%-a positive considering the underperformance of these issues. Average
portfolio credit quality remained at a solid AA.
As inflation pressures have grown, we have increased our small but strategic
allocation to Treasury inflation-protected securities (TIPS) by two percentage
points. Our holdings now stand at 3% of assets. These securities have a lower
coupon than traditional Treasuries, but their principal adjusts upward at the
rate of inflation so that the securities provide a stable real return. They act
as a good inflation hedge for short-term investors, and we expect that we will
continue to use TIPS as long as the threat of inflation lingers.
<PAGE>
SUMMIT GNMA FUND
Performance Comparison
------------------------------------------------------------------
Periods Ended 4/30/00 6 Months 12 Months
------------------------------------------------------------------
GNMA Fund 1.33% 1.00%
Lipper GNMA Funds Average 1.15 0.97
Your fund struggled to adjust to continually rising interest rates, but
managed to post a respectable 1.33% gain. This helped it surpass its Lipper peer
group for both the past six and 12 months. Since the share price declined by
$0.19 during the six-month period, returns came entirely from a healthy income
level, aided by low expenses. The fund's 0.60% expense ratio is in the lowest
quartile of the 57 funds in its Lipper peer group.
During the period, concerns about the overheating economy along with
dwindling supply encouraged investors to buy Treasuries despite rising rates. At
the same time, many investors cut back on what they perceive as riskier bond
investments. Collectively, these securities are known as "spread products"
because they provide a yield bonus (often called a spread) over
government-backed Treasuries to compensate for their higher risk potential.
Although mortgages are generally high-quality investments and are usually
considered to carry only modest risk, they do offer a yield spread and often
underperform along with other spread products when investors are especially risk
conscious. For this reason, your fund underperformed most Treasury investments.
However, the fund did well relative to its peer group. One key strategy over
the previous six months was to focus on issues that were attractively priced
relative to their risk level. For example, we built up our position in
comparatively high-yielding GNMA collateral holdings with 7.5% and 8% coupons.
We also sold older discount bonds (whose coupons are comparatively low) in favor
of more recently issued bonds with somewhat higher coupons. These moves worked
in our favor as higher coupons outperformed lower coupons and more recent bonds
outperformed older ones. Recently, we bought a small amount of FNMA mortgages
because we felt they were cheap compared with GNMA mortgages, as well as some
15-year GNMA issues that appeared underpriced. We eliminated all Treasuries
during the course of the period: this move has worked against us so far in 2000,
but we expect that the yield advantage mortgages now offer over Treasuries
should help their relative performance later in the year.
Liquidity was also an important aspect of our strategy. We have for many
quarters kept a stake in "structured" products-securities
<PAGE>
whose income distributions and principal gains are structured somewhat
differently from a typical mortgage-backed bond. However, these products can
become illiquid and fall in price when investors are favoring Treasuries. We
were able to anticipate much of this problem. In December, when structured
products were outperforming, we sold many of our holdings at a high point, and
ultimately reduced our weighting in the area by five percentage points early in
the first quarter to 10% of assets. This improved our overall liquidity and
helped as structured products weakened during 2000.
Our duration had been neutral, compared with our average Lipper competitor,
from November through mid-January. At that time, we shortened to protect against
rising rates. Ultimately, this approach proved unhelpful, and so, in early
March, we returned to a neutral duration stance, which is where the fund stands
today. As always, the credit quality of the portfolio remains high.
OUTLOOK
Compared with past efforts to tighten the money supply, the Fed has been
relatively easygoing about raising interest rates in recent months. However, the
soft-pedal approach has not yet curbed inflationary pressures, and we expect the
Fed to become more vigilant as 2000 wears on. After the period ended, the Fed
raised short-term rates another 50 basis points, and more hikes are possible.
Corporate profits are likely to be pinched as a result. We therefore expect to
take a cautious approach in all the Summit Funds, limiting interest rate
exposure where possible. We will also try to strike a balance between
maintaining high credit quality and seeking out higher yields, which tend to
hold up well when rates rise.
In the Summit Cash Reserves Fund, we expect to keep overall portfolio
maturity slightly shorter than the peer group average until it appears the Fed
has finished raising rates. A modest maturity will also be part of the Summit
Limited-Term Bond Fund's strategy, and we will be very selective about corporate
bonds as we wait to see how corporate America reacts to the higher rate
environment. In the Summit GNMA Fund, we will keep our focus on liquidity and
look for opportunities to increase overall value.
Respectfully submitted,
Edward A. Wiese
President
May 25, 2000
<PAGE>
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Portfolio Highlights
------------------------------------------------------------------
KEY STATISTICS
10/31/99 4/30/00
Summit Cash Reserves Fund
------------------------------------------------------------------
Price Per Share $1.00 $1.00
Dividends Per Share
For 6 months 0.024 0.028
For 12 months 0.048 0.051
Dividend Yield (7-Day Compound) * 5.24% 5.89%
Weighted Average Maturity (days) 62 46
Weighted Average Quality ** First Tier First Tier
Summit Limited-Term Bond Fund
------------------------------------------------------------------
Price Per Share $4.48 $4.41
Dividends Per Share
For 6 months 0.13 0.13
For 12 months 0.26 0.26
Dividend Yield *
For 6 months 5.81% 6.15%
For 12 months 5.92 6.12
30-Day Standardized Yield 6.37 6.66
Weighted Average Maturity (years) 3.7 3.4
Weighted Average Effective Duration (years) 3.0 2.7
Weighted Average Quality *** AA AA
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
<PAGE>
Portfolio Highlights
------------------------------------------------------------------
KEY STATISTICS
10/31/99 4/30/00
Summit GNMA Fund
------------------------------------------------------------------
Price Per Share $9.39 $9.20
Dividends Per Share
For 6 months 0.31 0.31
For 12 months 0.61 0.62
Dividend Yield *
For 6 months 6.62% 6.87%
For 12 months 6.75 6.93
30-Day Standardized Yield 6.42 6.67
Weighted Average Maturity (years) 9.1 8.7
Weighted Average Effective Duration (years) 5.0 4.7
Weighted Average Quality *** AAA AAA
* Dividends earned and reinvested for the periods indicated are annualized and
divided by the fund's net asset value per share at the end of the period.
** All securities purchased in the money fund are rated in the two highest
categories (tiers) as established by national rating agencies or, if unrated,
are deemed of comparable quality by T. Rowe Price.
*** Based on T. Rowe Price research.
<PAGE>
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Portfolio Highlights
------------------------------------------------------------------
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
10/31/99 4/30/00
Summit Cash Reserves Fund
------------------------------------------------------------------
U.S. Negotiable Bank Notes 9% 4%
Certificates of Deposit 26 33
Domestic Negotiable CDs 5 6
Eurodollar Negotiable CDs 13 5
U.S. Dollar Denominated Foreign Negotiable CDs 8 22
Commercial Paper and Medium-Term Notes 61 61
Asset-Backed 26 21
Banking 13 12
Finance and Credit 2 5
Insurance 4 4
Auto and Related 3 4
All Other 13 15
Foreign Government and Municipalities -- --
Funding Agreements 3 1
Other Assets Less Liabilities 1 1
------------------------------------------------------------------
Total 100% 100%
Fixed-Rate Obligations 68 78
Floating-Rate Instruments 32 22
<PAGE>
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Portfolio Highlights
SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
10/31/99 4/30/00
Summit Limited-Term Bond Fund
------------------------------------------------------------------
Corporate Bonds and Notes 47% 41%
Banking and Finance 10 10
Consumer Products and Services 13 8
Utilities 8 7
Industrials 9 7
Transportation 2 4
Media and Communications 4 3
All Other 1 2
Asset-Backed Securities 12 14
Mortgage-Backed Securities 18 23
U.S. Government Obligations 18 20
U.S. Treasuries 10 12
Government Agency Obligations 8 8
Money Market Funds* 5 1
Other Assets Less Liabilities - 1
------------------------------------------------------------------
Total 100% 100%
Summit GNMA Fund
------------------------------------------------------------------
GNMA 92% 97%
U.S. Government Agencies 3 2
Agency-Backed STRIPS 1 1
<PAGE>
Asset-Backed Securities 3 -
Money Market Funds* 3 2
Other Assets Less Liabilities -2 -2
------------------------------------------------------------------
Total 100% 100%
*See note at end of financial statements.
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Performance Comparison
------------------------------------------------------------------
These charts show the value of a hypothetical $25,000 investment in each fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
Line Chart: SUMMIT CASH RESERVES FUND
------------------------------------------------------------------
Index SCR Fund SCR Fund Area
10/29/1993 25000 25000 25000
4/94 25335 25372 25372
4/95 26491 26617 26617
4/96 27873 28088 28088
4/97 29227 29538 29538
4/98 30712 31133 31133
4/99 32174 32731 32731
4/00 33767 34452 34452
<PAGE>
Line Chart: SUMMIT LIMITED-TERM BOND FUND
------------------------------------------------------------------
Merrill Lipper Summit Ltd line Summit Ltd area
10/29/93 25000 25000 25000 25000
4/94 24646 24249 24455 24455
4/95 26153 25599 25620 25620
4/96 28097 27467 27045 27045
4/97 29847 29150 28620 28620
4/98 32199 31403 30920 30920
4/99 34237 33025 32600 32600
4/00 35192 33592 33208 33208
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Performance Comparison
------------------------------------------------------------------
Line Chart: SUMMIT GNMA FUND
------------------------------------------------------------------
Salomon Lipper Summit Line Summit Area
10/29/93 25000 25000 25000 25000
4/94 24463 24229 24629 24629
4/95 26496 25912 26425 26425
4/96 28840 27998 28502 28502
4/97 31166 29945 30474 30474
4/98 34237 32863 33722 33722
4/99 36358 34637 35594 35594
4/00 37208 35032 35950 35950
Average Annual Compound Total Return
------------------------------------------------------------------
This table shows how each fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
<PAGE>
Periods Since Inception
Ended 4/30/00 1 Year 3 Years 5 Years Inception Date
------------------------------------------------------------------
Summit Cash
Reserves Fund 5.26% 5.26% 5.30% 5.06% 10/29/93
Summit Limited
-Term Bond 1.87 5.08 5.33 4.46 10/29/93
Summit GNMA
Fund 1.00 5.66 6.35 5.75 10/29/93
Investment return represents past performance and will vary. Shares of the bond
funds may be worth more or less at redemption than at original purchase, as
their principal value will fluctuate. Investments in the money fund are not
insured or guaranteed by the FDIC or any other government agency. Although it
seeks to preserve the value of your investment at $1.00 per share, it is
possible to lose money by investing in the fund.
T. Rowe Price Summit Cash Reserves Fund
------------------------------------------------------------------
Unaudited
Financial Highlights For a share outstanding throughout
each period
------------------------------------------------------------------
6 Months Year
Ended Ended
4/30/00 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
NET ASSET VALUE
Beginning of
period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Investment activities
Net investment
income (loss) 0.028 0.048 0.052 0.052 0.051 0.055
Distributions
Net investment
income (0.028) (0.048) (0.052) (0.052) (0.051) (0.055)
NET ASSET VALUE
End of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------------------------------------------------------------------
<PAGE>
Ratios/
Supplemental Data
Total return
(diamond) 2.79% 4.87% 5.35% 5.33% 5.23% 5.68%
Ratio of total
expenses to average
net assets 0.45%! 0.45% 0.45% 0.45% 0.45% 0.45%
Ratio of net
investment income
(loss) to average
net assets 5.53%! 4.78% 5.24% 5.18% 5.09% 5.55%
Net assets,
end of period
(in millions) $2,741 $2,441 $1,885 $1,303 $742 $433
(diamond) 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.
! Annualized The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Summit Limited-Term Bond Fund
------------------------------------------------------------------
Unaudited
Financial Highlights For a share outstanding throughout
each period
------------------------------------------------------------------
6 Months Year
Ended Ended
4/30/00 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
NET ASSET VALUE
Beginning of
period $4.48 $4.69 $4.61 $4.60 $4.65 $4.64
Investment activities
Net investment
income (loss) 0.13 0.26 0.28 0.29 0.30 0.32
<PAGE>
Net realized
and unrealized
gain (loss) (0.07) (0.21) 0.08 0.01 (0.05) 0.01
Total from
investment
activities 0.06 0.05 0.36 0.30 0.25 0.33
Distributions
Net investment
income (0.13) (0.26) (0.28) (0.28) (0.29) (0.31)
Tax return of
capital - - - (0.01) (0.01) (0.01)
Total
distributions (0.13) (0.26) (0.28) (0.29) (0.30) (0.32)
NET ASSET VALUE
End of period $4.41 $4.48 $4.69 $4.61 $4.60 $4.65
------------------------------------------------------------------
Ratios/
Supplemental Data
Total return
(diamond) 1.44% 1.06% 7.97% 6.73% 5.48% 7.36%
Ratio of total
expenses to average
net assets 0.55%! 0.55% 0.55% 0.55% 0.55% 0.55%
Ratio of net
investment income
(loss) to average
net assets 6.03%! 5.65% 5.96% 6.28% 6.43% 6.85%
Portfolio turnover
rate 81.4%! 42.2% 52.0% 74.5% 116.1% 84.3%
Net assets,
end of period
(in thousands) $47,722 $52,992 $40,904 $29,620 $25,984 $27,004
(diamond) 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.
! Annualized
<PAGE>
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit GNMA Fund
------------------------------------------------------------------
Unaudited
For a share outstanding throughout each period
Financial Highlights
6 Months Year
Ended Ended
4/30/00 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
NET ASSET VALUE
Beginning of
period $9.39 $9.87 $9.83 $9.65 $9.81 $9.15
Investment activities
Net investment
income (loss) 0.31 0.61 0.64 0.67 0.67 0.70
Net realized
and unrealized
gain (loss) (0.19) (0.48) 0.04 0.18 (0.16) 0.66
Total from
investment
activities 0.12 0.13 0.68 0.85 0.51 1.36
Distributions
Net investment
income (0.31) (0.61) (0.64) (0.64) (0.62) (0.67)
Tax return
of capital - - - (0.03) (0.05) (0.03)
Total
distributions (0.31) (0.61) (0.64) (0.67) (0.67) (0.70)
NET ASSET VALUE
End of period $9.20 $9.39 $9.87 $9.83 $9.65 $9.81
------------------------------------------------------------------
<PAGE>
Ratios/
Supplemental Data
Total return
(diamond) 1.33% 1.39% 7.10% 9.17% 5.47% 15.43%
Ratio of total
expenses to average
net assets 0.60%! 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of net
investment income
(loss) to average
net assets 6.74%! 6.41% 6.47% 6.91% 6.99% 7.40%
Portfolio
turnover rate 57.5%! 89.9% 83.8% 111.8% 136.1% 173.8%
Net assets,
end of period
(in thousands) $57,812 $63,843 $46,571 $29,530 $24,718 $22,777
(diamond) 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.
