<PAGE>
T.ROWEPRICE
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T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD 21202
James S. Riepe
Managing Director\KO
Dear Shareholder:
All of the T. Rowe Price mutual funds will hold shareholder meetings in
1994 to elect directors, ratify the selection of independent accountants, and
approve amendments to a number of investment policies.
The T. Rowe Price funds are not required to hold annual meetings each year
if the only items of business are to elect directors or ratify accountants. In
order to save fund expenses, most of the funds have not held annual meetings
for a number of years. There are, however, conditions under which the funds
must ask shareholders to elect directors, and one is to comply with a
requirement that a minimum number have been elected by shareholders, not
appointed by the funds' boards. Since the last annual meetings of the T. Rowe
Price funds, several directors have retired and new directors have been added.
In addition, a number of directors will be retiring in the near future.
Given this situation, we believed it appropriate to hold annual meetings
for all the T. Rowe Price funds in 1994. At the same time, we reviewed the
investment policies of all of the funds for consistency and to assure the
portfolio managers have the flexibility they need to manage your money in
today's fast changing financial markets. The changes being recommended, which
are explained in detail in the enclosed proxy material, DO NOT ALTER THE
FUNDS' INVESTMENT OBJECTIVES OR BASIC INVESTMENT PROGRAMS.
In many cases the proposals are common to several funds, so we have
combined certain proxy statements to save on fund expenses. For those of you
who own more than one of these funds, the combined proxy may also save you the
time of reading more than one document before you vote and mail your ballots.
The proposals which are specific to an individual fund are easily identifiable
on the Notice and in the proxy statement discussion. If you own more than one
fund, please note that EACH FUND HAS A SEPARATE CARD. YOU SHOULD VOTE AND SIGN
EACH ONE, then return all of them to us in the enclosed postage-paid envelope.
Your early response will be appreciated and could save your fund the
substantial costs associated with a follow-up mailing. We know we are asking
you to review a rather formidable proxy statement, but this approach
represents the most efficient one for your fund as well as for the other
funds. Thank you for your cooperation. If you have any questions, please call
us at 1-800-225-5132.
Sincerely,
SIGNATURE
James S. Riepe
Director, Mutual Funds Division
CUSIP#779572106/fund#065
<PAGE>
T. ROWE PRICE OTC FUND, INC.
NOTICE OF MEETING OF SHAREHOLDERS
APRIL 20, 1994
The Annual Meeting of Shareholders of the T. Rowe Price OTC Fund ("the
Fund") will be held on Wednesday, April 20, 1994, at 8:00 o'clock a.m.,
Eastern time, at the offices of the Fund, 100 East Pratt Street, Baltimore,
Maryland 21202. The Fund is currently the sole portfolio of the T. Rowe Price
OTC Fund, Inc., a Maryland corporation (the "Corporation"). The following
matters will be acted upon at that time:
1. To elect ten (10) directors to serve until the next annual meeting, if
any, or until their successors shall have been duly elected and
qualified;
2. A. To amend the Fund's fundamental policies to increase its ability to
engage in borrowing transactions;
B. To amend the Fund's fundamental policies on investing in commodities
and futures contracts to permit greater flexibility in futures
trading;
C. To amend the Fund's fundamental policies to increase its ability to
engage in lending transactions;
D. To amend the Fund's fundamental policies to increase the percentage
of Fund assets which may be invested in the securities of any single
issuer;
E. To amend the Fund's fundamental policies to permit the Fund to
purchase more than 10% of an issuer's voting securities;
F. To amend the Fund's fundamental policies concerning real estate;
G. To amend the Fund's fundamental policies on the issuance of senior
securities;
H. To change from a fundamental to an operating policy the Fund's
policy on control of portfolio companies;
I. To change from a fundamental to an operating policy the Fund's
policy on investing in other investment companies;
J. To change from a fundamental to an operating policy the Fund's
policy on purchasing securities on margin;
K. To change from a fundamental to an operating policy the Fund's
policy on investing in oil and gas programs;
L. To change from a fundamental to an operating policy the Fund's
policy on investing in options;
M. To change from a fundamental to an operating policy the Fund's
policy on ownership of portfolio securities by officers and
directors;
N. To change from a fundamental to an operating policy the Fund's
policy on purchasing illiquid securities;
O. To change from a fundamental to an operating policy the Fund's
policy on short sales;
P. To change from a fundamental to an operating policy the Fund's
policy on unseasoned issuers;
CUSIP#779572106/fund#065
<PAGE>
3. To ratify or reject the selection of the firm of Coopers & Lybrand as
the independent accountants for the Fund for the fiscal year 1994; and
4. To transact such other business as may properly come before the meeting
and any adjournments thereof.
LENORA V. HORNUNG
Secretary
March 9, 1994
100 East Pratt Street
Baltimore, Maryland 21202
YOUR VOTE IS IMPORTANT
SHAREHOLDERS ARE URGED TO DESIGNATE THEIR CHOICES ON EACH OF THE MATTERS TO BE
ACTED UPON AND TO DATE, SIGN, AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE
PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOUR
PROMPT RETURN OF THE PROXY WILL HELP ASSURE A QUORUM AT THE MEETING AND AVOID
THE ADDITIONAL FUND EXPENSE OF FURTHER SOLICITATION.
<PAGE>
T. ROWE PRICE OTC FUND, INC.
MEETING OF SHAREHOLDERS--APRIL 20, 1994
PROXY STATEMENT
This statement is furnished in connection with the solicitation of proxies
by the T. Rowe Price OTC Fund (the "Fund") for use at the Annual Meeting of
Shareholders of the Fund to be held on April 20, 1994, and at any adjournments
thereof. The Fund is currently the sole portfolio of the T. Rowe Price OTC
Fund, Inc., a Maryland corporation (the "Corporation").
Shareholders are entitled to one vote for each full share, and a
proportionate vote for each fractional share, of the Fund held as of the
record date. 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: (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.
In order to hold the meeting, a majority of the 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 one or more of
the Proposals are not received by the time scheduled for the meeting, the
persons named as proxies may propose one or more adjournments of the meeting
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 session of the meeting adjourned. The persons named as proxies will
vote in favor of such adjournment if they determine that such adjournment and
additional solicitation is reasonable and in the interests of the Fund's
shareholders.
The individuals named as proxies (or their substitutes) in the enclosed
proxy card (or cards if you have multiple accounts) will vote in accordance
with your directions as indicated thereon if your proxy is received properly
executed. You may direct the proxy holders to vote your shares on a 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 Proposals. If you properly execute your proxy
card and give no voting instructions with respect to a Proposal, your shares
will be voted for the Proposal. Any proxy may be revoked at any time prior to
its exercise by filing with the Fund a written notice of revocation, by
delivering a duly executed proxy bearing a later date, or by attending the
meeting and voting in person.
Abstentions and "broker non-votes" (as defined below) are counted for
purposes of determining whether a quorum is present, but do not represent
votes cast with respect to any Proposal. "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 one or more Proposals 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.
<PAGE>
VOTE REQUIRED: A PLURALITY OF ALL VOTES CAST AT THE MEETING IS SUFFICIENT
TO APPROVE PROPOSAL 1. A MAJORITY OF THE SHARES PRESENT IN PERSON OR BY PROXY
AT THE MEETING IS SUFFICIENT TO APPROVE PROPOSAL 3. APPROVAL OF ALL REMAINING
PROPOSALS REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF THE LESSER OF (A)
67% OF THE SHARES PRESENT AT THE MEETING IN PERSON OR BY PROXY, OR (B) A
MAJORITY OF THE FUND'S OUTSTANDING SHARES.