! Annualized
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Cash Reserves Fund
------------------------------------------------------------------
Unaudited April 30, 2000
Statement of Net Assets Par Value
------------------------------------------------------------------
In thousands
BANK NOTES 3.8%
Comerica Bank, VR
6.08%, 5/15/00 $ 15,000 $ 14,998
6.153%, 5/1/00 8,000 7,999
Kansallis-Osake-Pankki, 6.375%, 8/15/00 10,000 10,013
<PAGE>
Key Bank North America, VR, 6.07%, 5/26/00 15,000 14,999
National City Bank, VR, 6.203%, 5/30/00 25,000 24,992
U.S. Bank North America, VR, 6.08%, 5/17/00 25,000 24,996
Westpac Banking, VR, 6.168%, 5/4/00 5,000 4,999
Total Bank Notes (Cost $102,996) 102,996
CERTIFICATES OF DEPOSIT 33.0%
Allfirst Bank, 6.13%, 5/10/00 5,000 5,000
Banco Bilbao Vizcaya, 5.60%, 6/12/00 19,900 19,899
Bank of Scotland, 5.90%, 8/31/00 5,000 4,997
Bank of Austria
5.93%, 9/7/00 7,000 6,996
6.185%, 12/1/00 20,000 19,993
Bank of Nova Scotia, 6.22%, 12/4/00 10,000 9,995
Banque Paribas, 6.75%, 3/19/01 10,000 9,996
Bayerische Hypo-Und Vereinsbank, 6.10%, 5/18/00 26,500 26,500
Canadian Imperial Bank of Commerce
6.06%, 5/11/00 31,500 31,500
6.07%, 5/4/00 25,000 25,000
6.20%, 8/1/00 1,650 1,651
Chase Manhattan Bank (USA), 5.365%, 5/22/00 24,500 24,488
Commerzbank
5.90%, 8/9/00 11,000 10,997
(London), 6.05%, 6/16/00 25,000 25,000
Credit Agricole Indosuez, VR
6.12%, 5/8/00 10,000 9,997
<PAGE>
6.123%, 5/1/00 20,000 19,991
Credit Communal De Belgique, VR, 6.101%, 5/30/00 20,000 19,997
Deutsche Bank, 6.19%, 12/1/00 10,000 9,996
Dresdner Bank, VR, 6.115%, 5/24/00 20,000 19,998
First National Bank of Maryland
VR
5.54%, 6/21/00 $ 8,100 $ 8,092
6.088%, 5/8/00 15,000 14,999
First Union National Bank, VR, 6.16%, 5/17/00 4,000 4,000
Halifax, 6.05%, 6/7/00 48,000 48,000
Huntington National Bank, 6.26%, 10/27/00 10,000 9,998
Landesbank Hessen-Thuringen, 6.02%, 6/1/00 23,000 23,000
Lloyds TSB Bank, 6.34%, 8/31/00 31,500 31,502
Merita Bank, 6.09%, 10/10/00 10,000 9,998
Natexis Banque, 6.06%, 5/8/00 30,000 30,000
Norddeutsche Landesbank Girozentrale, (London)
6.02%, 5/31/00 49,000 49,000
6.23%, 12/4/00 25,000 24,990
Northern Trust, 6.36%, 8/31/00 40,000 40,007
Rabobank, 6.06%, 5/26/00 44,500 44,501
Royal Bank of Scotland, 6.00%, 5/31/00 25,000 25,000
Skandinaviska Enskilda Banken, VR, 6.125%,
5/24/00 10,000 9,999
Societe Generale
VR
6.085%, 5/16/00 20,000 19,998
<PAGE>
6.235%, 12/4/00 10,000 9,996
Toronto Dominion, 6.21%, 7/20/00 47,500 47,500
UBS
5.29%, 5/22/00 500 500
5.51%, 6/5/00 10,000 10,000
5.60%, 6/26/00 1,000 999
5.80%, 8/2/00 15,000 14,984
6.01%, 8/14/00 10,000 9,998
Unibank A/S, 5.92%, 8/7/00 10,000 9,999
Union Bank of California, VR, 6.133%, 5/1/00 15,000 15,000
Westdeutsche Landesbank
6.01%, 6/6/00 30,000 29,999
6.02%, 5/30/00 25,000 25,000
Wilmington Trust
6.09%, 6/9/00 14,500 14,501
6.23%, 10/23/00 20,000 19,994
Total Certificates of Deposit (Cost $903,545) 903,545
COMMERCIAL PAPER 43.6%
Albertsons, VR, 4(2), 6.11%, 5/15/00 $ 10,000 $ 9,999
Alpine Securitization, 4(2)
6.03%, 5/10/00 19,000 18,971
6.04%, 5/17/00 37,000 36,901
Anheuser Busch, 6.04%, 5/1/00 14,999 14,999
AON, 6.10%, 5/2 - 5/8/00 41,500 41,481
<PAGE>
Asset Securitization Cooperative, 4(2)
6.03%, 5/23/00 19,000 18,930
6.05%, 5/4/00 46,500 46,477
AT&T, VR, 4(2), 6.24%, 7/13/00 30,000 29,998
AWB Finance Limited, 6.07%, 5/17/00 20,000 19,946
Bavaria TRR, 4(2), 6.05%, 5/23/00 20,200 20,125
CBA (Delaware) Finance, 5.75%, 5/22/00 10,000 9,966
Citicorp, 6.03%, 5/25/00 40,000 39,839
Coca-Cola, 4(2), 6.05%, 5/17/00 25,000 24,933
Corporate Asset Funding, 4(2), 6.02%, 5/1/00 16,264 16,264
Corporate Receivables
6.06%, 5/19/00 25,000 24,924
6.07%, 6/6/00 30,000 29,818
Delaware Funding, 4(2)
6.03%, 5/18/00 30,000 29,914
6.05%, 5/25/00 9,234 9,197
Deutsche Bank Financial, 6.02%, 5/16/00 17,515 17,471
Dover Corp., 4(2), 6.13%, 2/28/01 16,000 16,000
Enterprise Funding, 4(2)
6.04%, 5/16/00 1,509 1,505
6.07%, 5/23/00 8,800 8,768
Falcon Asset Securitization, 4(2), 6.03%, 5/24/00 20,666 20,586
Finova Capital, 6.10%, 5/2/00 20,000 19,997
France Telecom
6.02%, 5/18/00 25,000 24,929
6.04%, 5/25/00 12,000 11,952
<PAGE>
GE Capital International Funding, 6.05%, 5/8/00 25,000 24,971
Golden Funding, 4(2)
6.06%, 5/2 - 5/19/00 22,033 22,015
6.07%, 5/12/00 1,425 1,422
Greenwich Funding, 4(2)
6.02%, 5/15/00 $ 15,000 $ 14,965
6.04%, 5/15 - 5/23/00 24,000 23,920
6.05%, 5/26/00 5,000 4,979
International Lease Finance, 6.13%, 5/3/00 20,000 20,000
Kitty Hawk Funding, 4(2), 6.06%, 5/22/00 30,000 29,894
Market Street Funding, 6.05%, 5/19/00 15,188 15,142
Merck and Company, 6.00%, 5/19/00 25,000 24,925
Metlife Funding, 6.00%, 5/3/00 33,848 33,837
Motiva Enterprises, 6.02%, 5/22/00 15,000 14,947
Park Avenue Receivables
6.04%, 5/22/00 25,000 24,912
6.06%, 5/3/00 47,000 46,984
6.07%, 5/23/00 25,000 24,907
Preferred Receivables Funding
6.04%, 5/17 - 5/30/00 54,000 53,801
R.R. Donnelly & Sons, 6.02%, 5/23/00 27,425 27,324
Sara Lee Corporation
6.08%, 5/8/00 18,500 18,500
6.10%, 5/23/00 16,400 16,400
Statoil, 6.00%, 5/2/00 40,000 39,993
<PAGE>
Sysco, 4(2)
6.07%, 5/22/00 25,000 24,911
6.08%, 5/22/00 10,000 9,965
Three River Funding, 6.07%, 5/22/00 2,843 2,833
Trident Capital Finance, 4(2), 6.03%, 5/9/00 20,500 20,473
Tulip Funding, 6.04%, 5/18/00 19,500 19,444
Variable Funding Capital
6.03%, 5/5/00 30,000 29,980
6.05%, 5/4/00 9,000 8,995
Woolwich Building Society, 5.75%, 5/5/00 800 800
ZCM Matched Funding
6.02%, 5/17/00 25,000 24,933
6.06%, 5/18/00 5,000 4,986
Total Commercial Paper (Cost $1,195,048) 1,195,048
MEDIUM-TERM NOTES 17.4%
AT&T Capital, VR, 6.971%, 12/1/00 $ 30,000 $ 30,115
Abbey National Treasury Services, 5.92%, 8/7/00 20,000 19,998
Associates Manufactured Housing Pass Through Trust
VR, (144a), 6.36%, 5/15/00 13,970 13,970
Banc One, VR, 6.383%, 6/26/00 14,500 14,520
Bank of Scotland Treasury Services,
VR, 6.283%, 7/19/00 30,000 29,997
Bank One, VR, 6.416%, 1/16/01 8,500 8,507
Beta Finance
6.15%, 10/6/00 20,000 20,000
<PAGE>
6.75%, 3/15/01 5,000 5,000
Caterpillar Financial Services
5.88%, 12/13/00 1,500 1,497
8.85%, 3/15/00 1,150 1,160
VR, 6.11%, 7/10/00 7,000 7,000
Chrysler Financial, 6.625%, 6/26/00 5,000 5,005
Ciesco VR, (144a)
6.11%, 5/16/00 30,000 29,997
6.15%, 8/17/00 15,000 14,999
Citicorp, VR, 6.165%, 5/10/00 5,000 5,000
Colgate Palmolive, VR, 5.998%, 5/8/00 10,000 9,997
DaimlerChrysler North America Holdings,
VR, 6.113%, 5/30/00 20,000 19,998
Diageo PLC, 6.24%, 6/5/00 10,000 9,996
Electronic Data Systems, 6.85%, 5/15/00 4,000 4,001
Ford Capital BV, 10.125%, 11/15/00 5,900 6,014
Ford Motor Credit, VR
6.058%, 5/18/00 10,000 9,997
6.27%, 10/2/00 10,000 9,996
General Electric Capital, VR, 6.101%, 6/1/00 10,000 9,999
General Motors Acceptance Corporation,
VR, 6.253%, 7/20/00 16,360 16,358
Goldman Sachs Group
6.11%, 5/17/00 10,000 10,000
(144a), 6.20%, 12/15/00 1,200 1,200
GTE, VR, 6.165%, 6/12/00 10,000 9,999
<PAGE>
Heller Financial
6.42%, 8/25/00 3,400 3,402
6.435%, 8/8/00 1,900 1,901
Heller Financial
VR
6.35%, 7/3/00 $ 10,000 $ 10,000
6.38%, 7/3/00 10,000 10,003
Hydro Quebec, 9.23%, 12/4/00 1,500 1,524
IBM Corp., VR, 6.275%, 7/28/00 10,000 9,998
John Deere Capital Corp., 6.26%, 6/21/00 10,000 10,003
National Rural Utilities, VR, 6.133%, 5/2/00 10,000 10,000
Northern Rock, VR, (144a), 6.13%, 5/22/00 20,000 20,000
Nynex Capital Funding, 9.42%, 6/1/00 1,000 1,003
Paccar Financial, 5.65%, 2/15/00 5,000 4,997
R.R. Donnelley & Sons, 9.125%, 12/1/00 4,040 4,104
Rabobank Optional Redemption Trust,
VR, 6.13%, 5/17/00 2,563 2,563
Sigma Finance, (144a), 6.75%, 3/15/01 18,000 18,000
Strategic Money Market Trust 2000-B,
VR, 6.15%, 6/15/00 20,000 20,000
Toyota Motor Credit, VR, 6.20%, 7/12/00 25,000 24,986
Total Medium-Term Notes (Cost $476,804) 476,804
FUNDING AGREEMENTS 1.6%
Allstate Life Insurance, VR, 6.217%, 5/1/00 10,000 10,000
<PAGE>
Peoples Benefit Life Insurance, VR
6.27%, 5/1/00 20,000 20,000
6.28%, 5/1/00 10,000 10,000
Protective Life Insurance, VR, 6.251%, 6/1/00 5,000 5,000
Total Funding Agreements (Cost $45,000) 45,000
Total Investments in Securities
99.4% of Net Assets (Cost $2,723,393) $2,723,393
Other Assets Less Liabilities 17,639
NET ASSETS $2,741,032
----------
Net Assets Consist of:
Accumulated net realized gain/loss - net of distributions $10
Paid-in-capital applicable to 2,741,021,845 shares of
$0.0001 par value capital stock outstanding;
4,000,000,000 shares of the Corporation authorized 2,741,022
NET ASSETS $2,741,032
----------
NET ASSET VALUE PER SHARE $1.00
----------
VR Variable Rate
4(2) Commercial paper sold within terms of a private placement
memorandum, exempt from registration under section 4.2 of the
Securities Act of 1933, as amended, and may be sold only to
dealers in that program or other "accredited investors."
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- total of such
securities at period-end amounts to 3.6% of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Summit Limited-Term Bond Fund
------------------------------------------------------------------
Unaudited April 30, 2000
Statement of Net Assets Par/Shares Value
------------------------------------------------------------------
In thousands
CORPORATE BONDS AND NOTES 40.7%
Banking and Finance 10.5%
ABN AMRO Bank (Chicago), N.V., Gtd. Sub. Notes
7.25%, 5/31/05 $ 340 $ 328
AIG Sunamerica Global Financing, Sr. Notes
(144a), 7.40%, 5/5/03 450 450
Banco Generale, Sr. Sub. Notes,
(144a), 7.70%, 8/1/02 250 241
CIT Group, 5.50%, 2/15/04 450 414
Finova Capital, MTN, 5.98%, 2/27/01 65 63
First USA Bank, 7.00%, 8/20/01 65 65
General Electric Capital, MTN, 6.15%, 11/5/01 285 281
HSBC Finance Nederland, Sub. Gtd. Notes,
(144a), 7.40%, 4/15/03 160 158
Intermediate American Development Bank,
6.375%, 10/22/07 175 166
Kansallis-Osake-Pankki (New York),
Sub. Notes, 10.00%, 5/1/02 325 339
Marsh & McLennan, Sr. Notes, 6.625%, 6/15/04 450 430
MBNA, Sub. Notes, 7.25%, 9/15/02 165 162
Mercantile Safe Deposit & Trust, 6.53%, 7/3/00 300 300
<PAGE>
Merrill Lynch
6.81%, 6/13/02 225 222
7.00%, 3/15/06 225 216
Morgan Guaranty Trust, Sub. Notes, 7.375%, 2/1/02 115 115
Potomac Capital Investment, MTN,
(144a), 7.55%, 11/19/01 225 224
Provident Bank, Sub. Notes, 7.125%, 3/15/03 225 217
Republic of New York, 8.875%, 2/15/01 160 162
Salomon Smith Barney, 7.30%, 5/15/02 300 299
Union Planters, Sub. Notes, 6.25%, 11/1/03 160 151
5,003
Consumer Products and Services 8.4%
Beckman Instruments, Sr. Notes, 7.10%, 3/4/03 315 300
Coca-Cola Femsa, 8.95%, 11/1/06 180 180
Comcast Cable Communications, 6.20%, 11/15/08 360 316
Federated Department Stores, Sr. Notes,
8.125%, 10/15/02 450 452
Grand Metropolitan Investment, Zero Coupon, 1/6/04 675 511
Johnson & Johnson, 6.625%, 9/1/09 380 363
Nabisco, 6.125%, 2/1/33 260 239
PepsiCo, MTN, 5.75%, 1/2/03 250 240
Sony, 6.125%, 3/4/03 375 364
Viacom, 6.75%, 1/15/03 190 185
Wal-Mart Stores, 6.55%, 8/10/04 $ 675 $ 656
Watson Pharmaceuticals, 7.125%, 5/15/08 240 211
4,017
<PAGE>
Energy 0.8%
PDV America, Sr. Notes, 7.875%, 8/1/03 205 191
YPF Sociedad Anonima, 7.25%, 3/15/03 190 183
374
Industrials 6.7%
Caterpillar Financial Services, 6.875%, 8/1/04 450 435
DaimlerChrysler, 7.125%, 3/1/02 450 447
Eaton Offshore, Gtd. Notes, 9.00%, 2/15/01 330 335
Ford Motor Credit, 7.50%, 3/15/05 225 222
Lockheed Martin, 6.75%, 3/15/03 205 197
Parker Hannifin, MTN, 5.65%, 9/15/03 450 423
Toyota Motor Credit, 5.625%, 11/13/03 450 426
United Technologies, 6.625%, 11/15/04 450 434
Waste Management, 6.625%, 7/15/02 310 288
3,207
Media and Communications 3.4%
360 Communications, Sr. Notes, 7.125%, 3/1/03 450 444
Sprint Capital, 5.70%, 11/15/03 340 320
US West Capital Funding, 6.875%, 8/15/01 450 447
Vodafone Airtouch, (144a), 7.625%, 2/15/05 390 388
1,599
Transportation 4.1%
Amerco, Sr. Notes, 8.80%, 2/4/05 450 427
Delta Air Lines
7.90%, 12/15/09 270 252
<PAGE>
ETC, 9.60%, 5/26 - 6/1/00 172 172
ERAC USA Finance, (144a), 6.375%, 5/15/03 175 165
Gatx Capital, 6.875%, 11/1/04 225 211
Norfolk Southern
6.95%, 5/1/02 450 443
7.875%, 2/15/04 125 124
Northwest Airlines, 8.375%, 3/15/04 190 170
1,964
Utilities 6.8%
CE Electric UK Funding, Sr. Notes, (144a),
6.853%, 12/30/04 270 260
Cleveland Electric, 7.19%, 7/1/00 190 190
Entergy Mississippi, 6.45%, 4/1/08 $ 345 $ 322
National Rural Utilities Cooperative Finance,
5.00%, 10/1/02 450 426
Niagara Mohawk Power
Sr. Disc. Notes, 7.375%, 7/1/03 253 248
Sr. Notes, 7.25%, 10/1/02 255 251
Pacific Gas & Electric, 1st Mtg. Bonds,
8.75%, 1/1/01 215 217
Public Service Electric & Gas, 1st Mtg. Bonds,
8.875%, 6/1/03 240 241
Texas NM Power
1st Mtg. Notes, 9.25%, 9/15/00 200 201
Secured Deb., 10.75%, 9/15/03 225 226
Utilicorp United, Sr. Notes, 7.00%, 7/15/04 450 427
<PAGE>
Williams Companies, 6.125%, 2/15/12 240 232
3,241
Total Corporate Bonds and Notes (Cost $20,119) 19,405
U.S. GOVERNMENT OBLIGATIONS/
AGENCIES 20.3%
U.S. Government Agency Obligations 7.9%
Federal Home Loan Banks, 5.125%, 9/15/03 2,750 2,580
Federal National Mortgage Assn.
4.625%, 10/15/01 475 460
6.375%, 6/15/09 292 273
7.65%, 10/6/06 280 275
U.S. Department Housing & Urban Development,
6.49%, 8/1/07 200 195
3,783
U.S. Treasury Obligations 12.4%
U.S. Treasury Inflation-Indexed Notes,
3.625%, 7/15/02 1,404 1,400
U.S. Treasury Notes
4.25%, 11/15/03 3,345 3,103
7.25%, 5/15/04 1,400 1,431
5,934
Total U.S. Government Obligations/Agencies (Cost $9,958) 9,717
<PAGE>
U.S. GOVERNMENT MORTGAGE-
BACKED SECURITIES 16.8%
U.S. Government Agency Obligations 12.9%
Federal Home Loan Mortgage
6.00%, 2/15/08 - 5/15/16 2,207 2,155
Federal Home Loan Mortgage
6.40%, 1/15/08 $ 450 $ 440
10.75%, 12/1/09 76 81
7-Year Balloon, 6.50%, 5/1/05 124 122
CMO
5.75%, 6/15/10 859 842
6.92%, 1/25/12 3 3
REMIC
6.00%, 8/15/06 - 1/15/08 834 810
6.50%, 4/15/21 450 437
Federal National Mortgage Assn.
6.00%, 11/1/13 347 327
7.00%, 4/1/09 204 201
9.00%, 5/1/05 115 117
REMIC, 9.00%, 1/25/08 614 626
6,161
U.S. Government Guaranteed Obligations 3.9%
Government National Mortgage Assn.
I
7.00%, 9/15/12 875 859
8.00%, 5/15/07 583 586
<PAGE>
10.00%, 11/15/09 - 10/15/21 266 285
II, 10.00%, 10/20/20 60 64
Midget, I
9.00%, 4/15 - 12/15/01 15 15
10.00%, 8/15/00 - 4/15/01 37 37
10.50%, 8/15/00 - 2/15/01 17 17
1,863
Total U.S. Government Mortgage-Backed
Securities (Cost $8,215) 8,024
ASSET-BACKED SECURITIES 14.3%
Advanta Equipment Receivables, 7.56%, 2/15/07 340 339
Banc One Auto Grantor Trust, 6.27%, 11/20/03 42 42
BMW Vehicle Owner Trust, 6.54%, 4/25/04 450 444
California Infrastructure & Economic
6.38%, 9/25/08 500 476
6.42%, 9/25/08 400 382
Comed Transitional Funding Trust, 5.44%, 3/25/07 530 486
Dayton Hudson Credit Card Master Trust,
5.90%, 5/25/06 $ 450 $ 434
Fingerhut Master Trust, 6.07%, 2/15/05 320 318
First USA Secured Notes Trust, 6.50%, 1/18/06 450 433
Harley Davidson Eaglemark
5.94%, 2/15/04 113 112
6.35%, 10/15/02 ! 29 29
Heller Equipment Asset Trust, 6.65%, 3/14/04 450 445
MBNA Asset Backed Note Trust, 7.90%, 7/16/07 450 452
MBNA Credit Card Trust, 7.45%, 4/16/07 225 222
<PAGE>
MMCA Auto Owner Trust, 6.80%, 8/15/03 450 448
Neiman Marcus Credit Master Trust, 7.60%, 6/15/03 150 150
New Holland Equipment Receivables, 6.80%, 12/15/07 450 444
Onyx Acceptance Owner Trust, 5.83%, 3/15/04 450 438
Peco Energy Transport Trust, 5.63%, 3/1/05 270 260
WFS Financial Owner Trust, 7.41%, 9/20/07 450 447
Total Asset-Backed Securities (Cost $6,961) 6,801
NON-U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 5.5%
EQCC Home Equity Loan Trust, 6.159%, 4/15/08 325 309
GMAC Commercial Mortgage Securities, 6.15%, 5/15/35 408 388
LB Commercial Conduit Mortgage Trust, 6.41%, 8/15/07 522 500
Prudential Securities, 6.074%, 1/15/08 579 545
Residential Accredit Loans, 7.25%, 11/25/27 435 414
Saxon Asset Securities Trust, 6.73%, 2/25/27 500 482
Total Non-U.S. Government Mortgage-Backed
Securities (Cost $2,750) 2,638
MUNICIPAL BONDS 0.1%
Taxable Municipal 0.1%
University of Miami, 6.90%, 4/1/04 (MBIA Insured) 50 49
Total Municipal Bonds (Cost $50) 49
MONEY MARKET FUNDS 1.3%
Reserve Investment Fund, 6.18% # 630 630
Total Money Market Funds (Cost $630) 630
<PAGE>
Total Investments in Securities
99.0% of Net Assets (Cost $48,683) $47,264
Other Assets Less Liabilities 458
NET ASSETS $47,722
----------
Net Assets Consist of:
Accumulated net investment income
- - net of distributions $(193)
Accumulated net realized gain/loss - net of distributions (2,302)
Net unrealized gain (loss) (1,419)
Paid-in-capital applicable to 10,826,547 shares
of $0.0001 par value capital stock outstanding;
4,000,000,000 shares of the Corporation authorized 51,636
NET ASSETS $47,722
--------
NET ASSET VALUE PER SHARE $4.41
----------
! Private Placement
# Seven-day yield
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
MBIA Municipal Bond Investors Assurance Corp.
MTN Medium Term Note
REMIC Real Estate Mortgage Investment Conduit
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--total of such
securities at period-end amounts to 4.0% of net assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Summit GNMA Fund
------------------------------------------------------------------
Unaudited April 30, 2000
Statement of Net Assets Par/Shares Value
------------------------------------------------------------------
In thousands
U.S. GOVERNMENT MORTGAGE-BACKED
SECURITIES 100.3%
U.S. Government Guaranteed Obligations 97.5%
Government National Mortgage Assn.
I
6.00%, 4/15/28 - 5/15/29 $ 4,000 $ 3,643
6.50%, 9/15/25 - 8/15/29 11,669 10,952
7.00%, 4/15/24 - 10/15/29 10,291 9,929
7.50%, 7/15/23 - 2/15/30 11,833 11,654
8.00%, 4/15/17 - 3/15/30 5,327 5,358
8.50%, 6/15/16 - 3/15/27 1,287 1,316
9.00%, 8/15/08 - 8/15/21 636 661
9.50%, 6/15/09 - 7/15/20 190 198
10.00%, 12/15/17 - 3/15/26 1,056 1,132
10.50%, 7/15/15 - 11/15/19 416 454
11.00%, 12/15/09 - 12/15/15 57 62
11.50%, 7/15 - 12/15/15 19 21
II
6.50%, 11/20/28 905 845
8.00%, 5/20 - 6/20/29 762 762
8.50%, 6/20/29 188 191
9.00%, 5/20/22 - 3/20/25 140 145
<PAGE>
9.50%, 2/20/17 - 12/20/20 102 107
10.00%, 1/20/14 - 3/20/21 98 104
11.00%, 9/20/17 13 14
Construction Loan, I, 6.75%, 7/15/00 - 5/1/29 1,136 1,042
CMO, I, 7.00%, 5/16/24 3,000 2,870
GPM, I
9.25%, 7/15/16 - 7/15/17 8 9
9.50%, 7/15/09 30 32
10.00%, 8/15/13 2 2
Project Loan, I
6.70%, 4/15/34 466 431
7.37%, 8/15/33 396 384
8.00%, 11/15/17 382 387
Principal Only, Zero Coupon, 3/16/28 422 283
Government National Mortgage Assn.