If the proposed amendments to the Fund's fundamental investment policies
are approved, they will become effective on or about May 1, 1994. If a
proposed amendment to the Fund's fundamental investment policies is not
approved, that policy will remain unchanged.
The costs of the meeting, including the solicitation of proxies, will be
paid by the Fund. Persons holding shares as nominees will be reimbursed, upon
request, for their reasonable expenses in sending solicitation materials to
the principals of the accounts. In addition to the solicitation of proxies by
mail, directors, officers, and/or employees of the Fund or of its investment
manager, T. Rowe Price Associates, Inc. ("T. Rowe Price"), may solicit proxies
in person or by telephone.
The approximate date on which this Proxy Statement and form of proxy is
first being mailed to shareholders is March 9, 1994.
1. ELECTION OF DIRECTORS
The Corporation's Board of Directors has nominated the ten (10) persons
listed below for election as directors, each to hold office until the next
annual meeting (if any) or his/her successor is duly elected and qualified.
With the exception of Ms. Merriman, each of the nominees is a member of the
present Board of Directors of the Corporation and has served in that capacity
since originally elected. Mr. Laporte was elected as Chairman of the Board by
the Board of Directors effective January 19, 1994. A shareholder using the
enclosed proxy form can vote for all or any of the nominees of the Board of
Directors or withhold his or her vote from all or any of such nominees. IF THE
PROXY CARD IS PROPERLY EXECUTED BUT UNMARKED, IT WILL BE VOTED FOR ALL OF THE
NOMINEES. Each of the nominees has agreed to serve as a director if elected;
however, should any nominee become unable or unwilling to accept nomination or
election, the persons named in the proxy will exercise their voting power in
favor of such other person or persons as the Board of Directors of the
Corporation may recommend. There are no family relationships among these
nominees.
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Fund Shares All Other
Beneficially Price Funds'
Owned, Shares
Year of Directly Beneficially
Original Directly or Owned
Name, Address, Election Indirectly, Directly
and Date of Principal as as of as of
Birth of Nominee Occupations/(1)/ Director 1/31/94/(2)/ 1/31/94
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Leo C. Bailey Retired; Director of the 1992 -- 177,668
3396 S. Placita following T. Rowe Price
Fabula Funds: Growth Stock, New
Green Valley, AZ Era, Science &
85614 Technology, Index Trust
3/3/24 (since inception),
Balanced (since
inception), Mid-Cap
Growth (since
inception), Dividend
Growth (since
inception), Blue Chip
Growth (since
inception),
International, and
Institutional
International (since
inception)
<PAGE>
Donald W. Dick, Principal, Overseas 1992 227 171,872
Jr. Partners, Inc., a
375 Park Avenue financial investment
New York, NY firm; (formerly
10152 6/65-3/89) Director and
1/27/43 Vice President-Consumer
Products Division,
McCormick & Company,
Inc., international food
processors;
Director/Trustee,
Waverly Press, Inc. and
the following T. Rowe
Price Funds/ Trusts:
Growth Stock, Growth &
Income, New America
Growth, Capital
Appreciation, Balanced
(since inception),
Mid-Cap Growth (since
inception), Dividend
Growth (since
inception), Blue Chip
Growth (since
inception),
International, and
Institutional
International (since
inception)
David K. Fagin Chairman, Chief 1992 1,109 18,753
One Norwest Center Executive Officer and
1700 Lincoln Director, Golden Star
Street Resources, Ltd.;
Suite 1950 formerly (1986-7/91)
Denver, CO 80203 President, Chief
4/9/38 Operating Officer and
Director, Homestake
Mining Company;
Director/ Trustee of the
following T. Rowe Price
Funds/Trusts: New
Horizons, New Era,
Equity Income, Capital
Appreciation, Balanced
(since inception),
Mid-Cap Growth (since
inception), Dividend
Growth (since
inception), and Blue
Chip Growth (since
inception)
Addison Lanier Financial management; 1992 777 25,746
441 Vine Street, President and Director,
#2310 Thomas Emery's Sons,
Cincinnati, OH Inc. and Emery Group,
45202-2913 Inc.; Director/Trustee,
1/12/24 Scinet Development and
Holdings, Inc. and the
following T. Rowe Price
Funds/Trusts: New
America Growth, Equity
Income, Small-Cap Value,
Balanced (since
inception), Mid-Cap
Growth (since
inception), Dividend
Growth (since
inception), Blue Chip
Growth (since
inception),
International, and
Institutional
International (since
inception)
<PAGE>
*John H. Laporte Chairman of the Board 1994 1,431 600,333
100 East Pratt and member of the
Street Executive Committee of
Baltimore, MD the Fund; Managing
21202 Director, T. Rowe Price
7/26/45 Associates, Inc.;
Chairman of the Board of
the following T. Rowe
Price Funds: Science &
Technology and Small-Cap
Value; President and
Director/Trustee of the
following T. Rowe Price
Fund/Trust: New Horizons
and New America Growth
John K. Major Chairman of the Board 1992 -- 69,981
126 E. 26 Place and President, KCMA
Tulsa, OK Incorporated, Tulsa,
74114-2422 Oklahoma; Director/
8/3/24 Trustee of the following
T. Rowe Price
Funds/Trusts: Growth
Stock, New Horizons, New
Era, Growth & Income,
Capital Appreciation,
Science & Technology,
Balanced (since
inception), Mid-Cap
Growth (since
inception), Dividend
Growth (since
inception), and Blue
Chip Growth (since
inception)
Hanne M. Merriman Retail business -- -- 2,029
655 15th Street consultant; formerly,
Suite 300 President and Chief
Washington, D.C. Operating Officer
20005 (1991-92), Nan Duskin,
11/16/41 Inc., a women's
specialty store,
Director (1984-90) and
Chairman (1989-90)
Federal Reserve Bank of
Richmond, and President
and Chief Executive
Officer (1988-89),
Honeybee, Inc., a
division of Spiegel,
Inc.; Director,
AnnTaylor Stores
Corporation, Central
Illinois Public Service
Company, CIPSCO
Incorporated, The Rouse
Company, State Farm
Mutual Automobile
Insurance Company and
USAir Group, Inc.;
Member, National Women's
Forum; Trustee,
American-Scandinavian
Foundation
<PAGE>
*James S. Riepe Vice President and 1992 2,531 580,197
100 East Pratt member of the Executive
Street Committee of the Fund;
Baltimore, MD Managing Director, T.
21202 Rowe Price Associates,
6/25/43 Inc.; President and
Director, T. Rowe Price
Investment Services,
Inc.; Chairman of the
Board, T. Rowe Price
Services, Inc., T. Rowe
Price Trust Company, T.
Rowe Price Retirement
Plan Services, Inc. and
the following T. Rowe
Price Funds: Growth &
Income, Spectrum (since
inception), Balanced
(since inception), and
Mid-Cap Growth (since
inception); Vice
President of the
following T. Rowe Price
Funds/ Trusts: New Era,
New America Growth,
Prime Reserve,
International, and
Institutional
International (since
inception); Vice
President and
Director/Trustee of the
23 other T. Rowe Price
Funds/Trusts; Director,
T. Rowe Price Tax-Free
Insured Intermediate
Bond Fund, Inc. (since
inception) and
Rhone-Poulenc Rorer,
Inc.
Hubert D. Vos President, Stonington 1992 399 10,405
1231 State Street Capital Corporation, a
Suite 210 private investment
Santa Barbara, CA company;
93190-0409 Director/Trustee of the
8/2/33 following T. Rowe Price
Funds/Trusts: New
Horizons, New Era,
Equity Income, Capital
Appreciation, Science &
Technology, Small-Cap
Value, Balanced (since
inception), Mid-Cap
Growth (since
inception), Dividend
Growth (since
inception), and Blue
Chip Growth (since
inception)
<PAGE>
Paul M. Wythes Founding General 1992 -- 49,308
755 Page Mill Road Partner, Sutter Hill
Suite A200 Ventures, a venture
Palo Alto, CA capital limited
94304 partnership providing
6/23/33 equity capital to young
high technology
companies throughout the
United States; Director/
Trustee, Teltone
Corporation,
Interventional
Technologies, Inc.,
Stuart Medical, Inc. and
the following T. Rowe
Price Funds/ Trusts: New
Horizons, Growth &
Income, New America
Growth, Science &
Technology, Small-Cap
Value, Index Trust
(since inception),
Balanced (since
inception), Mid-Cap
Growth (since
inception), Dividend
Growth (since
inception), and Blue
Chip Growth (since
inception)
* Nominees considered "interested persons" of T. Rowe Price.
(1) Except as otherwise noted, each individual has held the office indicated,
or other offices in the same company, for the last five years.
(2) In addition to the shares owned beneficially and of record by each of the
nominees, the amounts shown reflect the proportionate interests of
Messrs. Laporte and Riepe in 3,962 shares of the Fund which are owned
by a wholly-owned subsidiary of the Fund's investment manager, T. Rowe
Price.
The directors of the Corporation who are officers or employees of T. Rowe
Price receive no remuneration from the Corporation. For the year 1993, Messrs.
Bailey, Dick, Fagin, Lanier, Major, Vos, and Wythes, were each paid a
director's fee by the Fund in accordance with the following fee schedule: a
fee of $25,000 per year as the initial fee for the first Price Fund/Trust on
which a director serves; a fee of $5,000 for each of the second, third, and
fourth Price Funds/Trusts on which a director serves; a fee of $2,500 for each
of the fifth and sixth Price Funds/Trusts on which a director serves; and a
fee of $1,000 for each of the seventh and any additional Price Funds/Trusts on
which a director serves. For the year ended December 31, 1993, this group of
directors received from the Fund directors' fees aggregating $12,108,
including expenses. Those nominees indicated by an asterisk (*) are persons
who, for purposes of Section 2(a)(19) of the Investment Company Act of 1940
are considered "interested persons" of T. Rowe Price. Each such nominee is
deemed to be an "interested person" by virtue of his officership,
directorship, and/or employment with T. Rowe Price. Messrs. Bailey, Dick,
Fagin, Lanier, Major, Vos and Wythes are the current independent directors of
the Corporation.
<PAGE>
The Price Funds have established a Joint Audit Committee, which is
comprised of at least one independent director representing each of the Funds.
Messrs. Bailey, Dick and Vos, directors of the Corporation, are members of the
Committee. The other member is Anthony W. Deering. These directors also
receive a fee of $500 for each Committee meeting attended. The Audit Committee
holds two regular meetings during each fiscal year, at which time it meets
with the independent accountants of the Price Funds to review: (1) the
services provided; (2) the findings of the most recent audit; (3) management's
response to the findings of the most recent audit; (4) the scope of the audit
to be performed; (5) the accountants' fees; and (6) any accounting questions
relating to particular areas of the Price Funds' operations or the operations
of parties dealing with the Price Funds, as circumstances indicate.
The Board of Directors of the Corporation has an Executive Committee which
is authorized to assume all the powers of the Board to manage the Corporation,
with respect to the Fund, in the intervals between meetings of the Board,
except the powers prohibited by statute from being delegated.
The Board of Directors of the Corporation has a Nominating Committee,
which is comprised of all the Price Funds' independent directors. The
Nominating Committee, which functions only in an advisory capacity, is
responsible for reviewing and recommending to the full Board candidates for
election as independent directors to fill vacancies on the Corporation's Board
of Directors. The Nominating Committee will consider written recommendations
from shareholders for possible nominees. Shareholders should submit their
recommendations to the Secretary of the Corporation. Members of the Nominating
Committee met informally during the last full fiscal year, but the Committee
as such held no formal meetings.
The Board of Directors held seven meetings during the last full fiscal
year. With the exception of Mr. Major, each director standing for reelection
attended 75% or more of the aggregate of (i) the total number of meetings of
the Board of Directors (held during the period for which he was a director)
and (ii) the total number of meetings held by all committees of the Board on
which he served.
2. APPROVAL OR DISAPPROVAL OF CHANGES TO THE FUND'S FUNDAMENTAL INVESTMENT
POLICIES
The Investment Company Act of 1940 (the "1940 Act") requires investment
companies such as the Fund to adopt certain specific investment policies that
can be changed only by shareholder vote. An investment company may also elect
to designate other policies that may be changed only by shareholder vote. Both
types of policies are often referred to as "fundamental policies." Certain of
the Fund's fundamental policies have been adopted in the past to reflect
regulatory, business or industry conditions that are no longer in effect.
Accordingly, the Board of Directors of the Corporation, on behalf of the Fund,
has approved, and has authorized the submission to the Fund's shareholders for
their approval, the amendment and/or reclassification of certain of the
fundamental policies applicable to the Fund.
<PAGE>
The proposed amendments would (i) conform the fundamental policies of the
Fund to ones which are expected to become standard for all T. Rowe Price
Funds, (ii) simplify and modernize the limitations that are required to be
fundamental by the 1940 Act and (iii) eliminate as fundamental any limitations
that are not required to be fundamental by that Act. The Board believes that
standardized policies will assist the Fund and T. Rowe Price in monitoring
compliance with the various investment restrictions to which the T. Rowe Price
Funds are subject. By reducing to a minimum those limitations that can be
changed only by shareholder vote, the Fund would be able to minimize the costs
and delay associated with holding frequent annual shareholders' meetings.
Finally, the Directors also believe that T. Rowe Price's ability to manage the
Fund's assets in a changing investment environment will be enhanced and that
investment management opportunities will be increased by these changes.
A. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY TO INCREASE ITS
ABILITY TO ENGAGE IN BORROWING TRANSACTIONS
The Board of Directors has proposed an amendment to the Fund's Fundamental
Investment Policy which would permit the Fund greater flexibility to engage in
borrowing transactions. The current restriction is not required by applicable
law. The new restriction would (1) allow the Fund to borrow slightly larger
amounts of money; (2) borrow from persons other than banks or other Price
Funds to the extent permitted by applicable law; and (3) clarify that the
Fund's restriction on borrowing does not prohibit the Fund from entering into
reverse repurchase agreements and other proper investments and transactions.
The new restriction would also conform the Fund's policy on borrowing to one
which is expected to become standard for all T. Rowe Price Funds. The Board
believes that standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to which the T.