REMIC, 7.00%, 5/16/24 $ 3,000 $ 2,870
TBA, I, 7.50%, 5/15/12 503 508
56,366
U.S. Government Agency Obligations 2.8%
Federal Home Loan Mortgage, REMIC, 5.85%, 11/15/17 14 14
Federal National Mortgage Assn.
6.50%, 1/1/26 - 1/1/30 1,285 1,201
CMO, Interest Only, 8.50%, 4/1/22** 248 44
REMIC, 5.00%, 8/25/22 16 15
Principal Only, Zero Coupon, 10/25/21 392 366
1,640
<PAGE>
Total U.S. Government Mortgage-Backed
Securities (Cost $59,973) 58,006
ASSET-BACKED SECURITIES 0.0%
Home Equity Loans-Backed 0.0%
Prudential Home Mortgage Securities, 6.00%, 10/25/07 2 2
Total Asset-Backed Securities (Cost $2) 2
MONEY MARKET FUNDS 1.8%
Reserve Investment Fund, 6.18% # 1,034 1,034
Total Money Market Funds (Cost $ 1,034) 1,034
Total Investments in Securities
102.1% of Net Assets (Cost $61,009) $59,042
Other Assets Less Liabilities (1,230)
NET ASSETS $57,812
----------
Net Assets Consist of:
Accumulated net investment income - net of distributions $(244)
Accumulated net realized gain/loss - net of distributions (1,405)
Net unrealized gain (loss) (1,967)
Paid-in-capital applicable to 6,281,453 shares of $0.0001 par
value capital stock outstanding; 4,000,000,000 shares of the
Corporation authorized 61,428
NET ASSETS $57,812
----------
NET ASSET VALUE PER SHARE $9.20
----------
** For Interest-Only securities, par amount represents notional
principal, on which the fund receives interest.
# Seven-day yield
CMO Collateralized Mortgage Obligation
GPM Graduated Payment Mortgage
REMIC Real Estate Mortgage Investment Conduit
TBA To be announced security was purchased on a forward
commitment basis.
<PAGE>
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Unaudited
Statement of Operations
------------------------------------------------------------------
In thousands Cash Reserves Limited-Term GNMA
Fund Bond Fund Fund
6 Months 6 Months 6 Months
Ended Ended Ended
4/30/00 4/30/00 4/30/00
Investment Income (Loss)
Interest income $ 78,025 $ 1,609 $ 2,172
Expenses
Investment management
and administrative 5,858 134 177
Net investment income (loss) 72,167 1,475 1,995
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
on securities (26) (797) (901)
Change in net unrealized gain or loss
on securities -- 27 (332)
Net realized and unrealized
gain (loss) (26) (770) (1,233)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 72,141 $ 705 $ 762
The accompanying notes are an integral part of these financial statements.
<PAGE>
T. Rowe Price Summit Cash Reserves Fund
------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
In thousands
6 Months Year
Ended Ended
4/30/00 10/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 72,167 $ 103,946
Net realized gain (loss) (26) (4)
Increase (decrease) in net assets from operations 72,14 103,942
Distributions to shareholders
Net investment income (72,167) (103,946)
Capital share transactions *
Shares sold 2,401,146 3,301,638
Distributions reinvested 69,053 99,573
Shares redeemed (2,169,742) (2,845,153)
Increase (decrease) in net assets from capital
share transactions 300,457 556,058
Net Assets
Increase (decrease) during period 300,431 556,054
Beginning of period 2,440,601 1,884,547
End of period $2,741,032 $2,440,601
------------------------
*Share information
Shares sold 2,401,146 3,301,638
Distributions reinvested 69,053 99,573
<PAGE>
Shares redeemed (2,169,742) (2,845,153)
Increase (decrease) in shares outstanding 300,457 556,058
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Limited-Term Bond Fund
------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
4/30/00 10/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 1,475 $ 2,921
Net realized gain (loss) (797) (144)
Change in net unrealized gain or loss 27 (2,174)
Increase (decrease) in net
assets from operations 705 603
Distributions to shareholders
Net investment income (1,475) (2,921)
Capital share transactions *
Shares sold 7,572 28,634
Distributions reinvested 1,001 2,063
Shares redeemed (13,073) (16,291)
Increase (decrease) in net assets from capital
share transactions (4,500) 14,406
Net Assets
Increase (decrease) during period (5,270) 12,088
<PAGE>
Beginning of period 52,992 40,904
End of period $ 47,722 $ 52,992
----------------------
*Share information
Shares sold 1,708 6,229
Distributions reinvested 226 453
Shares redeemed (2,946) (3,572)
Increase (decrease) in shares outstanding (1,012) 3,110
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit GNMA Fund
------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
4/30/00 10/31/99
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) $ 1,995 $ 3,658
Net realized gain (loss) (901) (56)
Change in net unrealized gain or loss (332) (2,837)
Increase (decrease) in net
assets from operations 762 765
Distributions to shareholders
Net investment income (1,995) (3,658)
Capital share transactions *
Shares sold 10,433 35,537
<PAGE>
Distributions reinvested 1,335 2,630
Shares redeemed (16,566) (18,002)
Increase (decrease) in net assets from capital
share transactions (4,798) 20,165
Net Assets
Increase (decrease) during period (6,031) 17,272
Beginning of period 63,843 46,571
End of period $ 57,812 $ 63,843
----------------------
*Share information
Shares sold 1,128 3,684
Distributions reinvested 145 274
Shares redeemed (1,794) (1,874)
Increase (decrease) in shares outstanding (521) 2,084
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Summit Income Funds
------------------------------------------------------------------
Unaudited April 30, 2000
Notes to Financial Statements
------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Summit Income Funds, Inc. (the corporation) is registered under
the Investment Company Act of 1940. The Summit Cash Reserves Fund (the Cash
Reserves Fund), the Summit Limited-Term Bond Fund (the Limited-Term Bond Fund),
and the Summit GNMA Fund (the GNMA Fund), diversified, open-end management
investment companies, are the three portfolios established by the corporation
and commenced operations on October 29, 1993. The Cash Reserves Fund seeks
preservation of capital and liquidity and, consistent with these, the highest
possible current income by investing in high-quality, U.S. dollar-denominated
money market securities of U.S. and foreign issuers. The Limited-Term Bond Fund
seeks a high level of income consistent with moderate fluctuations in principal
<PAGE>
value by investing primarily in short- and intermediate-term bonds. The GNMA
Fund seeks a high level of income and maximum credit protection by investing
primarily in GNMA securities backed by the full faith and credit of the U.S.
government.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
Valuation Debt securities are generally traded in the over-the-counter
market. Except for securities held by the Cash Reserves Fund, investments in
securities with original 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 original maturities of 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. Securities
held by the Cash Reserves Fund are valued at amortized cost.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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 that
fund, as authorized by the Board of Directors.
Premiums and Discounts Premiums and discounts on debt securities, other than
mortgage-backed securities (MBS), are amortized for both financial reporting and
tax purposes. Premiums and discounts on all MBS are recognized upon disposition
or principal repayment as gain or loss for financial reporting purposes. For tax
purposes, premiums and discounts on MBS acquired on or before June 8, 1997, are
recognized upon disposition or principal repayment as ordinary income. For MBS
acquired after June 8, 1997, premiums are recognized as gain or loss; discounts
are recognized as gain or loss, except to the extent of accrued market discount.
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 the identified cost basis. Distributions to shareholders are
recorded by each fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and
<PAGE>
may differ from those determined in accordance with generally accepted
accounting principles.
Note 2 - INVESTMENT TRANSACTIONS
Purchases and sales of portfolio securities, other than short-term
securities, for the six months ended April 30, 2000, were as follows:
-----------------------------------------------------------------
Limited-Term
Bond Fund GNMA Fund
U.S. government securities
Purchases $9,041,000 $17,170,000
Sales 9,421,000 21,410,000
Other securities
Purchases 10,448,000 --
Sales 13,155,000 9,000
Note 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since each fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income. As of October 31, 1999, the Cash Reserves Fund had capital loss
carryforwards for federal income tax purposes of $4,000, all of which expires in
2007; the Limited-Term Bond Fund had capital loss carryforwards for federal
income tax purposes of $1,484,000, of which $808,000 expires in 2002, $354,000
in 2003, and $322,000 thereafter through 2007; the GNMA Fund had capital loss
carryforwards for federal income tax purposes of $405,000, of which $131,000
expires in 2003, $142,000 in 2004, and $132,000 in 2005. Each fund intends to
retain gains realized in future periods that may be offset by available capital
loss carryforwards.
At April 30, 2000, the costs of investments for the Cash Reserves,
Limited-Term Bond, and GNMA Funds for federal income tax purposes were
substantially the same as for financial reporting and totaled $2,723,393,000
$,48,683,000, and $61,009,000, respectively. For the Cash Reserves Fund,
amortized cost is equivalent to value; and for the Limited-Term Bond and GNMA
Funds, net unrealized gain (loss) on investments was as follows:
------------------------------------------------------------------
<PAGE>
Limited-Term
Bond Fund GNMA Fund
Appreciated investments $ 16,000 $ 79,000
Depreciated investments (1,435,000) (2,046,000)
Net unrealized gain (loss) $(1,419,000) $(1,967,000)
--------------------------
Note 4 - RELATED PARTY TRANSACTIONS
The investment management and administrative agreement between each fund and
T. Rowe Price Associates, Inc. (the manager) provides for an all-inclusive
annual fee, of which $1,074,000, $38,000, and $48,000 were payable at April 30,
2000, by the Cash Reserves, Limited-Term Bond, and GNMA Funds, respectively. The
fee, computed daily and paid monthly, is equal to 0.45% of average daily net
assets for the Cash Reserves Fund, 0.55% of average daily net assets for the
Limited-Term Bond Fund, and 0.60% of average daily net assets for the GNMA Fund.
Pursuant to the agreement, investment management, shareholder servicing,
transfer agency, accounting, and custody services are provided to each fund, and
interest, taxes, brokerage commissions, and extraordinary expenses are paid
directly by each fund.
Additionally, the Cash Reserves Fund is one of several T. Rowe
Price-sponsored mutual funds (underlying funds) in which the T. Rowe Price
Spectrum Funds (Spectrum) may invest. Spectrum does not invest in the underlying
funds for the purpose of exercising management or control. Expenses associated
with the operation of Spectrum are borne by each underlying fund to the extent
of estimated savings to it and in proportion to the average daily value of its
shares owned by Spectrum, pursuant to special servicing agreements between and
among Spectrum, the underlying funds, T. Rowe Price, and, in the case of T. Rowe
Price Spectrum International, Rowe Price-Fleming International. Spectrum Income
Fund held approximately 0.4% of the outstanding shares of the fund at April 30,
2000. For the six months then ended, the Cash Reserves Fund was allocated $2,000
of Spectrum expenses.
The Limited-Term Bond and GNMA Funds may invest in the Reserve Investment
Fund and Government Reserve Investment Fund (collectively, the Reserve Funds),
open-end management investment companies managed by T. Rowe Price Associates,
Inc. The Reserve Funds are offered as cash management options only to mutual
funds and other accounts managed by T. Rowe Price and its affiliates and are not
available to the public. The Reserve Funds pay no investment management fees.
Distributions from the Reserve Funds
<PAGE>
to the Limited-Term Bond and the GNMA Funds for the six months ended April 30,
2000, totaled $28,000 and $40,000, respectively, and are reflected as interest
income in the accompanying Statement of Operations.
T. Rowe Price Shareholder Services
------------------------------------------------------------------
Investment Services And Information
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10
p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access (registered trademark) and
the T. Rowe Price Web site on the Internet. Address: www.troweprice.com
BROKERAGE SERVICES*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over full-service commission rates.**
INVESTMENT INFORMATION
Combined Statement Overview of all your accounts with T. Rowe Price.
Shareholder Reports Fund managers' reviews of their strategies and results.
<PAGE>
T. Rowe Price Report Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
* T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services,
Inc., Member NASD/SIPC.
** Based on a September 1999 survey for representative-assisted stock trades.
Services vary by firm, and commissions may vary depending on size of order.
For fund and account information
or to conduct transactions,
24 hours, 7 days a week
By touch-tone telephone
Tele*Access 1-800-638-2587
By Account Access on the Internet
www.troweprice.com/access
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132
To open a brokerage account
or obtain information, call:
1-800-638-5660
Internet address:
www.troweprice.com
Plan Account Lines for retirement
plan participants:
The appropriate 800 number appears
on your retirement account statement.
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
<PAGE>
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
Walk-In Investor Centers:
For directions, call 1-800-225-5132
or visit our Web site
Baltimore Area
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
Boston Area
386 Washington Street
Wellesley
Colorado Springs
4410 ArrowsWest Drive
Los Angeles Area
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills
Tampa
4200 West Cypress Street
10th Floor
Washington, D.C.
900 17th Street N.W.
Farragut Square
Invest With Confidence (registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor.
C10-051 4/30/00
<PAGE>
T. Rowe Price
------------------------------------------------------------------
Annual Report
Short-Term Bond Fund
------------------------------------------------------------------
May 31, 2000
------------------------------------------------------------------
REPORT HIGHLIGHTS
==================================================================
SHORT-TERM BONDFUND
-----------------
* The Federal Reserve raised rates repeatedly during the 12 months ended May
31, 2000.
* A defensive strategy helped the fund outpace its Lipper benchmark despite
the difficult environment.
* In the past six months, we trimmed overall interest rate sensitivity and
improved the portfolio's average quality.
* We reduced our holdings in corporate bonds out of concern for corporate
financial health.
* The Fed may moderate its efforts to tighten the money supply, but we think
a cautious approach is still warranted.
==================================================================
UPDATES AVAILABLE
----------------
For updates on T. Rowe Price funds following the end of each calendar
quarter, please see our Web site at www.troweprice.com.
==================================================================
FELLOW SHAREHOLDERS
------------------
The Federal Reserve tightened monetary policy during the 12 months ended May
31, 2000, leading to sharply higher interest rates. The environment proved
challenging to nearly all fixed-income markets, but short-term bonds were
especially affected by rising rates and declining prices. Our defensive approach
helped the Short-Term Bond Fund post a positive return and outpace its Lipper
peer group for both the 6- and 12-month periods.
MARKET ENVIRONMENT
------------------
Interest Rate Levels chart showing interest rates for five-year Treasury
notes, two-year Treasury notes, and the Federal Funds Target Rate 5/31/99through
5/31/00.
<PAGE>
The past year has been a roller-coaster ride in the U.S. financial markets.
After months of positive economic news and attractive investment performance,
the dawn of the new year brought renewed concerns about economic overheating.
First-quarter GDP growth steamed ahead at a 5.4% rate; at the same time,
consumer demand rose 7% and business fixed investment rose 17%. The Fed
indicated that it viewed these growth levels as unsustainable and inflationary,
and, indeed, signs of inflation became evident in labor costs and basic goods.
The central bank responded by raising the federal funds target rate three times
in 2000 by a total of 100 basis points (which is equivalent to a full percent),
the most recent move being a 50-basis-point hike on May 16. Since beginning its
tightening program a little more than a year ago, the Fed has raised the fed
funds rate by 175 basis points, to 6.5% on May 31.
For the most part, the bond market weakened in response to the Fed's
tightening program, but the effect on short-term bonds has been more immediate
and pronounced than on many other sectors.
As indicated in the chart on the previous page, over the past year the yield
on the five-year Treasury note rose 114 basis points, while the two-year
Treasury yield soared 142 basis points. In addition, long-term Treasuries
performed unexpectedly well, with rising prices and falling yields, largely
because of a feared supply shortage in that market. With rates on short-term
bonds rising more than intermediate and long rates, the yield curve inverted --
an unusual occurrence that historically has foreshadowed slower economic growth.
The performance of mortgage bonds was mixed: their rates rose over the past
six months, but eased off after reaching two-year highs in February. Despite
declining prices, income helped investment-grade corporate bonds produce
modestly positive total returns after November. Lower-quality bonds struggled,
however, as economic uncertainty and a sharp decline in the stock market spurred
investors to seek higher-quality securities. Corporate bonds tend to perform
best when the economic outlook is positive and optimism about corporate
financial performance is high. When these factors come under pressure,
lower-quality bonds are usually affected first.
PERFORMANCE AND STRATEGY REVIEW
------------------------------
PERFORMANCE COMPARISON
----------------------
Periods Ended 5/31/00 6 Months 12 Months
--------------------- -------- ---------
Short-Term Bond Fund 2.09% 3.39%
Lipper Short Investment-
Grade Debt Funds Average 1.70 3.37
<PAGE>
The harsh rate environment made it difficult for your fund to make much
headway in the past year. Nonetheless, it posted a return of 2.09% for the six
months, superior to the 1.70% advance of the Lipper Short Investment-Grade Debt
Funds Average. That showing helped it post a 3.39% one-year result that also
outpaced the Lipper, despite trailing the benchmark earlier in the year.
Twelve-month dividends per share rose by one penny over six months ago, and
income helped compensate for a modest decline in share price from $4.56 to $4.52
during the six-month period.
With rates rising steadily, we steered the fund toward a more defensive
strategy. An important part of this effort was to reduce the portfolio's
sensitivity to interest rates. Over the past six months, we have trimmed
weighted average maturity from 2.3 years to 2.1 years, and cut effective
duration (a measure of interest rate exposure where higher numbers indicate
greater sensitivity to rate changes) from 2.0 to 1.8 years.
This effort helped us to keep principal losses to a minimum. One of the ways
we implemented this strategy was by maintaining a reserve position (invested
largely in money market securities) at a relatively high 18%. We also felt it
was prudent to raise the credit quality of the portfolio. We elevated the
position in AAA securities from 38% to 42% of assets; AA holdings rose from 17%
to 20%, and A issues rose from 22% to 24%. Correspondingly, we sharply reduced
our stake in lower-rated securities. Six months ago, the fund had 23% of assets
in bonds rated BBB and BB. At the period's end we reduced that stake to 14%, all
in BBB securities -- those at the weak end of the investment-grade spectrum.
This change aided results since lower-rated bonds underperformed during the
six-month period. Average portfolio credit quality remained at a solid AA.
Quality Diversification pie chart showing percent of assets as follows;
AAA-42%; AA-20%; A-24%; BBB-14%. Based on net assets as of 5/31/00.
Corporate bonds became a less attractive investment for us after November.
Generally speaking, we believe that cost pressures may begin to threaten
corporate balance sheets. Rapid economic growth in the absence of inflation has
resulted in higher production costs without the flexibility to pass those costs
through to consumers. We have already seen corporate profit margins come under
pressure, increasing the likelihood that credit quality will erode. Corporate
bonds -- particularly lower-rated, high-yield issues -- have already been hurt
by deteriorating liquidity and declining prices. Therefore, we reduced corporate
holdings from 47% of assets to 41% mainly by selling underperforming sectors
such as consumer products. However, we held steady positions in the
transportation and media and communication sectors, where we see
<PAGE>
fundamentals continuing to improve. To keep the fund's yield competitive, the
proceeds of these sales were deployed into AAA rated asset-backed securities,
mortgage-backed securities, and Treasuries.
As inflation pressures have grown, we have increased our small but strategic
allocation to Treasury inflation-protected securities (TIPS) to 3% of assets.
These securities have a lower coupon than traditional Treasuries, but their
principal value adjusts upward at the rate of inflation, providing a stable real
(after inflation) return of approximately 4%. TIPS act as a good inflation hedge
for short-term investors, and we expect to use them as long as the threat of
inflation lingers.
OUTLOOK
-------
In the wake of the Fed's series of rate hikes, new data suggest that the
economy may have begun to slow. The Fed will undoubtedly watch these signs of
moderating growth carefully, as it does not want to push the economy into
recession. Nevertheless, inflation risks have not disappeared, and we think
further rate hikes are a strong possibility, although they may come at a slower
pace than the first half of the year. We therefore expect to maintain the
cautious approach we established over the past six months until we see more
stability in the economy and the rate environment. We will also try to strike a
balance between maintaining high credit quality and seeking out higher-yielding
bonds, which we think will provide good returns while limiting risk.