Rowe Price Funds are subject. The Board has directed that such amendment be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of borrowing is as
follows:
"[As a matter of fundamental policy, the Fund may not:] Borrow money,
except the Fund may borrow for non-leveraging purposes from banks or other
Price Funds (i) in amounts not exceeding 30% of its total assets as a
temporary measure to meet redemption requests which might otherwise
require untimely disposition of portfolio securities; or (ii) in amounts
not exceeding 5% of its total assets for emergency, administrative or
other temporary proper purposes. Interest paid on any such borrowings will
reduce net investment income;"
As amended, the Fund's fundamental policy on borrowing would be as
follows:
"[As a matter of fundamental policy, the Fund may not:] Borrow money
except that the Fund may (i) borrow for non-leveraging, temporary or
emergency purposes and (ii) engage in reverse repurchase agreements and
make other investments or engage in other transactions, which may involve
a borrowing, in a manner consistent with the Fund's investment objective
and program, provided that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's total assets (including the
amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this
amount will be reduced in accordance with applicable law. The Fund may
borrow from banks, other Price Funds or other persons to the extent
permitted by applicable law;"
<PAGE>
If approved, the primary effect of the amendment would be to allow the
Fund to: (1) borrow up to 33 1/3% (or such higher amount permitted by law) of
its total assets (including the amount borrowed) less liabilities (other than
borrowings) as opposed to the current limitation of 30%; (2) borrow from
persons in addition to banks and other mutual funds advised by T. Rowe Price
or Rowe Price-Fleming International, Inc. ("Price Funds"); (3) enter into
reverse repurchase agreements and other investments consistent with the Fund's
investment objective and program; and (4) eliminate the distinction between
the amount which may be borrowed to meet redemption requests (currently 30%)
and the amount which may be borrowed for other purposes (currently 5%).
33 1/3% LIMITATION
The increase in the amount of money which the Fund could borrow is
primarily designed to allow the Fund greater flexibility to meet shareholder
redemption requests should the need arise. As is the case under its current
policy, the Fund would not borrow to increase income through leveraging. It is
possible the Fund's ability to borrow a larger percentage of its assets could
adversely affect the Fund if the Fund were unable to liquidate sufficient
securities, or the Fund were forced to liquidate securities at unfavorable
prices, to pay back the borrowed sums. However, the Directors believe the
risks of such possibilities are outweighed by the greater flexibility the Fund
would have in borrowing. The increased ability to borrow should permit the
Fund, if it were faced with substantial shareholder redemptions, to avoid
liquidating securities at unfavorable prices or times to a greater degree than
would be the case under the current policy.
REVERSE REPURCHASE AGREEMENTS
To facilitate portfolio liquidity, it is possible the Fund could enter
into reverse repurchase agreements. In a repurchase agreement the Fund would
purchase securities from a bank or broker-dealer (Counterparty) with the
agreement that the Counterparty would repurchase the securities at a later
date. Reverse repurchase agreements are ordinary repurchase agreements in
which a fund is a seller of, rather than the purchaser of, securities and
agrees to repurchase them at an agreed upon time and price. Reverse repurchase
agreements can avoid certain market risks and transaction costs associated
with an outright sale and repurchase. Reverse repurchase agreements, however,
may be viewed as borrowings. To the extent they are, the proposed amendment
would clarify that the Fund's restrictions on borrowing would not prohibit the
Fund from entering into a reverse repurchase agreement.
OTHER CHANGES
The other proposed changes in the Fund's fundamental policy--(1) to allow
the Fund to borrow from persons other than banks and other Price Funds to the
extent consistent with applicable law; (2) to engage in transactions other
than reverse repurchase agreements which may involve a borrowing; and (3) to
apply the Fund's 33 1/3% limitation on borrowing to all Fund borrowings
regardless of their purpose (as opposed to the current policy which permits
only 5% to be borrowed for purposes other than meeting redemption
requests)--are simply designed to permit the Fund the greatest degree of
flexibility permitted by law in pursuing its investment program. As noted
above, the Fund will not use its increased flexibility to borrow to engage in
transactions which could result in leveraging the Fund. All activities of the
Fund are, of course, subject to the 1940 Act and the rules and regulations
thereunder as well as various state securities laws.
The Board of Directors recommends that shareholders vote FOR the proposal.
<PAGE>
B. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL POLICIES ON INVESTING IN
COMMODITIES AND FUTURES CONTRACTS TO PROVIDE GREATER FLEXIBILITY IN
FUTURES TRADING
The Board of Directors has proposed amendments to the Fundamental
Investment Policies of the Fund to permit the Fund to engage in futures
trading. Currently, the Fund may not engage in any futures trading. If the
amendments are approved, the Fund would be permitted to engage in the range of
activity now allowed for all other T. Rowe Price equity funds. All futures
would be used for hedging purposes, yield enhancement or appropriate risk
management purposes. Although not specifically described in the amended
fundamental restriction, the Fund would have the ability to enter into forward
foreign currency contracts and to invest in instruments which have the
characteristics of futures and securities or whose value is determined, in
whole or in part, by reference to commodity prices. The Board has directed
that the following amendments be submitted for approval or disapproval:
The Fund's current fundamental policy on investing in commodities is as
follows:
"[As a matter of fundamental policy, the Fund may not:] Buy or sell
commodities and invest in commodities futures contracts;"
As amended, the Fund's fundamental policy on investing in commodities and
futures would be combined as follows:
"[As a matter of fundamental policy, the Fund may not:] Purchase or sell
physical commodities; except that it may enter into futures contracts and
options thereon;"
In addition, the Board of Directors intends to adopt the following
operating policy, which may be changed by the Board of Directors without
further shareholder approval.
"[As a matter of operating policy, the Fund will not:] 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 (the "New Operating Policy")."
A description of futures transactions and the manner in which the Fund
would expect to use them follows, along with a discussion of the associated
risks.
FUTURES CONTRACTS
TRANSACTIONS IN FUTURES
The Fund may enter into futures contracts, including stock index, interest
rate and currency futures ("futures or futures contracts").
<PAGE>
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, however,
purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the Fund must enter
into futures contracts 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 Commodity Futures
Trading Commission ("CFTC"). Futures are traded in London at the London
International Financial Futures Exchange, in Paris at the MATIF and in Tokyo
at the Tokyo Stock Exchange. Although techniques other than the sale and
purchase of futures contracts could be used for the above-referenced purposes,
futures contracts offer an effective and relatively low cost means of
implementing the Fund's objectives in these areas.
REGULATORY LIMITATIONS
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, yield enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the
CFTC and applicable state law.
The Fund will not 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
positions would exceed 5% of the Fund's net asset value.
In instances involving the purchase of futures contracts thereon or the
writing of put or call options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt obligations, equal to
the market value of the futures contracts and options thereon (less any
related margin deposits), will be identified in an account with the Fund's
custodian to cover the position, or alternative cover will be employed thereby
insuring that the use of such futures contracts and options is unleveraged.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Fund would comply with such
new restrictions.
TRADING IN FUTURES
A futures contract provides for the future sale by one party and purchase
by another party of a specified amount of a specific financial instrument
(e.g., units of a stock index) 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.
<PAGE>
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, U.S.
government securities, suitable money market instruments, or liquid,
high-grade debt securities, known as "initial margin." The margin required for
a particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing out
an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 Index were $150,
one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
<PAGE>
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
VOLATILITY AND LEVERAGE. The prices of futures contracts are volatile and
are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies 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.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase, 10%
of the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, the Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
futures contract, the Fund earmarks to the futures contract money market
instruments equal in value to the current value of the underlying instrument
less the margin deposit.