Respectfully submitted,
Edward A. Wiese
/s/Edward A. Wiese
President and Chairman of the Investment Advisory Committee
June 21, 2000
==================================================================
T. Rowe Price Short-Term Bond Fund
------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS
------------------
KEY STATISTICS
-------------
11/30/99 5/31/00
-------- -------
Price Per Share $4.56 $4.52
------------------------------------------------------------------
Dividends Per Share
For 6 months 0.13 0.13
------------------------------------------------------------------
For 12 months 0.25 0.26
<PAGE>
------------------------------------------------------------------
Dividend Yield *
For 6 months 5.67% 6.00%
------------------------------------------------------------------
For 12 months 5.72 5.95
------------------------------------------------------------------
30-Day Standardized Yield 6.26 6.73
------------------------------------------------------------------
Weighted Average Maturity (years) 2.3 2.1
------------------------------------------------------------------
Weighted Average Effective Duration (years) 2.0 1.8
------------------------------------------------------------------
Weighted Average Quality ** AA AA
------------------------------------------------------------------
* Dividends earned and reinvested for the periods indicated are annualized
and divided by the fund's net asset value at the end of the period.
** Based on T. Rowe Price research.
==================================================================
T. Rowe Price Short-Term Bond Fund
------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS
-------------------
SECTOR DIVERSIFICATION
---------------------
Percent of Percent of
Net Assets Net Assets
11/30/99 5/31/00
---------- ----------
Corporate Bonds and Notes 47% 39%
Banking and Finance 12 10
Utilities 9 8
Industrial 8 7
Consumer Products and Services 10 6
Media and Communications 4 4
Transportation 2 3
All Other 2 1
Asset-Backed Securities 14 16
Mortgage-Backed Securities 19 22
U.S. Government Obligations 1 3 U.S.
Treasuries 1 3
Government Agency Obligations -- --
Money Market Funds * 18 18
Other Assets Less Liabilities 1 2
Total 100% 100%
* See note at end of financial statements.
==================================================================
T. Rowe Price Short-Term Bond Fund
------------------------------------------------------------------
PERFORMANCE COMPARISON
<PAGE>
---------------------
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with benchmarks, which may include a
broad-based market index and a peer group average or index. Market indexes do
not include expenses, which are deducted from fund returns as well as mutual
fund averages and indexes.
Lehman Brothers 1-3 Year TRP Short-Term
Government/Corp Bond Index Bond Fund
-------------------------- --------------
5/31/90 10,000 10,000
5/91 11,104 10,966
5/92 12,l82 11,983
5/93 13,030 12,870
5/94 13,303 13,045
5/95 14,297 13,489
5/96 15,061 14,107
5/97 16,064 14,993
5/98 17,189 16,024
5/99 18,112 16,701
5/00 18,840 17,267
AVERAGE ANNUAL COMPOUND TOTAL RETURN
-----------------------------------
This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Periods Ended 5/31/00 1 Year 3 Years 5 Years 10 Years
--------------------- ------ ------- ------- --------
Short-Term Bond Fund 3.39% 4.82% 5.06% 5.61%
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original purchase.
==================================================================
T. Rowe Price Short-Term Bond Fund
------------------------------------------------------------------
For a share outstanding throughout each period
FINANCIAL HIGHLIGHTS
- --------------------
Year
Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
------- ------- ------- ------- -------
NET ASSET VALUE
Beginning of period $ 4.63 $ 4.69 $ 4.65 $ 4.64 $ 4.72
------------------------------------------------------------------
<PAGE>
Investment activities
Net investment
income (loss) 0.26 0.26 0.27 0.27 0.29
Net realized and
unrealized gain
(loss) (0.11) (0.06) 0.04 0.01 (0.08)
------------------------------------------------------------------
Total from
investment activities 0.15 0.20 0.31 0.28 0.21
------------------------------------------------------------------
Distributions
Net investment income (0.26) (0.26) (0.27) (0.26) (0.28)
Tax return of capital -- -- -- (0.01) (0.01)
------------------------------------------------------------------
Total distributions (0.26) (0.26) (0.27) (0.27) (0.29)
------------------------------------------------------------------
NET ASSET VALUE
End of period $ 4.52 $ 4.63 $ 4.69 $ 4.65 $ 4.64
------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
------------------------
Total return* 3.39% 4.23% 6.87% 6.28% 4.58%
------------------------------------------------------------------
Ratio of total expenses to
average net assets 0.72% 0.73% 0.72% 0.74% 0.72%
------------------------------------------------------------------
Ratio of net investment
income (loss) to average
net assets 5.74% 5.44% 5.82% 5.91% 6.15%
------------------------------------------------------------------
Portfolio turnover
rate 50.7% 51.6% 73.0% 103.9% 118.7%
------------------------------------------------------------------
Net assets, end of period
(in thousands) $ 286,671 $ 324,098 $ 331,955 $ 373,284 $429,498
------------------------------------------------------------------
* 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.
The accompanying notes are an integral part of these financial statements.
==================================================================
T. Rowe Price Short-Term Bond Fund
------------------------------------------------------------------
May 31, 2000
STATEMENT OF NET ASSETS
----------------------
Par/Shares Value
---------- ---------
CORPORATE BONDS AND NOTES 38.8%
<PAGE>
- --------------------------------
BANKING AND FINANCE 10.3%
AIG Sunamerica Global Financing,
Sr. Notes, (144a) 7.40%, 5/5/03 $ 3,000 $ 2,971
----------------------------------------------------------------
Banco Generale, Sr. Sub. Notes,
(144a), 7.70%, 8/1/02 2,450 2,310
----------------------------------------------------------------
CIT Group, 5.50%, 2/15/04 3,000 2,745
----------------------------------------------------------------
General Electric Capital, MTN, 7.50%, 5/15/05 3,000 2,998
----------------------------------------------------------------
Marsh and McLennan, Sr. Notes, 6.625%, 6/15/04 3,250 3,081
----------------------------------------------------------------
MBNA, Sub. Notes, 7.25%, 9/15/02 2,650 2,591
----------------------------------------------------------------
Mercantile Safe Deposit & Trust, 6.53%, 7/3/00 4,200 4,195
----------------------------------------------------------------
Morgan Guaranty Trust,
Sub. Notes, 7.375%, 2/1/02 4,000 3,972
----------------------------------------------------------------
Provident Bank, Sub. Notes, 7.125%, 3/15/03 1,500 1,436
----------------------------------------------------------------
Salomon Smith Barney Holdings, 7.30%, 5/15/02 3,250 3,215
----------------------------------------------------------------
29,514
------------
CONSUMER PRODUCTS AND SERVICES 5.6%
Beckman Instruments, Sr. Notes, 7.10%, 3/4/03 2,800 2,664
----------------------------------------------------------------
Federated Department Stores,
Sr. Notes, 8.125%, 10/15/02 1,500 1,503
----------------------------------------------------------------
Grand Metropolitan Investment,
Zero Coupon, 1/6/04 3,000 2,289
----------------------------------------------------------------
Pepsico, MTN, 5.75%, 1/2/03 3,000 2,875
----------------------------------------------------------------
Sony, 6.125%, 3/4/03 4,025 3,894
----------------------------------------------------------------
Wal-Mart Stores, Sr. Notes, 6.15%, 8/10/01 3,000 2,960
----------------------------------------------------------------
16,185
------------
ENERGY 1.2%
PDV America, Sr. Notes, 7.875%, 8/1/03 1,400 1,298
----------------------------------------------------------------
YPF Sociedad Anonima, 7.25%, 3/15/03 2,400 2,285
----------------------------------------------------------------
3,583
<PAGE>
------------
INDUSTRIALS 6.6%
Caterpillar Financial Services,
6.875%, 8/1/04 3,250 3,131
----------------------------------------------------------------
DaimlerChrysler, 7.125%, 3/1/02 3,000 2,977
----------------------------------------------------------------
Ford Motor Credit, 7.50%, 3/15/05 1,500 1,473
----------------------------------------------------------------
Lockheed, 6.75%, 3/15/03 1,500 1,440
----------------------------------------------------------------
McDonnell Douglas Finance
Sr. Notes, 6.39%, 1/15/02 2,000 1,950
----------------------------------------------------------------
Toyota Motor Credit, 5.625%, 11/13/03 3,000 2,840
----------------------------------------------------------------
United Technologies, 6.625%, 11/15/04 3,000 2,888
----------------------------------------------------------------
Waste Management, 6.625%, 7/15/02 2,350 2,207
----------------------------------------------------------------
18,906
------------
MEDIA AND COMMUNICATIONS 3.8%
360 Communications, Sr. Notes, 7.125%, 3/1/03 $ 3,000 $ 2,955
----------------------------------------------------------------
Sprint Capital, 5.70%, 11/15/03 2,800 2,613
----------------------------------------------------------------
U.S. West Capital Funding, 6.875%, 8/15/01 3,000 2,969
----------------------------------------------------------------
Vodafone Airtouch, (144a), 7.625%, 2/15/05 2,250 2,224
----------------------------------------------------------------
10,761
------------
TRANSPORTATION 2.8%
Amerco, Sr. Notes, 8.80%, 2/4/05 3,000 2,837
----------------------------------------------------------------
ERAC USA Finance, (144a), 6.375%, 5/15/03 2,000 1,881
----------------------------------------------------------------
Gatx Capital, 6.875%, 11/1/04 1,500 1,398
----------------------------------------------------------------
Norfolk Southern, 6.95%, 5/1/02 2,000 1,964
----------------------------------------------------------------
8,080
------------
UTILITIES 8.5%
CE Electric UK Funding,
Sr. Notes, (144a), 6.853%, 12/30/04 2,100 2,018
----------------------------------------------------------------
National Rural Utilities, 5.00%, 10/1/02 4,000 3,771
----------------------------------------------------------------
<PAGE>
Niagara Mohawk, Sr. Disc. Notes, 7.375%, 7/1/03 3,024 2,957
----------------------------------------------------------------
Pacific Gas & Electric,
1st Mtg. Bonds, 8.75%, 1/1/01 4,500 4,534
----------------------------------------------------------------
Potomac Capital Investment,
MTN, (144a), 7.55%, 11/19/01 1,500 1,485
----------------------------------------------------------------
Public Service Electric & Gas,
Mtg. Bonds, 8.875%, 6/1/03 4,350 4,308
----------------------------------------------------------------
Utilicorp United, Sr. Notes, 7.00%, 7/15/04 3,000 2,833
----------------------------------------------------------------
Williams, 6.125%, 2/15/12 2,500 2,418
----------------------------------------------------------------
24,324
------------
Total Corporate Bonds and Notes (Cost $ 115,173) 111,353
------------
ASSET-BACKED SECURITIES 16.1%
- ------------------------------
Advanta Equipment Receivables, 7.56%, 2/15/07 1,867 1,858
----------------------------------------------------------------
Banc One Auto Grantor Trust, 6.27%, 11/20/03 760 757
----------------------------------------------------------------
BMW Vehicle Owner Trust, 6.54%, 4/25/04 3,000 2,943
----------------------------------------------------------------
California Infrastructure
6.28%, 9/25/05 1,900 1,843
----------------------------------------------------------------
6.42%, 9/25/08 1,850 1,766
----------------------------------------------------------------
Circuit City Credit Card Master
Trust, 6.7525%, 2/15/06 3,000 3,000
----------------------------------------------------------------
Comed Transitional Funding
Trust, 5.44%, 3/25/07 4,000 3,670
----------------------------------------------------------------
Dayton Hudson Credit Card Master
Trust, 5.90%, 5/25/06 3,000 2,897
----------------------------------------------------------------
Delta Air Lines, 9.60%, 6/1/00 1,260 1,260
----------------------------------------------------------------
Fingerhut Master Trust, 6.07%, 2/15/05 3,300 3,280
----------------------------------------------------------------
Harley Davidson Eaglemark
5.94%, 2/15/04 739 739
----------------------------------------------------------------
6.35%, 10/15/02 459 457
----------------------------------------------------------------
Heller Equipment Asset Trust, 6.65%, 3/14/04 $ 3,000 $ 2,969
<PAGE>
----------------------------------------------------------------
MBNA Master Credit Card Trust
7.45%, 4/16/07 1,500 1,481
----------------------------------------------------------------
7.503%, 3/15/05 3,000 3,013
----------------------------------------------------------------
MMCA Automobile Trust, 6.80%, 8/15/03 3,250 3,237
----------------------------------------------------------------
Neiman Marcus Credit Master Trust,
7.60%, 6/15/03 667 667
----------------------------------------------------------------
New Holland Equipment Receivables,
(144a), 6.80%, 12/15/07 3,000 2,922
----------------------------------------------------------------
Onyx Acceptance Auto Trust, 6.76%, 5/15/04 2,000 1,970
----------------------------------------------------------------
Peco Energy Transport Trust, 5.63%, 3/1/05 2,650 2,557
----------------------------------------------------------------
WFS Financial Owner Trust, 7.41%, 9/20/07 3,000 2,971
----------------------------------------------------------------
Total Asset-Backed Securities (Cost $47,107) 46,257
------------
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 17.1%
------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 14.5%
Federal Home Loan Mortgage
5.75%, 6/15/10 5,631 5,519
----------------------------------------------------------------
6.00%, 8/15/06 - 5/15/16 24,999 24,294
----------------------------------------------------------------
6.40%, 1/15/08 4,000 3,921
----------------------------------------------------------------
9.00%, 2/1 - 7/1/02 255 256
----------------------------------------------------------------
9.50%, 8/1/01 - 9/1/02 158 159
----------------------------------------------------------------
10.00%, 1/1/01 - 10/1/05 144 145
----------------------------------------------------------------
11.00%, 8/1 - 12/1/00 11 11
----------------------------------------------------------------
Federal National Mortgage Assn.
5.50%, 11/1/05 24 24
----------------------------------------------------------------
9.00%, 5/1/05 - 1/25/08 6,997 7,119
----------------------------------------------------------------
11.00%, 10/1 - 12/1/00 6 6
----------------------------------------------------------------
41,454
------------
U.S. GOVERNMENT GUARANTEED OBLIGATIONS 2.6%
<PAGE>
Government National Mortgage Assn.
I
7.00%, 9/15/12 5,757 5,613
----------------------------------------------------------------
8.50%, 2/15/05 - 3/15/06 214 216
----------------------------------------------------------------
10.50%, 11/15/15 109 118
----------------------------------------------------------------
GPM, I
8.50%, 1/15/06 36 36
----------------------------------------------------------------
9.50%, 8/15 - 10/15/09 5 5
----------------------------------------------------------------
11.00%, 8/15/10 52 57
----------------------------------------------------------------
11.25%, 6/15/13 - 1/15/16 194 213
----------------------------------------------------------------
11.75%, 8/15/13 - 10/15/15 $ 589 $ 653
----------------------------------------------------------------
13.00%, 9/15/11 7 7
----------------------------------------------------------------
GPM, II, 11.00%, 9/20/13 - 4/20/14 5 5
----------------------------------------------------------------
Midget, I
9.00%, 7/15/01 - 2/15/06 205 208
----------------------------------------------------------------
9.50%, 5/15/01 - 4/15/05 60 61
----------------------------------------------------------------
10.00%, 6/15/01 - 10/15/04 206 209
----------------------------------------------------------------
7,401
------------
Total U.S. Government Mortgage-Backed
Securities (Cost $ 50,070) 48,855
------------
U.S. GOVERNMENT OBLIGATIONS/AGENCIES 3.6%
- ------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS 0.3%
Chilbar Shipping, 6.98%, 7/15/01 755 753
----------------------------------------------------------------
753
------------
U.S. TREASURY OBLIGATIONS 3.3%
U.S. Treasury Inflation-Indexed
Notes, 3.625%, 7/15/02 9,693 9,609
----------------------------------------------------------------
9,609
------------
Total U.S. Government Obligations/Agencies
(Cost $10,410) 10,362
------------
<PAGE>
NON-U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES 5.2%
---------------------------------------------------
Advanta Mortgage Loan Trust,
Interest Only, 5.00%, 12/25/00 ** 18,000 547
----------------------------------------------------------------
EQCC Home Equity Loan Trust, 6.159%, 4/15/08 2,000 1,905
----------------------------------------------------------------
GMAC Commercial Mortgage Securities,
6.15%, 5/15/35 2,706 2,570
----------------------------------------------------------------
Great Western Bank, ARM, 5.951%, 7/25/17 753 708
----------------------------------------------------------------
LB Commercial Conduit Mortgage Trust,
6.41%, 8/15/07 3,655 3,498
----------------------------------------------------------------
Prudential Securities Secured
Financing, 6.074%, 1/15/08 2,984 2,797
----------------------------------------------------------------
Saxon Asset Securities Trust, 6.73%, 2/25/27 2,900 2,798
----------------------------------------------------------------
Total Non-U.S. Government
Mortgage-Backed Securities (Cost $15,240) 14,823
------------
MONEY MARKET FUNDS 17.6%
- -------------------------
Reserve Investment Fund, 6.48% # 50,568 50,568
----------------------------------------------------------------
Total Money Market Funds (Cost $50,568) 50,568
------------
TOTALINVESTMENTSIN SECURITIES
98.4% of Net Assets (Cost $288,568) $ 282,218
Other Assets Less Liabilities 4,453
------------
NET ASSETS $ 286,671
------------
NET ASSETS CONSIST OF:
---------------------
Accumulated net investment income - net of distributions $(1,492)
Accumulated net realized gain/loss - net of distributions (38,476)
Net unrealized gain (loss) (6,350)
Paid-in-capital applicable to 63,463,031 shares
of $0.01 par value capital stock outstanding; 1,000,000,000 shares authorized
332,989
------------
NET ASSETS $ 286,671
------------
NET ASSET VALUE PER SHARE $ 4.52
------------
** For interest only securities, par amount
represents notional principal on which the
<PAGE>
fund receives interest
# Seven-day yield
ARM Adjustable Rate Mortgage
GPM Graduated Payment Mortgage
MTN Medium Term Note
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 -- total of such securities at
period-end amounts to 5.5% of net assets.
The accompanying notes are an integral part of these financial statements.
==================================================================
T. Rowe Price Short-Term Bond Fund
----------------------------------------------------------------
STATEMENT OF OPERATIONS
----------------------
In thousands
Year
Ended
5/31/00
---------
INVESTMENT INCOME (LOSS)
Income
Interest $ 19,653
Securities lending 11
------------
Total Income 19,664
------------
Expenses
Investment management 1,276
Shareholder servicing 658
Custody and accounting 149
Prospectus and shareholder reports 69
Legal and audit 17
Registration 9
Directors 7
Miscellaneous 4
------------
Total expenses 2,189
Expenses paid indirectly (3)
------------
Net expenses 2,186
------------
Net investment income (loss) 17,478
------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on securities (4,753)
Change in net unrealized gain or loss on securities (2,829)
<PAGE>
------------
Net realized and unrealized gain (loss) (7,582)
------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 9,896
------------
The accompanying notes are an integral part of these financial statements.
==================================================================
T. Rowe Price Short-Term Bond Fund
----------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
---------------------------------
In thousands Year
Ended
5/31/00 5/31/99
---------- ---------
INCREASE (DECREASE) IN NET ASSETS
---------------------------------
Operations
Net investment income (loss) $ 17,478 $ 18,369
Net realized gain (loss) (4,753) 691
Change in net unrealized gain or loss (2,829) (4,962)
------------------------
Increase (decrease) in net assets
from operations 9,896 14,098
-----------------------
Distributions to shareholders
Net investment income (17,478) (18,343)
-----------------------
Capital share transactions *
Shares sold 115,130 158,317
Distributions reinvested 15,438 16,193
Shares redeemed (160,413) (178,122)
----------------------
Increase (decrease) in net assets from capital
share transactions (29,845) (3,612)
----------------------
NET ASSETS
----------
Increase (decrease) during period (37,427) (7,857)
Beginning of period 324,098 331,955
------------------------
END OF PERIOD $ 286,671 $ 324,098
------------------------
*Share information
Shares sold 25,226 33,727
Distributions reinvested 3,384 3,451
Shares redeemed (35,143) (37,964)
------------------------
Increase (decrease) in shares outstanding (6,533) (786)
<PAGE>
The accompanying notes are an integral part of these financial statements.
==================================================================
T. Rowe Price Short-Term Bond Fund
----------------------------------------------------------------
May 31, 2000
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Short-Term Bond Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company and commenced operations on March 2, 1984. The fund seeks a high level
of income consistent with minimal fluctuation in principal value and liquidity
by investing in a diversified portfolio of short- and intermediate-term
investment-grade corporate, government, and mortgage-backed securities.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
VALUATION Debt securities are generally traded in the over-the-counter
market. Investments in securities with original 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 original
maturities of 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.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
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.
PREMIUMS AND DISCOUNTS Premiums and discounts on debt securities, other than
mortgage-backed securities (MBS), are amortized for both financial reporting and
tax purposes. Premiums and discounts on all MBS are recognized upon disposition
or principal repayment as gain or loss for financial reporting
<PAGE>
purposes. For tax purposes, premiums and discounts on MBS acquired on or before
June 8, 1997, are recognized upon disposition or principal repayment as ordinary
income. For MBS acquired after June 8, 1997, premiums are recognized as gain or
loss; discounts are recognized as gain or loss, except to the extent of accrued
market discount.
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 the 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
and may differ from those determined in accordance with generally accepted
accounting principles. Expenses paid indirectly reflect credits earned on daily
uninvested cash balances at the custodian and are used to reduce the fund's
custody charges.
NOTE 2 - INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
SECURITIES LENDING The fund lends its securities to approved brokers to earn
additional income and receives cash and U.S. government securities as collateral
against the loans. Cash collateral received is invested in a money market pooled
account by the fund's lending agent. Collateral is maintained over the life of
the loan in an amount not less than 100% of the value of loaned securities.
Although risk is mitigated by the collateral, the fund could experience a delay
in recovering its securities and a possible loss of income or value if the
borrower fails to return them. At May 31, 2000, the value of loaned securities
was $1,297,000; aggregate collateral consisted of $1,357,000 in the securities
lending collateral pool.
OTHER Purchases and sales of portfolio securities, other than short-term and
U.S. government securities, aggregated $109,666,000 and $139,011,000,
respectively, for the year ended May 31, 2000. Purchases and sales of U.S.
government securities aggregated $20,023,000 and $45,482,000, respectively, for
the year ended May 31, 2000.
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. As of May 31, 2000, the
<PAGE>
fund has capital loss carryforwards for federal income tax purposes of
$35,370,000, of which $96,000 expires in 2001, $4,515,000 in 2002, and
$30,759,000 thereafter through 2008. The fund intends to retain gains realized
in future periods that may be offset by available capital loss carryforwards.
In order for the fund's capital accounts and distributions to shareholders to
reflect the tax character of certain transactions, the following
reclassifications were made during the year ended May 31, 2000. The results of
operations and net assets were not affected by the increases/(decreases) to
these accounts.
**********************************************************
Undistributed net investment income $(115,000)
Undistributed net realized gain 165,000
Paid-in-capital (50,000)
**********************************************************
At May 31, 2000, the cost of investments for federal income tax purposes was
substantially the same as for financial reporting and totaled $288,568,000. Net
unrealized loss aggregated $6,350,000 at period-end, of which $165,000 related
to appreciated investments and $6,515,000 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,
of which $102,000 was payable at May 31, 2000. The fee is computed daily and
paid monthly, and consists 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 0.295% for assets in excess of $120 billion. At
May 31, 2000, and for the year then ended, the effective annual group fee rate
was 0.32%. The fund pays a pro-rata share of the group fee based on the ratio of
its net assets to those of the group.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. is the fund's
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc. provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements
<PAGE>
totaling approximately $672,000 for the year ended May 31, 2000, of which
$75,000 was payable at period-end.
Additionally, the fund is one of several T. Rowe Price-sponsored mutual funds
(underlying funds) in which the T. Rowe Price Spectrum Funds (Spectrum) may
invest. Spectrum does not invest in the underlying funds for the purpose of
exercising management or control. Expenses associated with the operation of
Spectrum are borne by each underlying fund to the extent of estimated savings to
it and in proportion to the average daily value of its shares owned by Spectrum,
pursuant to special servicing agreements between and among Spectrum, the
underlying funds, T. Rowe Price, and, in the case of T. Rowe Price Spectrum
International, Rowe Price-Fleming International. Spectrum held none of the
outstanding shares of the fund at May 31, 2000. For the year then ended, the
fund was allocated $1,000 of spectrum expenses, all of which were payable at
period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the year ended May 31, 2000, totaled $2,721,000
and are reflected as interest income in the accompanying Statement of
Operations.
==================================================================
T. Rowe Price Short-Term Bond Fund
----------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS 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 financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price Short-Term Bond Fund, Inc. (the "Fund") at May 31, 2000, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (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 auditing
standards generally accepted in the
<PAGE>
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
audits, which included confirmation of securities at May 31, 2000 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
June 19, 2000
==================================================================
T. Rowe Price Shareholder Services
---------------------------------
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
-------------------------------------
BY PHONE 1-800-225-5132 Available Monday through Friday from 8 a.m. to 10 p.m.
ET and weekends from 8:30 a.m. to 5 p.m. ET.
IN PERSON Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
----------------
CHECKING Available on most fixed income funds ($500 minimum).
AUTOMATIC INVESTING From your bank account or paycheck.
AUTOMATIC WITHDRAWAL Scheduled, automatic redemptions.
DISTRIBUTION OPTIONS Reinvest all, some, or none of your distributions.
AUTOMATED 24-HOUR SERVICEs Including Tele*Access Mark and the T. Rowe Price Web
site on the Internet. Address: www.troweprice.com
BROKERAGE SERVICES*
- -------------------
INDIVIDUAL INVESTMENTS Stocks, bonds, options, precious metals, and other
securities at a savings over full-service commission rates. **
INVESTMENT INFORMATION
<PAGE>
COMBINED STATEMENT Overview of all your accounts with T. Rowe Price.
SHAREHOLDER REPORTS Fund managers' reviews of their strategies and results.
T. ROWE PRICE REPORT Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
INSIGHTS Educational reports on investment strategies and financial markets.
INVESTMENT GUIDES Asset Mix Worksheet, College Planning Kit, Diversifying
Overseas: A Guide to International Investing, Personal Strategy Planner,
Retirees Financial Guide, and Retirement Planning Kit.
* T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services,
Inc., Member NASD/SIPC.
** Based on a September 1999 survey for representative-assisted stock trades.
Services vary by firm, and commissions may vary depending on size of order.
==================================================================
FOR FUND AND ACCOUNT INFORMATION
OR TO CONDUCT TRANSACTIONS,
24 HOURS, 7 DAYS A WEEK
By touch-tone telephone
TELE*ACCESS 1-800-638-2587
By Account Access on the Internet
WWW.TROWEPRICE.COM/ACCESS
FOR ASSISTANCE
WITH YOUR EXISTING
FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132
TO OPEN A BROKERAGE ACCOUNT
OR OBTAIN INFORMATION, CALL:
1-800-638-5660
INTERNET ADDRESS:
www.troweprice.com
PLAN ACCOUNT LINES FOR RETIREMENT
PLAN PARTICIPANTS:
<PAGE>
The appropriate 800 number appears
on your retirement account statement.
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus appropriate
to the fund or funds covered in this
report.
WALK-IN INVESTOR CENTERS:
For directions, call 1-800-225-5132
or visit our Web site
BALTIMORE AREA
Downtown
101 East Lombard Street
Owings Mills
Three Financial Center
4515 Painters Mill Road
BOSTON AREA
386 Washington Street
Wellesley
COLORADO SPRINGS
4410 ArrowsWest Drive
LOS ANGELES AREA
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills
TAMPA
4200 West Cypress Street
10th Floor
Washington, D.C.
900 17th Street N.W.
Farragut Square
T. Rowe Price Investment Services, Inc., Distributor.
F55-050 5/31/00
<PAGE>
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Short-Term Bond Fund
Pro Forma Combined Portfolio of Investments
May 31, 2000
<TABLE>
<CAPTION>
Par/Shares (000's) Market Value (000's)
-----------------------------------------------------
Pro Forma Pro Forma
SLT STB Combined SLT STB Combined
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS AND
NOTES 38.8%
Banking and Finance
10.4%
ABN AMRO Bank
(Chicago), N.V., Gtd.
Sub. Notes,
7.25%, 5/31/05 340 340 $ 329 $ 329
AIG Sunamerica Global
Financing, Sr. Notes,
(144a)
7.40%, 5/5/03 450 3,000 3,450 446 2,971 3,417
Banco Generale, Sr.
Sub. Notes, (144a),
7.70%, 8/1/02 250 2,450 2,700 236 2,310 2,546
CIT Group, 5.50%,
2/15/04 450 3,000 3,450 412 2,745 3,157
Finova Capital, MTN,
5.98%, 2/27/01 65 65 62 62
First USA Bank,
7.00%, 8/20/01 65 65 64 64
General Electric
Capital, MTN, 7.50%,
5/15/05 240 3,000 3,250 250 2,998 3,248
HSBC Finance
Nederland, Sub. Gtd.
Notes, (144a), 7.40%,
4/15/03 160 160 158 158
Intermediate American
Development Bank,
6.375%, 10/22/07* 175 175 165 165
Kansallis-Osake-Pankki
(New York), Sub.
Notes, 10.00%, 5/1/02 325 325 337 337
Marsh and McLennan,
Sr. Notes, 6.625%,
6/15/04 450 3,250 3,700 427 3,081 3,508
MBNA, Sub. Notes,
7.25%, 9/15/02 165 2,650 2,815 161 2,591 2,752
Mercantile Safe
Deposit & Trust,
6.53%, 7/3/00 300 4,200 4,500 300 4,195 4,495
Merrill Lynch, 7.00%,
3/15/06 225 225 214 214
Morgan Guaranty
Trust, Sub. Notes,
7.375%, 2/1/02 115 4,000 4,115 114 3,972 4,086
Potomac Capital
Investment, MTN,
(144a), 7.55%,
11/19/01 225 225 223 223
Provident Bank, Sub.
Notes, 7.125%,
3/15/03 225 1,500 1,725 216 1,436 1,652
Salomon Smith Barney
Holdings, 7.30%,
5/15/02 300 3,250 3,550 297 3,215 3,512
Union Planters, Sub.
Notes, 6.25%, 11/1/03 160 160 150 150
Consumer Products and
Services 5.9%
Beckman Instruments,
Sr. Notes, 7.10%, 315 2,800 3,115 300 2,664 2,964
3/4/03
-----
Coca-Cola Femsa, 180 180 175 175
8.95%, 11/1/06
-----
Federated Department
Stores, Sr. Notes, 250 1,500 1,750 250 1,503 1,753
8.125%, 10/15/02
-----
Grand Metropolitan
Investment, Zero 675 3,000 3,675 515 2,289 2,804
Coupon, 1/6/04
-----
Johnson & Johnson, 380 380 358 358
6.625%, 9/1/09*
-----
Nabisco, 6.125%, 260 260 236 236
2/1/33
-----
Pepsico, MTN, 5.75%, 250 3,000 3,250 240 2,875 3,115
1/2/03
-----
Sony, 6.125%, 3/4/03 375 4,025 4,400 363 3,894 4,257
-----
Viacom, 6.75%, 190 190 185 185
1/15/03
-----
Wal-Mart Stores, Sr. 3,000 3,000 2,960 2,960
Notes, 6.15%, 8/10/01
-----
Wal-Mart Stores, 425 425 411 411
6.55%, 8/10/04
-----
Watson
Pharmaceuticals, 240 240 211 211
7.125%, 5/15/08*
-----
-----
Energy 1.2%
-----
PDV America, Sr. 205 1,400 1,605 190 1,298 1,488
Notes, 7.875%, 8/1/03
-----
YPF Sociedad Anonima, 190 2,400 2,590 181 2,285 2,466
7.25%, 3/15/03
-----
-----
Industrials 6.7%
-----
Caterpillar Financial
Services, 6.875%, 250 3,250 3,500 241 3,131 3,372
8/1/04
-----
Daimler Chrysler, 250 3,000 3,250 248 2,977 3,225
7.125%, 3/1/02
-----
Eaton Offshore, Gtd. 330 330 334 334
Notes, 9.00%, 2/15/01
-----
Ford Motor Credit, 225 1,500 1,725 221 1,473 1,694
7.50%, 3/15/05
-----
Lockheed, 6.75%, 205 1,500 1,705 197 1,440 1,637
3/15/03
-----
McDonnell Douglas
Finance, Sr. Notes, 2,000 2,000 1,950 1,950
6.39%, 1/15/02
-----
Parker Hannifin, MTN, 250 250 235 235
5.65%, 9/15/03
-----
Toyota Motor Credit, 250 3,000 3,250 237 2,840 3,077
5.625%, 11/13/03
-----
United Technologies, 250 3,000 3,250 241 2,888 3,129
6.625%, 11/15/04
-----
Waste Management, 310 2,350 2,660 291 2,207 2,498
6.625%, 7/15/02
-----
-----
Media and
Communications
3.7%
-----
360 Communications,
Sr. Notes, 7.125%, 250 3,000 3,250 246 2,955 3,201
3/1/03
-----
Comcast Cable
Communications, 360 360 314 314
6.20%, 11/15/08*
-----
Sprint Capital, 340 2,800 3,140 317 2,613 2,930
5.70%, 11/15/03
-----
U.S. West Capital
Funding, 6.875%, 250 3,000 3,250 247 2,969 3,216
8/15/01
-----
Vodafone Airtouch,
(144a), 7.625%, 390 2,250 2,640 385 2,224 2,609
2/15/05
-----
12,270
-----
-----
Transportation
2.8%
-----
Amerco, Sr. Notes, 250 3,000 3,250 236 2,837 3,073
8.80%, 2/4/05
-----
Delta Air Lines, ETC, 59 59 59 59
9.60%, 5/26 - 6/1/00
-----
ERAC USA Finance,
(144a), 6.375%, 175 2,000 2,175 165 1,881 2,046
5/15/03
-----
Gatx Capital, 6.875%, 225 1,500 1,725 210 1,398 1,608
11/1/04
-----
Norfolk Southern, 250 2,000 2,250 246 1,964 2,210
6.95%, 5/1/02
-----
Norfolk Southern, 125 125 124 124
7.875%, 2/15/04
-----
Northwest Airlines, 190 190 172 172
8.375%, 3/15/04*
-----
9,292
-----
-----
Utilities 8.1%
-----
CE Electric UK
Funding, Sr. Notes,
(144a), 6.853%, 270 2,100 2,370 259 2,018 2,277
12/30/04
-----
Cleveland Electric, 190 190 190 190
7.19%, 7/1/00*
-----
Entergy Mississippi, 345 345 309 309
6.45%, 4/1/08*
-----
National Rural
Utilities, 5.00%, 450 4,000 4,450 424 3,771 4,195
10/1/02
-----
Niagara Mohawk Power,
Sr. Disc. Notes, 253 3,024 3,277 248 2,957 3,205
7.375%, 7/1/03
-----
Pacific Gas &
Electric, 1st Mtg. 215 4,500 4,715 217 4,534 4,751
Bonds, 8.75%, 1/1/01
-----
Potomac Capital
Investment, MTN,
(144a), 7.55%, 1,500 1,500 1,485 1,485
11/19/01
-----
Public Service
Electric & Gas, Mtg. 240 4,350 4,590 238 4,308 4,546
Bonds, 8.875%, 6/1/03
-----
Utilicorp United, Sr. 250 3,000 3,250 235 2,833 3,068
Notes, 7.00%, 7/15/04
-----
Williams, 6.125%, 240 2,500 2,740 232 2,418 2,650
2/15/12
-----
26,676
-----
Total Corporate Bonds 126,847
and Notes
-----
-----
ASSET-BACKED
SECURITIES 16.1%
-----
Advanta Equipment
Receivables, 7.56%, 327 1,867 2,194 325 1,858 2,183
2/15/07
-----
Banc One Auto Grantor
Trust, 6.27%, 39 760 799 39 757 796
11/20/03
-----
BMW Vehicle Owner 250 3,000 3,250 245 2,943 3,188
Trust, 6.54%, 4/25/04
-----
California
Infrastructure
-----
6.28%, 9/25/05 500 1,900 2,400 475 1,843 2,318
-----
6.42%, 9/25/08 400 1,850 2,250 382 1,766 2,148
-----
Circuit City Credit
Card Master Trust, 3,000 3,000 3,000 3,000
6.7525%, 6/15/00
-----
Comed Transitional
Funding Trust, 5.44%, 530 4,000 4,530 486 3,670 4,156
3/25/07
-----
Dayton Hudson Credit
Card Master Trust, 200 3,000 3,200 193 2,897 3,090
5.90%, 5/25/06
-----
Delta Air Lines, 1,260 1,260 1,260 1,260
9.60%, 6/1/00
-----
Fingerhut Master 320 3,300 3,620 318 3,280 3,598
Trust, 6.07%, 2/15/05
-----
First USA Secured
Notes Trust, 6.50%, 450 450 432 432
1/18/06
-----
Harley Davidson
Eaglemark
-----
5.94%, 2/15/04 111 739 850 111 739 850
-----
6.35%, 10/15/02 26 459 485 26 457 483
-----
Heller Equipment
Asset Trust, 6.65%, 450 3,000 3,450 445 2,969 3,414
3/14/04
-----
MBNA Asset Backed
Note Trust, 7.90%, 250 250 243 243
7/16/07
-----
MBNA Master Credit
Card Trust
-----
7.45%, 6/16/07 225 1,500 1,725 222 1,481 1,703
-----
7.503%, 6/15/00 3,000 3,000 3,013 3,013
-----
MMCA Automobile 450 3,250 3,700 448 3,237 3,685
Trust, 6.80%, 8/15/03
-----
Neiman Marcus Credit
Master Trust, 7.60%, 75 667 742 75 667 742
6/15/03
-----
New Holland Equipment
Receivables, 6.80%, 450 3,000 3,450 438 2,922 3,360
12/15/07
-----
Onyx Acceptance Auto 450 2,000 2,450 438 1,970 2,408
Trust, 6.76%, 5/15/04
-----
Peco Energy Transport 270 2,650 2,920 261 2,557 2,818
Trust, 5.63%, 3/1/05
-----
Residential Accredit
Loans, 7.25%, 435 435 408 408
11/25/27*
-----
WFS Financial Owner 450 3,000 3,450 446 2,971 3,417
Trust, 7.41%, 9/20/07
-----
Total Asset-Backed 52,713
Securities
-----
-----
U.S. GOVERNMENT
MORTGAGE-BACKED
SECURITIES 17.0%
-----
U.S. Government
Agency Obligations
14.2%
-----
Federal Home Loan
Mortgage
-----
5.75%, 6/15/10 5,631 5,631 5,519 5,519
-----
6.00%, 8/15/06 - 1,659 24,999 26,658 1,640 24,294 25,934
5/15/16
-----
6.40%, 1/15/08 4,000 4,000 3,921 3,921
-----
6.50%, 5/1/05 124 124 120 120
-----
9.00%, 2/1 - 255 255 256 256
7/1/02
-----
9.50%, 8/1/01 - 158 158 159 159
9/1/02
-----
10.00%, 1/1/01 - 144 144 145 145
10/1/05
-----
10.75%, 12/1/09 76 76 80 80
-----
11.00%, 8/1 - 11 11 11 11
12/1/00
-----
5.75%, 6/15/10 845 845 828 828
-----
6.00%, 8/15/06 - 845 845 814 814
1/15/08
-----
6.50%, 4/15/21 450 450 438 438
-----
-----
Federal National
Mortgage Assn.
-----
5.50%, 11/1/05 24 24 24 24
-----
6.00%, 7/1/13 - 345 345 323 323
11/18/17
-----
9.00%, 5/1/05 - 115 6,997 7,112 112 7,119 7,231
1/25/08
-----
11.00%, 10/1 - 6 6 6 6
12/1/00
-----
REMIC
-----
9.00%, 1/25/08 614 614 626 626
-----
-----
U.S. Government
Guaranteed
Obligations 2.8%
-----
Government National
Mortgage Assn.