LIQUIDITY. The Fund may elect to close some or all of its futures
positions at any time prior to their expiration. The Fund would do so to
reduce exposure represented by long futures positions or short futures
positions. The Fund may close its positions by taking opposite positions which
would operate to terminate the Fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the Fund, and the Fund would realize
a loss or a gain.
<PAGE>
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 the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
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 the 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 the
imperfect correlation between price movements in the underlying instruments
and movements in the prices of futures contracts, even a correct forecast of
general market trends by T. Rowe Price might not result in a successful
hedging transaction over a very short time period.
<PAGE>
OPTIONS ON FUTURES CONTRACTS
Options on futures are similar to options on underlying instruments except
that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on stock
indices. 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
Fund and the other T. Rowe Price Funds in a fair and non-discriminatory
manner.
SPECIAL RISKS OF TRANSACTIONS IN OPTIONS ON FUTURES CONTRACTS
The risks described under "Special Risks of Transactions in Futures
Contracts" apply to transactions in options on futures. In addition, the Fund
may seek to close out an option position by writing or buying an offsetting
option covering the same index, underlying instruments, or contract and having
the same exercise price and expiration date. The ability to establish and
close out positions on such options will be subject to the maintenance of a
liquid secondary market. Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on the exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders.
<PAGE>
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 or options trading might involve risks which differ
from those involved in the futures and options described above.
FOREIGN FUTURES AND OPTIONS
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, when the Fund trades foreign futures or foreign
options contracts, it may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules
of the National Futures Association and any domestic exchange, including the
right to use reparations proceedings before the CFTC and arbitration
proceedings provided by the National Futures Association or any domestic
futures exchange. In particular, funds received from the Fund for foreign
futures or foreign options transactions may not be provided the same
protections as funds received in respect of transactions on United States
futures exchanges. In addition, the price of any foreign futures or foreign
options contract and, therefore, the potential profit and loss thereon may be
affected by any variance in the foreign exchange rate between the time the
Fund's order is placed and the time it is liquidated, offset or exercised.
The Board of Directors recommends that shareholders vote FOR the proposal.
C. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY REGARDING THE
MAKING OF LOANS
The Board of Directors has proposed an amendment to the Fundamental
Investment Policies of the Fund in order to: (i) specify the amount of its
assets which may be subject to its lending policy; (ii) authorize the Fund to
participate as a lender in an interfund lending program involving the funds
advised by T. Rowe Price or Rowe Price-Fleming International, Inc. (the "T.
Rowe Price Funds"); and (iii) allow the Fund to purchase the entire or any
portion of the debt of a company. The new restriction would also conform the
Fund's policy on lending to one which is expected to become standard for all
T. Rowe Price Funds. The Board believes that standardized policies will assist
the Fund and T. Rowe Price in monitoring compliance with the various
investment restrictions to which the T. Rowe Price Funds are subject. The
Board has directed that such amendment be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of making loans is as
follows:
<PAGE>
"[As a matter of fundamental policy, the Fund may not:] Make loans, except
that the Fund may: (i) invest in a portion of an issue of publicly issued
bonds, debentures, notes, and other debt securities for investment
purposes, and (ii) purchase money market securities and enter into
repurchase agreements;"
As amended, the Fund's fundamental policy on loans would be as follows:
"[As a matter of fundamental policy, the Fund may not:] 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;"
33 1/3% RESTRICTION
The Fund's current fundamental policy on loans does not impose any
specific limit on the amount of the Fund's assets which may be involved in
such activity. The new policy would restrict such lending to 33 1/3% of the
Fund's total assets.
INTERFUND LENDING PROGRAM
The proposed amendments to the Fund's fundamental policy would allow the
Fund to participate in an interfund lending program with other T. Rowe Price
Funds. The Fund is already permitted to participate in this program as a
borrower. The proposal, if adopted, would allow the Fund to act as a lender as
well.
The Directors believe that the interfund lending program: (i) may benefit
the Fund by providing it with greater flexibility to engage in lending
transactions; and (ii) would facilitate the Fund's ability to earn a higher
return on short-term investments by allowing it to lend cash to other T. Rowe
Price Funds. Implementation of interfund lending would be accomplished
consistent with applicable regulatory requirements, including the provisions
of any order the SEC might issue to the Fund and to other T. Rowe Price Funds.
The Fund has not yet applied for such an order and there is no guarantee any
such order would be granted, even if applied for.
PURCHASE OF DEBT
The Fund's fundamental policy on lending allows the Fund to purchase debt
securities as an exception to the general limitations on making loans.
However, there is no similar exception for the purchase of straight debt,
e.g., a corporate loan held by a bank for example which might not be
considered a debt security. The amended policy would allow the purchase of
this kind of debt. Because the purchase of straight debt could be viewed as a
loan by the Fund to the issuer of the debt, the Board of Directors has
determined to clarify this matter by including the purchase of debt as an
exception to the Fund's general prohibition against making loans. The purchase
of debt might be subject to greater risks of illiquidity and unavailability of
public information than would be the case for an investment in a publicly held
security. The primary purpose of this proposal is to conform the Fund's
fundamental policy in this area to one that is expected to become standard for
all T. Rowe Price Funds. The Fund will continue to invest primarily in equity
securities. However, the Board of Directors believes that increased
standardization will help promote operational efficiencies and facilitate
monitoring of compliance with the Fund's investment restrictions.
<PAGE>
LENDING PORTFOLIO SECURITIES
The Fund's fundamental policy on lending does not permit it to lend its
portfolio securities. This activity is permitted by virtually all other Price
Funds and the Board of Directors believes the Fund should be permitted to
engage in this activity as well.
A description of the lending of portfolio securities follows, along with a
discussion of the risks associated with this type of investment.
For the purpose of realizing additional income, the Fund may make secured
loans of portfolio securities amounting to not more than 33 1/3% of its total
assets. This policy is a fundamental policy. Securities loans are made to
broker-dealers, institutional investors, or other persons pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market
on a daily basis. The collateral received will consist of cash, U.S.
government securities, letters of credit or such other collateral as may be
permitted under its investment program. While the securities are being lent,
the Fund will continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the investment of
the collateral or a fee from the borrower. The Fund has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Fund will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to persons 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.
PRIVATE PLACEMENTS
The Fund is currently not permitted to purchase securities in private
placements or otherwise restricted securities. The Fund is requesting approval
elsewhere in this proxy to remove the current prohibition against investing in
private placements. Reference is made to pages 35--37 for a discussion of the
risks of investing in this type of security. Shareholders are also being asked
to approve a change in the Fund's policy on lending to permit investments in
private placements. Private placements in the form of debt securities may be
viewed as, in economic substance, a form of loan. Although the Fund will
continue to invest primarily in equity securities, the Board of Directors
believes this proposal should be adopted to provide the Fund with the
flexibility to invest in privately placed debt securities. The Board also
believes that adoption of a policy which is expected to become uniform for all
T. Rowe Price Funds will help promote its operational efficiencies and
facilitate monitoring of the compliance with the Fund's investment
restrictions.
<PAGE>
OTHER CHANGES
For purposes of this restriction, 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. Because such
transactions by the Fund could be viewed as a loan by the Fund to the maker of
the note, the Board of Directors has determined to clarify this matter by
including these transactions as an exception to the Fund's general prohibition
against making loans.