-----
I
-----
7.00%, 864 5,757 6,621 852 5,613 6,465
9/15/12
-----
8.00%, 570 570 570 570
5/15/07
-----
8.50%, 214 214 216 216
2/15/05 - 3/15/06
-----
10.00%, 263 263 279 279
11/15/09 - 10/15/21
-----
10.50%, 109 109 118 118
11/15/15
-----
II, 10.00%, 58 58 61 61
10/20/20
-----
GPM, I
-----
8.50%, 36 36 36 36
1/15/06
-----
9.50%, 8/15 - 5 5 5 5
10/15/09
-----
11.00%, 52 52 57 57
8/15/10
-----
11.25%, 194 194 213 213
6/15/13 - 1/15/16
-----
11.75%, 589 589 653 653
8/15/13 - 10/15/15
-----
13.00%, 7 7 7 7
9/15/11
-----
GPM, II, 11.00%, 5 5 5 5
9/20/13 - 4/20/14
-----
Midget, I
-----
9.00%, 14 205 219 14 208 222
4/15/01 - 2/15/06
-----
9.50%, 60 60 61 61
5/15/01 - 4/15/05
-----
10.00%, 30 206 236 30 209 239
8/15/00 - 10/15/04
-----
10.50%, 14 14 14 14
8/15/00 - 2/15/01
-----
9,221
-----
Total U.S. Government
Mortgage-Backed 55,656
Securities
-----
-----
NON-GOVERNMENT
ASSET-BACKED
SECURITIES 5.0%
-----
Advanta Mortgage Loan
Trust, Interest Only, 18,000 18,000 547 547
5.00%, 12/25/00 **
-----
EQCC Home Equity Loan
Trust, 6.159%, 325 2,000 2,325 309 1,905 2,214
4/15/08
-----
GMAC Commercial
Mortgage Securities, 406 2,706 3,112 386 2,570 2,956
6.15%, 5/15/35
-----
Great Western Bank, 753 753 708 708
ARM, 5.951%, 4/25/00
-----
LB Commercial Conduit
Mortgage Trust, 520 3,655 4,175 498 3,498 3,996
6.41%, 8/15/07
-----
Prudential
Securities, 6.074%, 2,984 2,984 2,797 2,797
1/15/08
-----
Saxon Asset
Securities Trust, 500 2,900 3,400 482 2,798 3,280
6.73%, 2/25/27
-----
Total Non-Government
Asset-Backed 16,498
Securities
-----
-----
U.S. GOVERNMENT
OBLIGATIONS/AGENCIES
5.5%
-----
U.S. Government
Agency Obligations
1.2%
-----
Chilbar Shipping, 755 755 753 753
6.98%, 7/15/01
-----
Federal Home Loan
Banks, 5.125%, 2,000 2,000 1,867 1,867
9/15/03
-----
Federal National
Mortgage Assn.
-----
4.625%, 10/15/01 475 475 460 460
-----
6.375%, 6/15/09* 292 292 270 270
-----
7.65%, 10/6/06 280 280 276 276
-----
U.S. Department
Housing & Urban
Development, 6.49%, 200 200 194 194
8/1/07*
-----
3,820
-----
U.S. Treasury
Obligations 4.3%
-----
U.S Treasury
Inflation-Indexed
Notes, 3.625%, 1,415 9,693 11,108 1,403 9,609 11,012
7/15/02
-----
U.S. Treasury Notes
-----
4.25%, 11/15/03 2,345 2,345 2,175 2,175
-----
7.25%, 5/15/04 1,400 1,400 1,020 1,020
-----
14,207
-----
Total U.S. Government 18,027
Obligations/Agencies
-----
-----
MUNICIPAL BONDS
0.0%
-----
Taxable Municipal
0.0%
-----
University of Miami,
6.90%, 4/1/04 (MBIA 50 50 49 49
Insured)
-----
Total Municipal Bonds 49
-----
-----
MONEY MARKET FUNDS
15.9%
-----
Reserve Investment 1,542 50,568 52,110 1,542 50,568 52,110
Fund, 6.48% #
-----
Total Money Market 52,110
Funds
-----
-----
Total Investments in $321,880
Securities
-----
-----
Other Assets Less 5,216
Liabilities
----------------
-----
NET ASSETS $327,096
----------------
</TABLE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
* Security does not conform to the investment program of Short-Term Bond
Fund Fund and will be eliminated prior to the merger; total of such
securities represent 0.8% of the pro forma combined net assets.
** For Interest Only securities, par amount represents notional principal,
on which the fund receives interest
# Seven-day yield
ARM Adjustable Rate Mortgage
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
GO General Obligation
GPM Graduated Payment Mortgage
MBIA Municipal Bond Investors Assurance Corp
MTN Medium Term Note
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 -- total of such securities at period-end amounts
to 4.5% of net assets.
REMIC Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND
T. ROWE PRICE SHORT-TERM BOND FUND
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
YEAR ENDED MAY 31, 2000
___________________________________________________________________________
Unaudited
Summit
Limited-Term Short-Term Pro Forma Pro Forma
Bond Fund Bond FundAdjustments Combined
Dollar amounts in thousands
Assets
Investments in securities, at cost$40,948$288,568 $329,516
Unrealized gain (loss) on securities(1,286)(6,350) (7,636)
Investments in securities, at value39,662282,218 321,880
Other assets 894 6,656 7,550
Total assets 40,556288,874 329,430
Liabilities
Other liabilities 131 2,203 2,334
Total liabilities 131 2,203 2,334
NET ASSETS $40,425$286,671 $327,096
--------------- --------
Net Assets Consist of:
Accumulated net investment income -
net of distributions$(193) $(1,492) $(1,685)
Accumulated net realized gain/loss -
net of distributions(2,641) (38,476) (41,117)
Net unrealized gain (loss) (1,286)(6,350) (7,636)
Paid-in-capital applicable to $0.01 par
value per share capital stock outstanding;
4,000,000,000 and 1,000,000,000
shares authorized, respectively44,545332,989 377,534
NET ASSETS $40,425$286,671 $327,096
--------------- --------
FUND SHARES OUTSTANDING 9,208,23263,463,031(264,648) 72,406,615
NET ASSET VALUE PER SHARE $4.39 $4.52 $4.52
----- ----- -----
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND
T. ROWE PRICE SHORT-TERM BOND FUND
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 2000
___________________________________________________________________________
Unaudited
Summit
Limited-Term Short-Term Pro Forma Pro Forma
Bond Fund Bond FundAdjustments Combined
In thousands
Investment Income
Income
Interest income $3,268 $19,653 $22,921
Security lending 11 11
Total income 3,268 19,664 22,932
Expenses
Investment management 276 1,276 $(558) Note 2C994
Shareholder servicing 658 28 Note 2B686
Custody and accounting 149 22 Note 2A, 2B 171
Prospectus and shareholder reports 69 4Note 2A, 2B 73
Legal and audit 17 17
Registration 9 8 Note 2B17
Directors 7 7
Miscellaneous 4 4
Total expenses 276 2,189 (496) 1,969
Expenses paid indirectly (3) (3)
Net expenses 276 2,186 (496) 1,966
Net investment income 2,992 17,478 496 20,966
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities(1,313) (4,753)(6,066)
Change in net unrealized gain or loss
on securities (460)(2,829) (3,289)
Net realized and unrealized gain (loss) (1,773) (7,582) (9,355)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS$1,219 $9,896 $496 $11,611
------ ------ ---- -------
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. Rowe Price Short-Term U.S. Government Fund
T. Rowe Price Short-Term Bond Fund
Pro Forma Combined Portfolio of Investments
May 31, 2000
<TABLE>
<CAPTION>
Par/Shares (000's) Market Value (000's)
------------------------------------------------------
Pro Forma Pro Forma
USG STB Combined USG STB Combined
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS AND
NOTES 28.8%
Banking and Finance
7.9%
AIG Sunamerica Global
Financing, Sr. Notes,
(144a)
7.40%, 5/5/03 3,000 3,000 $ 2,971 $ 2,971
Associates Corp.
N.A., MTN, 6.90%,
7/29/02 1,600 1,600 $1,578 1,578
Banco Generale, Sr.
Sub. Notes, (144a),
7.70%, 8/1/02 2,450 2,450 2,310 2,310
CIT Group, 5.50%,
2/15/04 3,000 3,000 2,745 2,745
General Electric
Capital, MTN, 7.50%,
5/15/05 3,000 3,000 2,998 2,998
Marsh and McLennan,
Sr. Notes, 6.625%,
6/15/04 3,250 3,250 3,081 3,081
MBNA, Sub. Notes,
7.25%, 9/15/02 2,650 2,650 2,591 2,591
Mercantile Safe
Deposit & Trust,
6.53%, 7/3/00 4,200 4,200 4,195 4,195
Merrill Lynch, 8.00%,
2/1/02 1,220 1,220 1,225 1,225
Morgan Guaranty
Trust, Sub. Notes,
7.375%, 2/1/02 4,000 4,000 3,972 3,972
Provident Bank, Sub.
Notes, 7.125%,
3/15/03 1,500 1,500 1,436 1,436
Salomon Smith Barney
Holdings, 7.30%,
5/15/02 3,250 3,250 3,215 3,215
Consumer Products and
Services 4.4%
Beckman Instruments,
Sr. Notes, 7.10%, 2,800 2,800 2,664 2,664
3/4/03
-----
Federated Department
Stores, Sr. Notes, 1,500 1,500 1,503 1,503
8.125%, 10/15/02
-----
Grand Metropolitan
Investment, Zero 3,000 3,000 2,289 2,289
Coupon, 1/6/04
-----
Pepsico, MTN, 5.75%, 3,000 3,000 2,875 2,875
1/2/03
-----
Sony, 6.125%, 3/4/03 4,025 4,025 3,894 3,894
-----
Wal-Mart Stores, Sr. 2,000 3,000 5,000 1,974 2,960 4,934
Notes, 6.15%, 8/10/01
-----
-----
Energy 0.9%
-----
PDV America, Sr. 1,400 1,400 1,298 1,298
Notes, 7.875%, 8/1/03
-----
YPF Sociedad Anonima, 2,400 2,400 2,285 2,285
7.25%, 3/15/03
-----
-----
Industrials 4.6%
-----
Caterpillar Financial
Services, 6.875%, 3,250 3,250 3,131 3,131
8/1/04
-----
Daimler Chrysler, 3,000 3,000 2,977 2,977
7.125%, 3/1/02
-----
Ford Motor Credit, 1,500 1,500 1,473 1,473
7.50%, 3/15/05
-----
Lockheed, 6.75%, 1,500 1,500 1,440 1,440
3/15/03
-----
McDonnell Douglas
Finance, Sr. Notes, 2,000 2,000 1,950 1,950
6.39%, 1/15/02
-----
Toyota Motor Credit, 3,000 3,000 2,840 2,840
5.625%, 11/13/03
-----
United Technologies, 3,000 3,000 2,888 2,888
6.625%, 11/15/04
-----
Waste Management, 2,350 2,350 2,207 2,207
6.625%, 7/15/02
-----
-----
Media and
Communications
3.1%
-----
360 Communications,
Sr. Notes, 7.125%, 3,000 3,000 2,955 2,955
3/1/03
-----
Southwestern Bell
Telephone, 6.375%, 2,000 2,000 1,982 1,982
4/1/01
-----
Sprint Capital, 2,800 2,800 2,613 2,613
5.70%, 11/15/03
-----
U.S. West Capital
Funding, 6.875%, 3,000 3,000 2,969 2,969
8/15/01
-----
Vodafone Airtouch,
(144a), 7.625%, 2,250 2,250 2,224 2,224
2/15/05
-----
-----
Transportation
2.0%
-----
Amerco, Sr. Notes, 3,000 3,000 2,837 2,837
8.80%, 2/4/05
-----
ERAC USA Finance,
(144a), 6.375%, 2,000 2,000 1,881 1,881
5/15/03
-----
Gatx Capital, 6.875%, 1,500 1,500 1,398 1,398
11/1/04
-----
Norfolk Southern, 2,000 2,000 1,964 1,964
6.95%, 5/1/02
-----
-----
Utilities 5.9%
-----
CE Electric UK
Funding, Sr. Notes,
(144a), 6.853%, 2,100 2,100 2,018 2,018
12/30/04
-----
National Rural
Utilities, 5.00%, 4,000 4,000 3,771 3,771
10/1/02
-----
Niagara Mohawk Power,
Sr. Disc. Notes, 3,024 3,024 2,957 2,957
7.375%, 7/1/03
-----
Pacific Gas &
Electric, 1st Mtg. 4,500 4,500 4,534 4,534
Bonds, 8.75%, 1/1/01
-----
Potomac Capital
Investment, MTN,
(144a), 7.55%, 1,500 1,500 1,485 1,485
11/19/01
-----
Public Service
Electric & Gas, Mtg. 4,350 4,350 4,308 4,308
Bonds, 8.875%, 6/1/03
-----
Utilicorp United, Sr. 3,000 3,000 2,833 2,833
Notes, 7.00%, 7/15/04
-----
Williams, 6.125%, 2,500 2,500 2,418 2,418
2/15/12
-----
24,324
-----
Total Corporate Bonds 118,112
and Notes
-----
-----
ASSET-BACKED
SECURITIES 16.6%
-----
Advanta Equipment
Receivables, 7.56%, 840 1,867 2,707 836 1,858 2,694
2/15/07
-----
Banc One Auto Grantor
Trust, 6.27%, 760 760 757 757
11/20/03
-----
BMW Vehicle Owner 1,250 3,000 4,250 1,226 2,943 4,169
Trust, 6.54%, 4/25/04
-----
California
Infrastructure
-----
6.28%, 9/25/05 1,900 1,900 1,843 1,843
-----
6.42%, 9/25/08 1,850 1,850 1,766 1,766
-----
Case Equipment Loan 1,500 1,500 1,441 1,441
Trust, 5.77%, 8/15/05
-----
Circuit City Credit
Card Master Trust, 1,500 3,000 4,500 1,500 3,000 4,500
6.7525%, 6/15/00
-----
CIT RV Trust, 6.35%, 1,500 1,500 1,487 1,487
4/15/11
-----
Comed Transitional
Funding Trust, 5.44%, 4,000 4,000 3,670 3,670
3/25/07
-----
Dayton Hudson Credit
Card Master Trust, 3,000 3,000 2,897 2,897
5.90%, 5/25/06
-----
Delta Air Lines, 1,260 1,260 1,260 1,260
9.60%, 6/1/00
-----
Fingerhut Master 3,300 3,300 3,280 3,280
Trust, 6.07%, 2/15/05
-----
Ford Credit Auto
Owner Trust, 6.40%, 1,300 1,300 1,287 1,287
10/15/02
-----
Harley Davidson
Eaglemark
-----
5.94%, 2/15/04 739 739 739 739
-----
6.35%, 10/15/02 459 459 457 457
-----
Heller Equipment
Asset Trust, 6.65%, 1,500 3,000 4,500 1,485 2,969 4,454
3/14/04
-----
MBNA Master Credit
Card Trust
-----
7.45%, 6/16/07 1,500 1,500 1,481 1,481
-----
7.503%, 6/15/00 3,000 3,000 3,013 3,013
-----
MMCA Automobile 1,500 3,250 4,750 1,494 3,237 4,731
Trust, 6.80%, 8/15/03
-----
Neiman Marcus Credit
Master Trust, 7.60%, 667 667 667 667
6/15/03
-----
New Holland Equipment
Receivables, 6.80%, 3,000 3,000 2,922 2,922
12/15/07
-----
Nissan Auto
Receivables, 7.17%, 1,000 1,000 994 994
8/15/04
-----
Onyx Acceptance Auto 2,000 2,000 4,000 1,970 1,970 3,940
Trust, 6.76%, 5/15/04
-----
Peco Energy
Transition Trust, 1,000 1,000 998 998
6.4475%, 9/1/00
-----
Peco Energy Transport 2,650 2,650 2,557 2,557
Trust, 5.63%, 3/1/05
-----
Prime Credit Card
Master Trust, 6.75%, 2,000 2,000 1,977 1,977
11/15/05
-----
Puget Sound Energy
Conservation, 6.23%, 1,410 1,410 1,386 1,386
7/11/02
-----
Wachovia Credit Card
Master Trust, 1,300 1,300 1,298 1,298
6.6725%, 6/15/00
-----
WFS Financial Owner 1,000 3,000 4,000 990 2,971 3,961
Trust, 7.41%, 9/20/07
-----
World Financial
Network Credit Master
Trust, 6.8525%, 1,500 1,500 1,499 1,499
6/15/00
-----
Total Asset-Backed 68,125
Securities
-----
-----
U.S. GOVERNMENT
MORTGAGE-BACKED
SECURITIES 25.5%
-----
U.S. Government
Agency ARM 0.5%
-----
Federal National
Mortgage Assn.
-----
5.875%, 8/1/17 42 42 41 41
-----
6.125%, 11/1/17 55 55 54 54
-----
6.149%, 3/1/19 7 7 7 7
-----
6.151%, 5/1/17 - 854 854 830 830
5/1/31
-----
6.21%, 3/1/18 22 22 21 21
-----
6.217%, 12/1/16 - 479 479 464 464
7/1/27
-----
6.227%, 5/1/24 86 86 83 83
-----
6.244%, 3/1/20 63 63 62 62
-----
6.25%, 6/1 - 118 118 115 115
7/1/18
-----
6.252%, 12/1/17 - 280 280 272 272
11/1/20
-----
6.817%, 10/1/14 9 9 9 9
-----
7.93%, 11/1/21 121 121 121 121
-----
-----
U.S. Government
Agency Obligations
20.6%
-----
Federal Home Loan
Mortgage
-----
5.75%, 6/15/10 5,631 5,631 5,519 5,519
-----
6.00%, 8/15/06 - 24,999 24,999 24,294 24,294
5/15/16
-----
6.40%, 1/15/08 4,000 4,000 3,921 3,921
-----
7.75%, 8/15/21 1,847 1,847 1,837 1,837
-----
9.00%, 2/1 - 255 255 256 256
7/1/02
-----
9.50%, 8/1/01 - 158 158 159 159
9/1/02
-----
10.00%, 1/1/01 - 144 144 145 145
10/1/05
-----
11.00%, 8/1 - 11 11 11 11
12/1/00
-----
5 year balloon
-----
6.50%, 9/1/02 2,302 2,302 2,262 2,262
-----
7.00%, 9/1/01 1,230 1,230 1,221 1,221
-----
7 year balloon
-----
6.50%, 8/1 - 1,483 1,483 1,435 1,435
12/1/03
-----
7.00%, 8/1/01 600 600 596 596
-----
REMIC
-----
5.60%, 1/15/08 2,000 2,000 1,960 1,960
-----
5.75%, 6/15/10 1,877 1,877 1,840 1,840
-----
5.85%, 11/15/17 48 48 48 48
-----
-----
Federal National
Mortgage Assn.
-----
5.50%, 11/1/05 24 24 24 24
-----
6.00%, 7/1/13 - 7,193 7,193 6,896 6,896
11/18/17
-----
9.00%, 5/1/05 - 6,997 6,997 7,119 7,119
1/25/08
-----
11.00%, 10/1 - 6 6 6 6
12/1/00
-----
7 year balloon
-----
7.00%, 6/1 - 3,080 3,080 3,007 3,007
9/1/03
-----
7.50%, 8/1/01 88 88 88 88
-----
REMIC
-----
5.75%, 6/25/06 212 212 211 211
-----
6.00%, 10/18/14 - 6,000 6,000 5,843 5,843
5/18/17
-----
6.10%, 8/25/21 1,205 1,205 1,180 1,180
-----
6.50%, 6/18/11 5,000 5,000 4,814 4,814
-----
7.00%, 4/18/22 4,000 4,000 3,961 3,961
-----
Principal Only, 5,193 5,193 4,503 4,503
9/25/00 - 10/25/03
-----
Inverse Floater, 1,359 1,359 1,264 1,264
VR, 6.243%, 10/25/21
-----
-----
U.S. Government
Guaranteed
Obligations 4.4%
-----
Government National
Mortgage Assn.
-----
I
-----
7.00%, 1,919 5,757 7,676 1,871 5,613 7,484
9/15/12
-----
8.50%, 214 214 216 216
2/15/05 - 3/15/06
-----
10.50%, 109 109 118 118
11/15/15
-----
11.50%, 1,321 1,321 1,450 1,450
3/15/10 - 12/15/15
-----
GPM, I
-----
8.50%, 36 36 36 36
1/15/06
-----
9.50%, 8/15 - 5 5 5 5
10/15/09
-----
11.00%, 52 52 57 57
8/15/10
-----
11.25%, 194 194 213 213
6/15/13 - 1/15/16
-----
11.75%, 589 589 653 653
8/15/13 - 10/15/15
-----
13.00%, 7 7 7 7
9/15/11
-----
GPM, II, 11.00%, 5 5 5 5
9/20/13 - 4/20/14
-----
Midget, I
-----
9.00%, 205 205 208 208
4/15/01 - 2/15/06
-----
9.50%, 60 60 61 61
5/15/01 - 4/15/05
-----
10.00%, 206 206 209 209
8/15/00 - 10/15/04
-----
REMIC
-----
6.00%, 5,000 5,000 4,733 4,733
10/16/25
-----
9.00%, 2,585 2,585 2,592 2,592
7/20/23
-----
18,047
-----
Total U.S. Government
Mortgage-Backed 104,546
Securities
-----
-----
NON-GOVERNMENT
ASSET-BACKED
SECURITIES 5.1%
-----
Advanta Mortgage Loan
Trust, Interest Only, 18,000 18,000 547 547
5.00%, 12/25/00 **
-----
EQCC Home Equity Loan
Trust, 6.159%, 2,020 2,000 4,020 1,924 1,905 3,829
4/15/08
-----
GMAC Commercial
Mortgage Securities, 1,804 2,706 4,510 1,714 2,570 4,284
6.15%, 5/15/35
-----
Great Western Bank, 753 753 708 708
ARM, 5.951%, 4/25/00
-----
LB Commercial Conduit
Mortgage Trust, 3,655 3,655 3,498 3,498
6.41%, 8/15/07
-----
Prudential
Securities, 6.074%, 1,108 2,984 4,092 1,039 2,797 3,836
1/15/08
-----
Ryland Mercury
Savings Trust, 181 181 180 180
6.11378%, 6/1/00
-----
Saxon Asset
Securities Trust, 1,207 2,900 4,107 1,164 2,798 3,962
6.73%, 2/25/27
-----
Total Non-Government
Asset-Backed 20,844
Securities
-----
-----
U.S. GOVERNMENT
OBLIGATIONS/AGENCIES
7.4%
-----
U.S. Government
Agency Obligations
0.2%
-----
Chilbar Shipping, 755 755 753 753
6.98%, 7/15/01
-----
753
-----
U.S. Government
Guaranteed
Obligations 0.7%
-----
Federal Home Loan
Mortgage, Deb., 3,000 3,000 2,902 2,902
5.50%, 5/15/02
-----
2,902
-----
U.S. Treasury
Obligations 6.5%
-----
U.S. Treasury
Inflation-Indexed
Notes, 3.625%, 8,010 9,693 17,703 7,941 9,609 17,550
7/15/02
-----
U.S. Treasury Notes
-----
5.75%, 11/30/02 1,350 1,350 1,320 1,320
-----
6.625%, 4/30/02 7,750 7,750 7,729 7,729
-----
26,599
-----
Total U.S. Government 30,254
Obligations/Agencies
-----
-----
SHORT-TERM
INVESTMENTS 0.9%
-----
Certificates of
Deposit 0.7%
-----
Bank of Montreal, 1,000 1,000 1,000 1,000
6.38%, 6/8/00
-----
National Westminster 1,000 1,000 999 999
Bank, 7.26%, 5/9/01
-----
Norddeutsche
Landesbank, 7.30%, 1,000 1,000 999 999
5/11/01
-----
2,998
-----
Commercial Paper
0.2%
-----
Santander Finance, 1,000 1,000 999 999
6.34%, 6/5/00
-----
999
-----
Total Short-Term 3,997
Investments
-----
-----
MONEY MARKET FUNDS
14.5%
-----
Reserve Investment 50,568 50,568 50,568 50,568
Fund, 6.48% #
-----
Government Reserve
Investment Fund, 8,770 8,770 8,770 8,770
6.08% #
-----
Total Money Market 59,338
Funds
-----
-----
Total Investments in $405,216
Securities
-----
-----
Other Assets Less 5,717
Liabilities
----------------
-----
NET ASSETS $410,170
----------------
</TABLE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
** For Interest Only securities, par amount represents notional principal,
on which the fund receives interest
# Seven-day yield
ARM Adjustable Rate Mortgage
GPM Graduated Payment Mortgage
MTN Medium Term Note
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 -- total of such securities at period-end amounts
to 3.1% of net assets.
Inverse Floater
Inverse floating rate note; interest rate is inversely tied to a
published index -
Rate shown reflects current rate as of 5/31/00.
REMIC Real Estate Mortgage Investment Conduit
VR Variable Rate
<PAGE>
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
T. ROWE PRICE SHORT-TERM BOND FUND
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
YEAR ENDED MAY 31, 2000
___________________________________________________________________________
Unaudited
Short-Term
U.S Government Short-Term Pro Forma Pro Forma
Fund Bond FundAdjustments Combined
Dollar amounts in thousands
Assets
Investments in securities, at cost$125,678$288,568 $414,246
Unrealized gain (loss) on securities(2,680)(6,350) (9,030)
Investments in securities, at value122,998282,218 405,216
Other assets 905 6,656 7,561
Total assets 123,903288,874 412,777
Liabilities
Other liabilities 404 2,203 2,607
Total liabilities 404 2,203 2,607
NET ASSETS $123,499$286,671 $410,170
---------------- --------
Net Assets Consist of:
Accumulated net investment income -
net of distributions$(562) $(1,492) $(2,054)
Accumulated net realized gain/loss -
net of distributions(13,038)(38,476) (51,514)
Net unrealized gain (loss) (2,680)(6,350) (9,030)
Paid-in-capital applicable to $0.01 par
value per share capital stock outstanding;
1,000,000,000 shares authorized139,779332,989 472,768
NET ASSETS $123,499$286,671 $410,170
---------------- --------
FUND SHARES OUTSTANDING 27,491,52763,463,031(168,740) 90,785,818
NET ASSET VALUE PER SHARE $4.49 $4.52 $4.52
----- ----- -----
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
T. ROWE PRICE SHORT-TERM BOND FUND
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 2000
___________________________________________________________________________
Unaudited
Short-Term
U.S Government Short-Term Pro Forma Pro Forma
Fund Bond FundAdjustments Combined
In thousands
Investment Income
Income
Interest income $8,175 $19,653 $27,828
Security lending 11 11
Total income 8,175 19,664 27,839
Expenses
Investment management 474 1,276 $(541) Note 2D1,209
Shareholder servicing 216 658 874
Custody and accounting133 149 (113) Note 2A169
Prospectus and shareholder reports41 69 (2)Note 2A 108
Registration 18 9 27
Legal and audit 17 17 (17) Note 2A17
Directors 6 7 (6) Note 2A 7
Miscellaneous 4 4 (4) Note 2A 4
Total expenses 909 2,189 (683) 2,415
Expenses paid indirectly(3) (3) (6)
Net expenses 906 2,186 (683) 2,409
Net investment income 7,26917,478 683 25,430
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities(1,922)(4,753) (6,675)
Change in net unrealized gain or loss
on securities (1,273) (2,829) (4,102)
Net realized and unrealized gain (loss)(3,195) (7,582)(10,777)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS$4,074 $9,896 $683 $14,653
------ ------ ---- -------
The accompanying notes are an integral part of these pro forma financial
statements.
T. Rowe Price Short-Term U.S. Government Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Short-Term Bond Fund
Pro Forma Combined Portfolio of Investments
May 31, 2000
<TABLE>
<CAPTION>
Par/Shares (000's) Market Value (000's)
---------------------------------------------------------------------
Pro Forma Pro Forma
USG SLT STB Combined USG SLT STB Combined
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <S>
CORPORATE BONDS AND
NOTES 29.7%
Banking and Finance
8.2%
ABN AMRO Bank
(Chicago), N.V., Gtd.
Sub. Notes,
7.25%, 5/31/05 340 340 $ 329 $ 329
AIG Sunamerica Global
Financing, Sr. Notes,
(144a)
7.40%, 5/5/03 450 3,000 3,450 446 $ 2,971 3,417
Associates Corp.
N.A., MTN, 6.90%,
7/29/02 1,600 1,600 $1,578 1,578
Banco Generale, Sr.
Sub. Notes, (144a),
7.70%, 8/1/02 250 2,450 2,700 236 2,310 2,546
CIT Group, 5.50%,
2/15/04 450 3,000 3,450 412 2,745 3,157
Finova Capital, MTN,
5.98%, 2/27/01 65 65 62 62
First USA Bank,
7.00%, 8/20/01 65 65 64 64
General Electric
Capital, MTN, 7.50%,
5/15/05 250 3,000 3,250 250 2,998 3,248
HSBC Finance
Nederland, Sub. Gtd.
Notes, (144a), 7.40%,
4/15/ 03 160 160 158 158
Intermediate American
Development Bank,
6.375%, 10/22/07* 175 175 165 165
Kansallis-Osake-Pankki
(New York), Sub.
Notes, 10.00%, 5/1/02 325 325 337 337
Marsh and McLennan,
Sr. Notes, 6.625%,
6/15/04 450 3,250 3,700 427 3,081 3,508
MBNA, Sub. Notes,
7.25%, 9/15/02 165 2,650 2,815 161 2,591 2,752
Mercantile Safe
Deposit & Trust,
6.53%, 7/3/00 300 4,200 4,500 300 4,195 4,495
Merrill Lynch, 7.00%,
3/15/06 225 225 214 214
Merrill Lynch, 8.00%,
2/1/02 1,220 1,220 1,225 1,225
Morgan Guaranty
Trust, Sub. Notes,
7.375%, 2/1/02 115 4,000 4,115 114 3,972 4,086
Potomac Capital
Investment, MTN,
(144a), 7.55%,
11/19/01 225 225 223 223
Provident Bank, Sub.
Notes, 7.125%,
3/15/03 225 1,500 1,725 216 1,436 1,652
Salomon Smith Barney
Holdings, 7.30%,
5/15/02 300 3,250 3,550 297 3,215 3,512
Union Planters, Sub.
Notes, 6.25%, 11/1/03 160 160 150 150
Consumer Products and
Services 4.7%
Beckman Instruments,
Sr. Notes, 7.10%, 315 2,800 3,115 300 2,664 2,964
3/4/03
-----
Coca-Cola Femsa, 180 180 175 175
8.95%, 11/1/06
-----
Federated Department
Stores, Sr. Notes, 250 1,500 1,750 250 1,503 1,753
8.125%, 10/15/02
-----
Grand Metropolitan
Investment, Zero 675 3,000 3,675 515 2,289 2,804
Coupon, 1/6/04
-----
Johnson & Johnson, 380 380 358 358
6.625%, 9/1/09*
-----
Nabisco, 6.125%, 260 260 236 236
2/1/33
-----
Pepsico, MTN, 5.75%, 250 3,000 3,250 240 2,875 3,115
1/2/03
-----
Sony, 6.125%, 3/4/03 375 4,025 4,400 363 3,894 4,257
-----
Viacom, 6.75%, 190 190 185 185
1/15/03
-----
Wal-Mart Stores, Sr. 2,000 3,000 5,000 1,974 2,960 4,934
Notes, 6.15%, 8/10/01
-----
Wal-Mart Stores, 425 425 411 411
6.55%, 8/10/04
-----
Watson
Pharmaceuticals, 240 240 211 211
7.125%, 5/15/08*
-----
-----
Energy 0.9%
-----
PDV America, Sr. 205 1,400 1,605 190 1,298 1,488
Notes, 7.875%, 8/1/03
-----
YPF Sociedad Anonima, 190 2,400 2,590 181 2,285 2,466
7.25%, 3/15/03
-----
-----
Industrials 4.7%
-----
Caterpillar Financial
Services, 6.875%, 250 3,250 3,500 241 3,131 3,372
8/1/04
-----
Daimler Chrysler, 250 3,000 3,250 248 2,977 3,225
7.125%, 3/1/02
-----
Eaton Offshore, Gtd. 330 330 334 334
Notes, 9.00%, 2/15/01
-----
Ford Motor Credit, 225 1,500 1,725 221 1,473 1,694
7.50%, 3/15/05
-----
Lockheed, 6.75%, 205 1,500 1,705 197 1,440 1,637
3/15/03
-----
McDonnell Douglas
Finance, Sr. Notes, 2,000 2,000 1,950 1,950
6.39%, 1/15/02
-----
Parker Hannifin, MTN, 250 250 235 235
5.65%, 9/15/03
-----
Toyota Motor Credit, 250 3,000 3,250 237 2,840 3,077
5.625%, 11/13/03
-----
United Technologies, 250 3,000 3,250 241 2,888 3,129
6.625%, 11/15/04
-----
Waste Management, 310 2,350 2,660 291 2,207 2,498
6.625%, 7/15/02
-----
-----
Media and
Communications
3.2%
-----
360 Communications,
Sr. Notes, 7.125%, 250 3,000 3,250 246 2,955 3,201
3/1/03
-----
Comcast Cable
Communications, 360 360 314 314
6.20%, 11/15/08*
-----
Southwestern Bell
Telephone, 6.375%, 2,000 2,000 1,982 1,982
4/1/01
-----
Sprint Capital, 340 2,800 3,140 317 2,613 2,930
5.70%, 11/15/03
-----
U.S. West Capital
Funding, 6.875%, 250 3,000 3,250 247 2,969 3,216
8/15/01
-----
Vodafone Airtouch,
(144a), 7.625%, 390 2,250 2,640 385 2,224 2,609
2/15/05
-----
-----
Transportation
2.1%
-----
Amerco, Sr. Notes, 250 3,000 3,250 236 2,837 3,073
8.80%, 2/4/05
-----
Delta Air Lines, ETC, 59 59 59 59
9.60%, 5/26 - 6/1/00
-----
ERAC USA Finance,
(144a), 6.375%, 175 2,000 2,175 165 1,881 2,046
5/15/03
-----
Gatx Capital, 6.875%, 225 1,500 1,725 210 1,398 1,608
11/1/04
-----
Norfolk Southern, 250 2,000 2,250 246 1,964 2,210
6.95%, 5/1/02
-----
Norfolk Southern, 125 125 124 124
7.875%, 2/15/04
-----
Northwest Airlines, 190 190 172 172
8.375%, 3/15/04*
-----
9,292
-----
Utilities 5.9%
-----
CE Electric UK
Funding, Sr. Notes,
(144a), 6.853%, 270 2,100 2,370 259 2,018 2,277
12/30/04
-----
Cleveland Electric, 190 190 190 190
7.19%, 7/1/00*
-----
Entergy Mississippi, 345 345 309 309
6.45%, 4/1/08*
-----
National Rural
Utilities, 5.00%, 450 4,000 4,450 424 3,771 4,195
10/1/02
-----
Niagara Mohawk Power,
Sr. Disc. Notes, 253 3,024 3,277 248 2,957 3,205
7.375%, 7/1/03
-----
Pacific Gas &
Electric, 1st Mtg. 215 4,500 4,715 217 4,534 4,751
Bonds, 8.75%, 1/1/01
-----
Potomac Capital
Investment, MTN,
(144a), 7.55%, 1,500 1,500 1,485 1,485
11/19/01
-----
Public Service
Electric & Gas, Mtg. 240 4,350 4,590 238 4,308 4,546
Bonds, 8.875%, 6/1/03
-----
Utilicorp United, Sr. 250 3,000 3,250 235 2,833 3,068
Notes, 7.00%, 7/15/04
-----
Williams, 6.125%, 240 2,500 2,740 232 2,418 2,650
2/15/12
-----
26,676
-----
Total Corporate Bonds 133,606
and Notes
-----
-----
ASSET-BACKED
SECURITIES 16.6%
-----
Advanta Equipment
Receivables, 7.56%, 840 327 1,867 3,034 836 325 1,858 3,019
2/15/07
-----
Banc One Auto Grantor
Trust, 6.27%, 39 760 799 39 757 796
11/20/03
-----
BMW Vehicle Owner 1,250 250 3,000 4,500 1,226 245 2,943 4,414
Trust, 6.54%, 4/25/04
-----
California
Infrastructure
-----
6.28%, 9/25/05 500 1,900 2,400 475 1,843 2,318
-----
6.42%, 9/25/08 400 1,850 2,250 382 1,766 2,148
-----
Case Equipment Loan 1,500 1,500 1,441 1,441
Trust, 5.77%, 8/15/05
-----
Circuit City Credit
Card Master Trust, 1,500 3,000 4,500 1,500 3,000 4,500
6.7525%, 6/15/00
-----
CIT RV Trust, 6.35%, 1,500 1,500 1,487 1,487
4/15/11
-----
Comed Transitional
Funding Trust, 5.44%, 530 4,000 4,530 486 3,670 4,156
3/25/07
-----
Dayton Hudson Credit
Card Master Trust, 200 3,000 3,200 193 2,897 3,090
5.90%, 5/25/06
-----
Delta Air Lines, 1,260 1,260 1,260 1,260
9.60%, 6/1/00
-----
Fingerhut Master 320 3,300 3,620 318 3,280 3,598
Trust, 6.07%, 2/15/05
-----
First USA Secured
Notes Trust, 6.50%, 450 450 432 432
1/18/06
-----
Ford Credit Auto
Owner Trust, 6.40%, 1,300 1,300 1,287 1,287
10/15/02
-----
Harley Davidson
Eaglemark
-----
5.94%, 2/15/04 111 739 850 111 739 850
-----
6.35%, 10/15/02 26 459 485 26 457 483
-----
Heller Equipment
Asset Trust, 6.65%, 1,500 450 3,000 4,950 1,485 445 2,969 4,899
3/14/04
-----
MBNA Asset Backed
Note Trust, 7.90%, 250 250 243 243
7/16/07
-----
MBNA Master Credit
Card Trust
-----
7.45%, 6/16/07 225 1,500 1,725 222 1,481 1,703
-----
7.503%, 6/15/00 3,000 3,000 3,013 3,013
-----
MMCA Automobile 1,500 450 3,250 5,200 1,494 448 3,237 5,179
Trust, 6.80%, 8/15/03
-----
Neiman Marcus Credit
Master Trust, 7.60%, 75 667 742 75 667 742
6/15/03
-----
New Holland Equipment
Receivables, 6.80%, 450 3,000 3,450 438 2,922 3,360
12/15/07
-----
Nissan Auto
Receivables, 7.17%, 1,000 1,000 994 994
8/15/04
-----
Onyx Acceptance Auto 2,000 450 2,000 4,450 1,970 438 1,970 4,378
Trust, 6.76%, 5/15/04
-----
Peco Energy
Transition Trust, 1,000 1,000 998 998
6.4475%, 9/1/00
-----
Peco Energy Transport 270 2,650 2,920 261 2,557 2,818
Trust, 5.63%, 3/1/05
-----
Prime Credit Card
Master Trust, 6.75%, 2,000 2,000 1,977 1,977
11/15/05
-----
Puget Sound Energy
Conservation, 6.23%, 1,410 1,410 1,386 1,386
7/11/02
-----
Residential Accredit
Loans, 7.25%, 435 435 408 408
11/25/27*
-----
Wachovia Credit Card
Master Trust, 1,300 1,300 1,298 1,298
6.6725%, 6/15/00
-----
WFS Financial Owner 1,000 450 3,000 4,450 990 446 2,971 4,407
Trust, 7.41%, 9/20/07
-----
World Financial
Network Credit Master
Trust, 6.8525%, 1,500 1,500 1,499 1,499
6/15/00
-----
Total Asset-Backed 74,581
Securities
-----
-----
U.S. GOVERNMENT
MORTGAGE-BACKED
SECURITIES 24.7%
-----
U.S. Government
Agency ARM 0.5%
-----
Federal National
Mortgage Assn.
-----
5.875%, 8/1/17 42 42 41 41
-----
6.125%, 11/1/17 55 55 54 54
-----
6.149%, 3/1/19 7 7 7 7
-----
6.151%, 5/1/17 - 854 854 830 830
5/1/31
-----
6.21%, 3/1/18 22 22 21 21
-----
6.217%, 12/1/16 - 479 479 464 464
7/1/27
-----
6.227%, 5/1/24 86 86 83 83
-----
6.244%, 3/1/20 63 63 62 62
-----
6.25%, 6/1 - 118 118 115 115
7/1/18
-----
6.252%, 12/1/17 - 280 280 272 272
11/1/20
-----
6.817%, 10/1/14 9 9 9 9
-----
7.93%, 11/1/21 121 121 121 121
-----
-----
U.S. Government
Agency Obligations
19.8%
-----
Federal Home Loan
Mortgage
-----
5.75%, 6/15/10 5,631 5,631 5,519 5,519
-----
6.00%, 8/15/06 - 1,659 24,999 26,658 1,640 24,294 25,934
5/15/16
-----
6.40%, 1/15/08 4,000 4,000 3,921 3,921
-----
6.50%, 5/1/05 124 124 120 120
-----
7.75%, 8/15/21 1,847 1,847 1,837 1,837
-----
9.00%, 2/1 - 255 255 256 256
7/1/02
-----
9.50%, 8/1/01 - 158 158 159 159
9/1/02
-----
10.00%, 1/1/01 - 144 144 145 145
10/1/05
-----
10.75%, 12/1/09 76 76 80 80
-----
11.00%, 8/1 - 11 11 11 11
12/1/00
-----
5 year balloon
-----
6.50%, 9/1/02 2,302 2,302 2,262 2,262
-----
7.00%, 9/1/01 1,230 1,230 1,221 1,221
-----
7 year balloon
-----
6.50%, 8/1 - 1,483 1,483 1,435 1,435
12/1/03
-----
7.00%, 8/1/01 600 600 596 596
-----
REMIC
-----
5.60%, 1/15/08 2,000 2,000 1,960 1,960
-----
5.75%, 6/15/10 1,877 845 2,722 1,840 828 2,668
-----
5.85%, 11/15/17 48 48 48 48
-----
6.00%, 8/15/06 - 845 845 814 814
1/15/08
-----
6.50%, 4/15/21 450 450 438 438
-----
-----
Federal National
Mortgage Assn.