The Board of Directors recommends that shareholders vote FOR the proposal.
D. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL POLICY TO INCREASE THE PERCENTAGE
OF FUND ASSETS WHICH MAY BE INVESTED IN ANY ONE ISSUER
The Board of Directors has proposed an amendment to the Fundamental
Investment Policies of the Fund to conform such policies to Section 5(b)(1) of
the 1940 Act and to permit the Fund greater flexibility to invest in
securities considered by T. Rowe Price to present attractive investment
opportunities. Under the amended policy, the Fund would be limited, with
respect to 75% of its total assets, to investing no more than 5% of its total
assets in the securities of any one issuer. However, no such limitation would
apply with respect to the remaining 25% of the Fund's assets. It should be
understood that the proposed amendment, by permitting the Fund to invest a
greater percentage of its assets with a single issuer, could increase the risk
to the Fund in the event of adverse developments affecting the securities of
such issuer. In addition, as under the current policy, the new restrictions
would apply, to repurchase agreements. The Board has directed that such
amendment be submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of investing in the
securities of a single issuer is as follows:
"[As a matter of fundamental policy, the Fund may not:] Invest in more
than 5% of its total assets in the securities of any one issuer;"
As amended, the Fund's fundamental policy on investing in the securities
of a single issuer would be as follows:
"[As a matter of fundamental policy, the Fund may not:] 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;"
<PAGE>
The proposed amendment will not affect the status of the Fund as a
diversified investment company under the 1940 Act. However, the proposed
amendment would allow the Fund to invest a significantly larger portion of its
assets in the securities of a single issuer. Thus, for example, the Fund could
invest 25% of its total assets in the securities of a single issuer, or 10% of
its total assets in securities of one issuer and 15% of its total assets in
securities of another issuer. This would cause the Fund's net asset value per
share to be more affected by changes in the value of, and market, credit and
business developments with respect to, the securities of such issuer(s). In
addition, if the Fund were to have a substantial portion of its assets
invested in the securities of a single issuer, the liquidity of the Fund's
investment in that issuer could be reduced. However, the Fund's Board of
Directors believes the Fund should have the increased flexibility to pursue
its investment program which the proposed amendment would allow.
The Board of Directors recommends that shareholders vote FOR the proposal.
E. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL POLICY REGARDING PURCHASING MORE
THAN 10% OF AN ISSUER'S VOTING SECURITIES
The Board of Directors has proposed an amendment to the Fundamental
Investment Policies of the Fund to conform such policies to Section 5(b)(1) of
the 1940 Act and to provide the Fund with greater flexibility to invest its
assets in the outstanding voting securities of various companies. Under the
amended policy, the Fund would be restricted from owning more than 10% of an
issuer's outstanding voting securities only with respect to 75% of the value
of its total assets, as opposed to 100% under the current policy. It should be
noted, however, that the Fund has no current intention of investing in any
portfolio company for the purpose of exercising management or control. By
permitting the Fund to own more than 10% of the outstanding voting securities
of an issuer, the proposed amendment, if adopted, could increase the risk to
the Fund with respect to adverse developments concerning such securities. The
Board of Directors, however, believes the Fund should have the increased
flexibility which the amendment would provide. The Board has directed that
such change be submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of purchasing more than
10% of an issuer's voting securities is as follows:
"[As a matter of fundamental policy, the Fund may not:] . . . Invest in
more than 10% of the outstanding voting securities of any one issuer;"
As amended, the Fund's fundamental policy on purchasing more than 10% of
an issuer's voting securities would be as follows:
"[As a matter of fundamental policy, the Fund may not:] 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);"
<PAGE>
The proposed amendment will not affect the status of the Fund as a
diversified investment company under the 1940 Act. However, the proposed
amendment would permit the Fund, with respect to 25% of its assets, to take a
larger position in the voting securities of companies than under the current
investment limitation. Thus, for example, the Fund could purchase 100% of the
voting securities of one or more companies. This would cause the Fund's net
asset value per share to be more affected by changes in the value of, and
market, credit and business developments with respect to, the securities of
such companies. In addition, if the Fund were to own a substantial percentage
of an issuer's voting or other securities, there is a risk that the liquidity
of those securities would be reduced. However, the Fund's Board of Directors
believes the Fund should have the increased flexibility to pursue its
investment program which the proposed amendment would allow.
The Board of Directors recommends that shareholders vote FOR the proposal.
F. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICIES CONCERNING
REAL ESTATE
The Board of Directors has proposed an amendment to the Fundamental
Investment Policies of the Fund to clarify the types of securities in which
the Fund is authorized to invest and to conform the Fund's fundamental policy
on investing in real estate to a policy that is expected to become standard
for all T. Rowe Price Funds. The proposed amendment is not expected to affect
the investment program of the Fund or instruments in which the Fund invests.
The Fund will not purchase or sell real estate. Although not specifically
referred to in the new restriction, the Fund also will not purchase or sell
real estate limited partnerships. The Fund would continue to be able to hold
or sell real estate as a result of its ownership of securities secured by real
estate as under the proposed policy. The new policy would not allow the Fund
to buy real estate for present or future office purposes, as is permitted
under the current policy. The Board has directed that such amendment be
submitted to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of investing in real
estate is as follows:
"[As a matter of fundamental policy, the Fund may not:] Buy real estate,
except for present or future office purposes. However, the Fund may, as
appropriate and consistent with its investment policies and other
investment restrictions, buy securities of issuers that engage in real
estate operations and securities that are secured by interests in real
estate (including partnership interests and shares of real estate
investment trusts) and may hold and sell real estate acquired as a result
of ownership of such securities;"
As amended, the Fund's fundamental policy on investing in real estate
would be as follows:
"[As a matter of fundamental policy, the Fund may not:] Purchase or sell
real estate unless acquired as a result of ownership of securities or
other instruments (but this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or in securities of
companies engaged in the real estate business);"
The Board of Directors recommends that shareholders vote FOR the proposal.
<PAGE>
G. PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT POLICY ON THE ISSUANCE
OF SENIOR SECURITIES
The Fund's Board of Directors has proposed an amendment to the Fund's
Fundamental Investment Policy on issuing senior securities which would allow
the Fund to issue senior securities to the extent permitted under the 1940
Act. The new policy, if adopted, would provide the Fund with greater
flexibility in pursuing its investment objective and program. The Board has
directed that such amendment be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of issuing senior
securities is as follows:
"[As a matter of fundamental policy, the Fund may not:] Issue senior
securities;"
As amended, the Fund's fundamental policy on issuing senior securities
would be as follows:
"[As a matter of fundamental policy, the Fund may not:] Issue senior
securities except in compliance with the Investment Company Act of 1940;"
The 1940 Act limits a Fund's ability to issue senior securities or engage
in investment techniques which could be deemed to create a senior security.
Although the definition of a "senior security" involves complex statutory and
regulatory concepts, a senior security is generally thought of as a class of
security preferred over shares of the Fund with respect to the Fund's assets
or earnings. It generally does not include temporary or emergency borrowings
by the Fund (which might occur to meet shareholder redemption requests) in
accordance with federal law and the Fund's investment limitations. Various
investment techniques that obligate the Fund to pay money at a future date
(e.g., the purchase of securities for settlement on a date that is longer than
required under normal settlement practices) occasionally raise questions as to
whether a "senior security" is created. The Fund utilizes such techniques only
in accordance with applicable regulatory requirements under the 1940 Act.