-----
5.50%, 11/1/05 24 24 24 24
-----
6.00%, 7/1/13 - 7,193 345 7,538 6,896 323 7,219
11/18/17
-----
9.00%, 5/1/05 - 115 6,997 7,112 112 7,119 7,231
1/25/08
-----
11.00%, 10/1 - 6 6 6 6
12/1/00
-----
7 year balloon
-----
7.00%, 6/1 - 3,080 3,080 3,007 3,007
9/1/03
-----
7.50%, 8/1/01 88 88 88 88
-----
REMIC
-----
5.75%, 6/25/06 212 212 211 211
-----
6.00%, 10/18/14 - 6,000 6,000 5,843 5,843
5/18/17
-----
6.10%, 8/25/21 1,205 1,205 1,180 1,180
-----
6.50%, 6/18/11 5,000 5,000 4,814 4,814
-----
7.00%, 4/18/22 4,000 4,000 3,961 3,961
-----
9.00%, 1/25/08 614 614 626 626
-----
Principal Only, 5,193 5,193 4,503 4,503
9/25/00 - 10/25/03
-----
Inverse Floater, 1,359 1,359 1,264 1,264
VR, 6.243%, 10/25/21
-----
89,401
-----
U.S. Government
Guaranteed
Obligations 4.4%
-----
Government National
Mortgage Assn.
-----
I
-----
7.00%, 1,919 864 5,757 8,540 1,871 842 5,613 8,326
9/15/12
-----
8.00%, 570 570 570 570
5/15/07
-----
8.50%, 214 214 216 216
2/15/05 - 3/15/06
-----
10.00%, 263 263 279 279
11/15/09 - 10/15/21
-----
10.50%, 109 109 118 118
11/15/15
-----
11.50%, 1,321 1,321 1,450 1,450
3/15/10 - 12/15/15
-----
II, 10.00%, 58 58 61 61
10/20/20
-----
GPM, I
-----
8.50%, 36 36 36 36
1/15/06
-----
9.50%, 8/15 - 5 5 5 5
10/15/09
-----
11.00%, 52 52 57 57
8/15/10
-----
11.25%, 194 194 213 213
6/15/13 - 1/15/16
-----
11.75%, 589 589 653 653
8/15/13 - 10/15/15
-----
13.00%, 7 7 7 7
9/15/11
-----
GPM, II, 11.00%, 5 5 5 5
9/20/13 - 4/20/14
-----
Midget, I
-----
9.00%, 14 205 219 14 208 222
4/15/01 - 2/15/06
-----
9.50%, 60 60 61 61
5/15/01 - 4/15/05
-----
10.00%, 30 206 236 30 209 239
8/15/00 - 10/15/04
-----
10.50%, 14 14 14 14
8/15/00 - 2/15/01
-----
REMIC
-----
6.00%, 5,000 5,000 4,733 4,733
10/16/25
-----
9.00%, 2,585 2,585 2,592 2,592
7/20/23
-----
19,857
-----
Total U.S. Government
Mortgage-Backed 111,337
Securities
-----
-----
NON-GOVERNMENT
ASSET-BACKED
SECURITIES 5.0%
-----
Advanta Mortgage Loan
Trust, Interest Only, 18,000 18,000 547 547
5.00%, 12/25/00 **
-----
EQCC Home Equity Loan
Trust, 6.159%, 2,020 325 2,000 4,345 1,924 309 1,905 4,138
4/15/08
-----
GMAC Commercial
Mortgage Securities, 1,804 406 2,706 4,916 1,714 386 2,570 4,670
6.15%, 5/15/35
-----
Great Western Bank, 753 753 708 708
ARM, 5.951%, 4/25/00
-----
LB Commercial Conduit
Mortgage Trust, 520 3,655 4,175 498 3,498 3,996
6.41%, 8/15/07
-----
Prudential
Securities, 6.074%, 1,108 2,984 4,092 1,039 2,797 3,836
1/15/08
-----
Ryland Mercury
Savings Trust, 181 181 180 180
6.11378%, 6/1/00
-----
Saxon Asset
Securities Trust, 1,207 500 2,900 4,607 1,164 482 2,798 4,444
6.73%, 2/25/27
-----
Total Non-Government
Asset-Backed 22,519
Securities
-----
-----
U.S. GOVERNMENT
OBLIGATIONS/AGENCIES
8.4%
-----
U.S. Government
Agency Obligations
0.9%
-----
Chilbar Shipping, 755 755 753 753
6.98%, 7/15/01
-----
Federal Home Loan
Banks, 5.125%, 2,000 2,000 1,867 1,867
9/15/03
-----
Federal National
Mortgage Assn.
-----
4.625%, 10/15/01 475 475 460 460
-----
6.375%, 6/15/09* 292 292 270 270
-----
7.65%, 10/6/06 280 280 276 276
-----
U.S. Department
Housing & Urban
Development, 6.49%, 200 200 194 194
8/1/07*
-----
3,820
-----
U.S. Government
Guaranteed
Obligations 0.6%
-----
Federal Home Loan
Mortgage, Deb., 3,000 3,000 2,902 2,902
5.50%, 5/15/02
-----
2,902
-----
U.S. Treasury
Obligations 6.9%
-----
U.S. Treasury
Inflation-Indexed
Notes, 3.625%, 8,010 1,415 9,693 19,118 7,941 1,403 9,609 18,953
7/15/02
-----
U.S. Treasury Notes
-----
4.25%, 11/15/03 2,345 2,345 2,175 2,175
-----
5.75%, 11/30/02 1,350 1,350 1,320 1,320
-----
6.625%, 4/30/02 7,750 7,750 7,729 7,729
-----
7.25%, 5/15/04 1,400 1,400 1,020 1,020
-----
31,197
-----
Total U.S. Government 37,919
Obligations/Agencies
-----
-----
MUNICIPAL BONDS
0.0%
-----
Taxable Municipal
0.0%
-----
University of Miami,
6.90%, 4/1/04 (MBIA 50 50 49 49
Insured)
-----
Total Municipal Bonds 49
-----
-----
SHORT-TERM
INVESTMENTS 0.8%
-----
Certificates of
Deposit 0.6%
-----
Bank of Montreal, 1,000 1,000 1,000 1,000
6.38%, 6/8/00
-----
National Westminster 1,000 1,000 999 999
Bank, 7.26%, 5/9/01
-----
Norddeutsche
Landesbank, 7.30%, 1,000 1,000 999 999
5/11/01
-----
2,998
-----
Commercial Paper
0.2%
-----
Santander Finance, 1,000 1,000 999 999
6.34%, 6/5/00
-----
999
-----
Total Short-Term 3,997
Investments
-----
-----
MONEY MARKET FUNDS
13.5%
-----
Reserve Investment 1,542 50,568 52,110 1,542 50,568 52,110
Fund, 6.48% #
-----
Government Reserve
Investment Fund, 8,770 8,770 8,770 8,770
6.08% #
-----
Total Money Market 60,880
Funds
-----
-----
Total Investments in $444,878
Securities
-----
-----
Other Assets Less 5,717
Liabilities
----------------
-----
NET ASSETS $450,595
----------------
</TABLE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
<PAGE>
* Security does not conform to the investment program of Short-Term Bond
Fund Fund and will be eliminated prior to the merger; total of such
securities represent 0.6% of the pro forma combined net assets.
** For Interest Only securities, par amount represents notional principal,
on which the fund receives interest
# Seven-day yield
ARM Adjustable Rate Mortgage
CMO Collateralized Mortgage Obligation
ETC Equipment Trust Certificate
GO General Obligation
GPM Graduated Payment Mortgage
MBIA Municipal Bond Investors Assurance Corp.
MTN Medium Term Note
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 -- total of such securities at period-end amounts
to 3.3% of net assets.
Inverse Floater
Inverse floating rate note; interest rate is inversely tied to a
published index -
Rate shown reflects current rate as of 5/31/00.
REMIC Real Estate Mortgage Investment Conduit
VR Variable Rate
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND
T. ROWE PRICE SHORT-TERM BOND FUND
PRO FORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
YEAR ENDED MAY 31, 2000
___________________________________________________________________________
Unaudited
Short-Term Summit
U.S. Government Limited-Term Short-Term Pro Forma Pro
Forma
Fund Bond Fund Bond Fund Adjustments Combined
Dollar amounts in thousands
Assets
Investments in securities,
at cost $125,678 $40,948 $288,568 $455,194
Unrealized gain (loss)
on securities(2,680) (1,286) (6,350) (10,316)
Investments in
securities, at value 122,998 39,662 282,218 444,878
Other assets 905 894 6,656 8,455
Total assets 123,903 40,556 288,874 453,333
Liabilities
Other liabilities404 131 2,203 2,738
Total liabilities 404 131 2,203 2,738
NET ASSETS $123,499 $40,425$286,671 $450,595
-------- --------------- --------
Net Assets Consist of:
Accumulated net investment income -
net of distributions $(562) $(193)$(1,492) $(2,247)
Accumulated net realized gain/loss -
net of distributions (13,038) (2,641)(38,476) (54,155)
Net unrealized gain (loss) (2,680) (1,286) (6,350)(10,316)
Paid-in-capital applicable to $0.01
par value per share capital stock
outstanding; 1,000,000,000,
4,000,000,000 and
1,000,000,000 shares
authorized, respectively139,779 44,545 332,989 517,313
NET ASSETS $123,499 $40,425$286,671 $450,595
-------- --------------- --------
FUND SHARES
OUTSTANDING27,491,5279,208,23263,463,031(433,363)99,729,427
NET ASSET VALUE
PER SHARE $4.49 $4.39 $4.52 $4.52
----- ----- ----- -----
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND
T. ROWE PRICE SHORT-TERM BOND FUND
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 2000
___________________________________________________________________________
Unaudited
Short-Term Summit
U.S. Government Limited-Term Short-Term Pro Forma Pro
Forma
Fund Bond Fund Bond Fund Adjustments Combined
In thousands
Investment Income
Income
Interest income$8,175 $3,268 $19,653 $31,096
Security lending 11 11
Total income 8,175 3,268 19,664 31,107
Expenses
Investment management 474 276 1,276 $(626)Note 2C, 2D 1,400
Shareholder servicing 216 658 28 Note 2B 902
Custody and accounting 133 149 (91)Note 2A, 2B 191
Prospectus and shareholder reports 41 69 2 Note 2A, 2B 112
Registration 18 9 8 Note 2B 35
Legal and audit 17 17 (17) Note 2A 17
Directors 6 7 (6) Note 2A 7
Miscellaneous 4 4 (4) Note 2A 4
Total expenses 909 276 2,189 (706) 2,668
Expenses paid indirectly (3) (3) (6)
Net expenses 906 276 2,186 (706) 2,662
Net investment income 7,269 2,992 17,478 706 28,445
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
on securities(1,922) (1,313) (4,753) (7,988)
Change in net unrealized gain or loss
on securities(1,273) (460) (2,829) (4,562)
Net realized and unrealized
gain (loss)(3,195) (1,773) (7,582) (12,550)
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $4,074 $1,219 $9,896 $706 $15,895
------ ------ ------ ------------
The accompanying notes are an integral part of these pro forma financial
statements.
<PAGE>
T. ROWE PRICE SHORT-TERM BOND FUND
T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND
T. ROWE PRICE SUMMIT LIMITED-TERM BOND FUND
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
May 31, 2000
___________________________________________________________________________
Unaudited
Note 1 - Basis of Presentation
------------------------------
Subject to approval of the Agreement and Plan of Reorganization ("Agreement")
by the shareholders of T. Rowe Price Short-Term U.S. Government Fund, Inc.
(USG), and T. Rowe Price Summit Limited-Term Bond Fund (SLT), a series of T.
Rowe Price Summit Funds, Inc., T. Rowe Price Short-Term Bond Fund, Inc. (STB)
would acquire substantially all of the assets of USG and SLT in exchange for
shares of STB at the net asset value as of the Valuation Date as defined in
the Agreement. Shares of STB would then be distributed such that shareholders
of USG and SLT will receive STB shares having an aggregate net asset value
equal to the aggregate net asset value of their respective USG and SLT
shares, resulting in complete liquidation of both USG and SLT. The proposed
mergers are intended to qualify as a tax-free reorganization for federal
income tax purposes, with no gain or loss recognized by the funds or their
shareholders. The USG and SLT proposed mergers with STB are not contingent
upon approval by the other fund.
The pro forma information is intended to provide the shareholders of USG,
SLT, and STB with information about the impact of the proposed merger by
showing how it might have affected historical financial statements if the
transactions had been consummated at an earlier date. The pro forma combined
Portfolios of Investments and Statements of Assets and Liabilities as of May
31, 2000 have been presented as if the proposed mergers had taken place on
May 31, 2000, and the pro forma combined Statements of Operations for the
year ended May 31, 2000 have been presented as if the proposed merger had
taken place on June 1, 1999. This information is based upon historical
financial statement data giving effect to the pro forma adjustments described
below. The accounting and valuation policies of USG, SLT, and STB are
identical. The pro forma financial statements should be read in conjunction
with the separate financial statements of USG, SLT, and STB, which are
incorporated by reference into this Statement of Additional Information.
Note 2 - Pro Forma Adjustments
------------------------------
The pro forma combined Statements of Operations reflect the following
adjustments.
A)
A decrease in expenses resulting from the elimination of duplicate fees.
B)An increase in expense reflecting the re-characterization of SLT
expense, historically an all-inclusive management and administrative
fee.
C)A decrease in investment management expense reflecting: (i) the
difference between the STB effective fee rate of 0.42% and the SLT
all-inclusive fee rate of 0.55%, and (ii) the impact of the expense
limitation of 0.55% and the pro forma combined STB expenses.
D)A decrease in investment management expense reflecting: (i) the
difference between the pro forma combined expense limitation of 0.55%
and the USG expense limitation of 0.70%, and (ii) the impact of the
expense limitation of 0.55% on the pro forma combined STB expenses.
<PAGE>
PART C
OTHER INFORMATION
15. INDEMNIFICATION
Article X, Section 10.01 of the Registrant's By-Laws provides as
follows:
SECTION 10.01. INDEMNIFICATION AND PAYMENT OF EXPENSES IN ADVANCE. The
Corporation shall indemnify any individual ("Indemnitee") who is a present or
former director, officer, employee, or agent of the Corporation, or who is or
has been serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, who, by reason of his position was, is, or is threatened to be
made, a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any judgments,
penalties, fines, settlements, and reasonable expenses (including attorneys'
fees) incurred by such Indemnitee in connection with any Proceeding, to the
fullest extent that such indemnification may be lawful under applicable Maryland
law, as from time to time amended. The Corporation shall pay any reasonable
expenses so incurred by such Indemnitee in defending a Proceeding in advance of
the final disposition thereof to the fullest extent that such advance payment
may be lawful under applicable Maryland Law, as from time to time amended.
Subject to any applicable limitations and requirements set forth in the
Corporation's Articles of Incorporation and in these By-Laws, any payment of
indemnification or advance of expenses shall be made in accordance with the
procedures set forth in applicable Maryland law, as from time to time amended.
Notwithstanding the foregoing, nothing herein shall protect or purport
to protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office
("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other body before
whom the Proceeding was brought that the Indemnitee was not liable by
reason of Disabling Conduct; or
<PAGE>
(b) in the absence of such a decision, there is a reasonable determination,
based upon a review of the facts, that the Indemnitee was not liable by
reason of Disabling Conduct, which determination shall be made by:
(i) the vote of a majority of a quorum of directors who are neither
"interested persons" of the Corporation, as defined in Section 2(a)(19)
of the Investment Company Act of 1940, nor parties to the Proceeding;
or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides a security for his undertaking; or
(b) the Corporation shall be insured against losses arising by reason of
any lawful advances; or
(c) there is a determination, based on a review of readily available facts,
that there is reason to believe that the Indemnitee will ultimately be
found entitled to indemnification, which determination shall be made
by:
(i) a majority of a quorum of directors who are neither "interested
persons" of the Corporation as defined in Section 2(a)(19) of the
Investment Company Act of 1940, nor parties to the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02 of the Registrant's By-Laws provides as follows:
SECTION 10.02. INSURANCE OF OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS.
To the fullest extent permitted by applicable Maryland law and by Section 17(h)
of the Investment Company Act of 1940, as from time to time amended, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or who is or
was serving at the request of the Corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise, against any liability asserted against him and incurred by him in or
<PAGE>
arising out of his position, whether or not the Corporation would have the power
to indemnify him against such liability.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
EXHIBITS
(1) Articles of Incorporation of Registrant, dated October 31, 1983
(electronically filed with Amendment No. 15 dated April 25, 1994)
(2) By-Laws of Registrant (electronically filed with Amendment No. 21 dated
September 29, 1999)
(3) Article SEVENTH, Section I--Issue of the Corporation's Shares and
Section II--Redemption and Repurchase of the Corporation's Shares, in
their entirety, from the Registrant's Articles of Incorporation, is
hereby incorporated by reference from Amendment No. 15 electronically
filed and dated April 25, 1994 and Article II, Shareholders, in its
entirety, and Article VIII, Capital Stock, in its entirety, from the
Registrant's By-Laws, are also hereby incorporated by reference from
Amendment No. 15 electronically filed and dated April 25, 1994.
(4) Agreement and Plan of Reorganization dated September 1, 2000 (See
Exhibit A of the Proxy)
(5) Incorporated by reference to Exhibits 1 and 2 above.
(6) Investment Management Agreement between Registrant and T. Rowe Price
Associates, Inc., dated July 1, 1991
<PAGE>
(electronically filed with Amendment No. 15 dated April 25, 1994)
(7) Underwriting Agreement between Registrant and T. Rowe Price Investment
Services, Inc., dated December 15, 1983 (electronically filed with
Amendment No. 15 dated April 25, 1994)
(8) Inapplicable
(9) Custody Agreements
(9)(a) Custodian Agreement between T. Rowe Price Funds and State Street Bank
and Trust Company, dated January 28, 1998, as amended November 4, 1998,
April 21, 1999, February 9, 2000, and April 19, 2000
(9)(b) Global Custody Agreement between The Chase Manhattan Bank, N.A., and T.
Rowe Price Funds, dated January 3, 1994, as amended April 18, 1994,
August 15, 1994, November 28, 1994, May 31, 1995, November 1, 1995,
July 31, 1996, July 23, 1997, September 3, 1997, October 29, 1997,
December 15, 1998, October 6, 1999, and February 9, 2000
(10) Inapplicable
(11) Opinion of Counsel as to the legality of securities (electronically
filed with Initial Registration Statement on Form N-14 dated July 25,
2000)
(12)(a) Opinion and Consent of Swidler Berlin Shereff Friedman, LLP for
Registrant and T. Rowe Price Limited-Term Bond Fund on certain tax
matters (to be filed by Amendment)
(12)(b) Opinion and Consent of Swidler Berlin Shereff Friedman, LLP for
Registrant and T. Rowe Price Short-Term U.S. Government Fund on certain
tax matters (to be filed by Amendment)
(13) Inapplicable
(14)(a) Inapplicable
(14)(b) Inapplicable
(15) Inapplicable
(16) Power of Attorney
<PAGE>
(17) Declaration pursuant to Rule 24f-2 under the 1940 Act is hereby
incorporated by reference from Registrant's Form 24f-2 dated May 31,
1999 (electronically filed July 30, 1999) (electronically filed with
Initial Registration Statement on Form N-14 dated July 25, 2000)
UNDERTAKINGS
(a) Electronically filed August 21, 2000
<PAGE>
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the registrant, in the City of Baltimore, and State
of Maryland, on this 23rd day of August, 2000.
T. Rowe Price Short-Term Bond Fund, Inc.
/s/William T. Reynolds
By: William T. Reynolds
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/William T. Reynolds Chairman of the Board August 23, 2000
William T. Reynolds (Chief Executive Officer)
/s/Joseph A. Carrier Treasurer (Chief August 23, 2000
Joseph A. Carrier Financial Officer)
* Director August 23, 2000
Calvin W. Burnett
* Director August 23, 2000
Anthony W. Deering
* Director August 23, 2000
F. Pierce Linaweaver
/s/James S. Riepe Director and August 23, 2000
James S. Riepe Vice President
* Director August 23, 2000
John G. Schreiber
/s/M. David Testa Director August 23, 2000
M. David Testa
*/s/Henry H. Hopkins
Henry H. Hopkins Attorney-In-Fact August 23, 2000