Although the Fund has no current intention of issuing senior securities, the
proposed change will clarify the Fund's authority to issue senior securities
in accordance with the 1940 Act without the need to seek shareholder approval.
The Board of Directors recommends that shareholders vote FOR the proposal.
H. PROPOSAL TO CHANGE THE DESIGNATION OF THE FUND'S FUNDAMENTAL POLICY ON
INVESTING FOR CONTROL OF PORTFOLIO COMPANIES
The Fund's Board of Directors has proposed that the Fund's Fundamental
Investment Policy on investing for control of portfolio companies be changed
from a fundamental policy to a substantially similar operating policy.
Fundamental policies may only be changed with shareholder approval, while
operating policies may be changed by vote of the Board of Directors without
shareholder approval. While the Fund has no current intention of investing in
companies for the purpose of obtaining or exercising control, the proposed
change would allow the Fund to do so if the Board of Directors determined to
change the new operating policy. No additional shareholder vote would be
necessary. The Board believes that the proposed amendment will provide the
Fund with greater flexibility to respond to market and regulatory developments
and has directed that such change be submitted to shareholders for approval or
disapproval.
The Fund's current fundamental policy in the area of investing for control
of portfolio companies is as follows:
<PAGE>
"[As a matter of fundamental policy, the Fund may not:] Invest for the
purpose of acquiring or exercising control of other companies;"
As changed, the Fund's operating policy on investing for control of
portfolio companies would be as follows:
"[As a matter of operating policy, the Fund may not:] Invest in companies
for the purpose of exercising management or control;"
The Board of Directors recommends that shareholders vote FOR the proposal.
I. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL POLICY ON INVESTING IN THE
SECURITIES OF OTHER INVESTMENT COMPANIES
The Board of Directors has proposed that the Fund's Fundamental Investment
Policy on investing in the securities of other investment companies be
eliminated and replaced with a substantially similar operating policy.
Fundamental policies may be changed only by shareholder vote, while operating
policies may be changed by vote of the Board of Directors without shareholder
approval. The current policy of the Fund is not required by applicable law to
be fundamental. The purpose of the proposed change is to provide the Fund
greater flexibility in pursuing its investment objective and in responding to
regulatory and market developments. Although the Fund does not typically
invest in the securities of other open-end investment companies and would
only, on occasion, purchase securities of closed-end investment companies, the
proposed change would permit the Fund to invest in the securities of other
investment companies to the maximum extent permitted under the 1940 Act and
applicable state law, as described below, without further shareholder
approval. The Board has directed that such change be submitted to shareholders
for approval or disapproval.
The Fund's current fundamental policy in the area of investing in the
securities of other investment companies is as follows:
"[As a matter of fundamental policy, the Fund may not:] Invest in the
securities of other investment companies. Duplicate fees may result from
such purchases;"
The operating policy on investing in the securities of other investment
companies, to be adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:] Purchase securities
of open-end or closed-end investment companies except in compliance with
the Investment Company Act of 1940 and applicable state law. Duplicate
fees may result from such purchases;"
<PAGE>
Under the 1940 Act, the Fund is subject to various restrictions in
purchasing the securities of closed-end and open-end investment companies. The
1940 Act limits the Fund, immediately after a purchase to: (1) investing no
more than 10% of its total assets in the securities of other investment
companies; (2) owning no more than 3% of the total outstanding voting stock of
any other investment company; and (3) having no more than 5% of its total
assets invested in securities of another investment company. Additionally, in
the case of a closed-end investment company, the Fund, and all other mutual
funds having T. Rowe Price as an investment manager, are limited to owning no
more than 10% of the total outstanding voting stock of any closed-end company.
The 1940 Act provides an alternative set of restrictions if the Fund were
to exceed certain of these percentage limitations. Under the alternative, the
Fund could invest any or all of its assets in other investment companies,
provided the Fund and all of its affiliates, immediately after a purchase, did
not own more than 3% of the total outstanding stock of the other investment
company. Under this alternative restriction, the rate at which the Fund could
redeem its investment in the other investment companies in which it invests
might be restricted which could result in a situation where the Fund would not
be able to redeem a portfolio security when it appears to T. Rowe Price to be
in the best interest of the Fund to do so. T. Rowe Price would consider the
effect on the Fund's liquidity and the Fund's ability to timely dispose of
securities, before purchasing the securities of another investment company.
Certain states impose further limitations on the purchase by the Fund of
the securities of other investment companies. At the present time, these
restrictions could prohibit the Fund, with certain exceptions, from: (i)
purchasing or retaining the securities of any open-end investment company;
(ii) purchasing the securities of any closed-end investment company except
through a purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the customary broker's
commission or when the purchase is part of a plan of merger, consolidation,
reorganization or acquisition; and (iii) investing more than 10% of its assets
in one or more investment companies.
It is possible the requirements of the 1940 Act or the states regarding
the Fund's investment in the securities of closed-end and open-end investment
companies could change, or that the Fund could obtain a waiver of their
application. The Board of Directors believes the Fund should have the ability
to respond to potential changes in these areas without the necessity of
holding a further meeting of shareholders.
The Board of Directors recommends that shareholders vote FOR the proposal.
J. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT POLICY ON
PURCHASING SECURITIES ON MARGIN
The Board of Directors has proposed that the Fund's Fundamental Investment
Policy on purchasing securities on margin be changed from a fundamental policy
to an operating policy. Fundamental policies may be changed only by
shareholder vote, while operating policies may be changed by the Board of
Directors without shareholder approval. The purpose of the proposal is to
allow the Fund greater flexibility in responding to market and regulatory
developments by providing the Board of Directors with the authority to make
changes in the Fund's policy on margin without further shareholder approval.
The new restriction would also conform the Fund's policy on margin to one
which is expected to become standard for all T. Rowe Price Funds. The Board
believes that standardized policies will assist the Fund and T. Rowe Price in
monitoring compliance with the various investment restrictions to which the T.
Rowe Price Funds are subject. The Board has directed that such amendment be
submitted to shareholders for approval or disapproval.
<PAGE>
The Fund's current fundamental policy in the area of purchasing securities
on margin is as follows:
"[As a matter of fundamental policy, the Fund may not:] Purchase
securities on margin;"
As amended, the Fund's operating policy on purchasing securities on margin
would be as follows:
"[As a matter of operating policy, the Fund may not:] 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;"
Both policies prohibit the purchase of securities on margin. The operating
policy, however, would enumerate two exceptions to this general prohibition.
The first exception "use of short-term credit necessary for clearance of
purchases of portfolio securities" is permitted by Section 12(a)(1) of the
1940 Act which sets forth the general restriction on mutual funds purchasing
securities on margin. The other exception relates to the establishment of
margin accounts in connection with futures transactions and other permissible
investments of the Fund. Elsewhere in this proxy, the Fund is seeking
authority to engage in futures transactions. The Fund does not consider the
establishment of a margin account in connection with the use of futures to be
subject to the prohibition against purchasing securities on margin. However,
to avoid any uncertainty in this area, the Fund is seeking approval to change
the Fund's fundamental policy to an operating policy which would specifically
refer to the use of margin in futures transactions as an exception to the
general prohibition against margin accounts. Other permissible uses of margin
would include, but not be limited to, the deposit of margin by the Fund in
connection with written options. If the Fund were to write an option, it could
be required to put up margin with a broker as security for the Fund's
obligation to deliver the security on which the option is written.
The Board of Directors recommends that shareholders vote FOR the proposal.
K. TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT POLICY ON INVESTING IN OIL
AND GAS PROGRAMS
The Fund's Board of Directors has proposed that the Fund's Fundamental
Investment Policy on investing in oil and gas programs be eliminated and
replaced with a substantially similar operating policy. Fundamental policies
may be changed only by shareholder vote, while operating policies may be
changed by the Board of Directors without shareholder approval. The current
policy of the Fund is not required by applicable law to be fundamental. The
Fund has no current intention of investing in oil or gas programs, but
adoption of the proposal would allow the Fund to make such investments in the
future without shareholder vote. The new restriction would also conform the
Fund's policy on investing in oil and gas programs to one which is expected to
become standard for all T. Rowe Price Funds. The Board believes that
standardized policies will assist the Fund and T. Rowe Price in monitoring
compliance with the various investment restrictions to which the T. Rowe Price
Funds are subject. The Board has directed that the proposal be submitted to
shareholders for approval or disapproval.
<PAGE>
The Fund's current fundamental policy in the area of investing in oil and
gas programs is as follows:
"[As a matter of fundamental policy, the Fund may not:] Invest in
interests in oil, gas, or other mineral exploration or development
programs, although investments may be made in the securities of issuers
engaged in any such business;"
The operating policy on investing in oil and gas programs, to be adopted
by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:] Purchase
participations or other direct interests or enter into leases with respect
to, oil, gas or other mineral exploration or development programs;"
The current fundamental policy was formerly required by certain states to
be fundamental. This is no longer the case and the replacement of the policy
with an operating policy will adequately protect the Fund while providing
greater flexibility to the Fund to respond to market or regulatory
developments by allowing the Board of Directors the authority to make changes
in this policy without seeking further shareholder approval. Like the current
restriction, the new operating policy would allow the Fund to invest in
securities of companies which are engaged in the oil and gas business. The new
operating policy also clarifies that the Fund may not purchase participations
in and leases with respect to oil, gas, or other mineral exploration or
development programs.
The Board of Directors recommends that shareholders vote FOR the proposal.
L. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT POLICY ON OPTIONS
The Fund's Board of Directors has proposed that the Fund's Fundamental
Investment Policy on investment in options be eliminated and replaced with an
operating policy which permits the Fund to purchase and sell options of any
type for any purpose consistent with the Fund's investment program.
Fundamental policies may be changed only by shareholder vote, while operating
policies may be changed by vote of the Board of Directors without shareholder
approval. The purpose of the proposal is to allow the Fund to engage in the
types of options transactions permitted other T. Rowe Price Funds, and in
connection therewith, give the Fund greater flexibility in responding to
market and regulatory developments by allowing the Board of Directors the
authority to make changes in the Fund's policy on options without seeking
further shareholder approval. The new restriction would also conform the
Fund's policy on investing in options to one which is expected to become
standard for all T. Rowe Price Funds. The Board believes that standardized
policies will assist the Fund and T. Rowe Price in monitoring compliance with
the various investment restrictions to which the T. Rowe Price Funds are
subject. The Board has directed that such change be submitted to shareholders
for approval or disapproval.
The Fund's current fundamental policy in the area of investing in options
is as follows:
<PAGE>
"[As a matter of fundamental policy, the Fund may not:] Invest in puts,
calls, straddles, spreads or any combination thereof;"
The operating policy on investing in options, to be adopted by the Fund,
would be as follows:
"[As a matter of operating policy, the Fund may not:] Invest in puts,
calls, straddles, spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement of Additional
Information;"
A description follows of the transactions in options in which it is
proposed the Fund be permitted to engage, along with a discussion of the risks
associated with investing in options. This language will become a part of the
Fund's prospectus and Statement of Additional Information, as the case may be,
as it may be amended from time to time.
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 the opinion of the Fund's investment manager, T. Rowe
Price, are not expected to make 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" a security
or currency at a specified price (the exercise price) at expiration of the
option (European style) or at any time until a certain date (the expiration
date) (American style). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at
which the writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his obligation to deliver
the underlying security or currency in the case of a call option, a writer is
required to deposit in escrow the underlying security or currency or other
assets in accordance with the rules of a clearing corporation.
The Fund will write only covered call options. This means that the Fund
will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid
high-grade debt obligations having a value equal to the fluctuating market
value of the optioned securities or currencies.
<PAGE>
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 objectives. The writing of covered call options is
a conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security or currency during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security or currency. The Fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the
option period. Once the decision to write a call option has been made, T. Rowe
Price, in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Fund is computed (close of the New York Stock Exchange), or, in the absence of
such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at a favorable price. 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.
<PAGE>
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.
In order to comply with the requirements of several states, the Fund will
not write a covered call option if, as a result, the aggregate market value of
all portfolio securities or currencies covering call or put options exceeds
25% of the market value of the Fund's net assets. Should these state laws
change or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. 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 of the exercise price
against delivery of the underlying security or currency. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
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 or other liquid high-grade debt obligations 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 the exercise of the put,
cannot benefit from appreciation, if any, with respect to such specific
securities or currencies. In order to comply with the requirements of several
states, the 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.
Should these state laws change or should the Fund obtain a waiver of their
application, the Fund reserves the right to increase this percentage. 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.
<PAGE>
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 below.
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.
To the extent required by the laws of certain states, the Fund may not be
permitted to commit more than 5% of its assets to premiums when purchasing put
and call options. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put 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.
<PAGE>
PURCHASING CALL OPTIONS
The Fund may purchase American or European call options. As the holder of
a call option, the Fund has the right to purchase the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The Fund may enter
into closing sale transactions with respect to such options, exercise them or
permit them to expire. The Fund may purchase call options for the purpose of
increasing its current return or avoiding tax consequences which could reduce
its current return. The Fund may also purchase call options in order to
acquire the underlying securities or currencies. Examples of such uses of call
options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost 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.
To the extent required by the laws of certain states, the Fund may not be
permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund obtain
a waiver of its application, the Fund may 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.
OVER-THE-COUNTER (DEALER) 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.
<PAGE>
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)
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 the Fund's ability to sell portfolio securities at
a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer options
and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as
liquid if the dealer agrees that the Fund may repurchase the OTC option it has
written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Accordingly, the Fund will treat dealer options as subject to the
Fund's limitation on unmarketable securities. If the SEC changes its position
on the liquidity of dealer options, the Fund will change its treatment of such
instrument accordingly.
The Board of Directors recommends that shareholders vote FOR the proposal.
M. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT POLICY ON
OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS
The Fund's Board of Directors has proposed that the Fund's Fundamental
Investment Policy on the ownership of portfolio securities by officers and
directors of the Fund and T. Rowe Price be eliminated and replaced with a
substantially similar operating policy. Fundamental policies may be changed
only by shareholder vote, while operating policies may be changed by vote of
the Board of Directors without shareholder approval. The current policy of the
Fund is not required by applicable law to be fundamental. The current
fundamental policy was formerly required by certain states. This is no longer
the case. The Board has directed that the proposal be submitted to
shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of ownership of
portfolio securities by officers and directors is as follows:
"[As a matter of fundamental policy, the Fund may not:] Purchase or retain
the securities of any issuer if those officers and directors of the Fund
or its investment manager, who own individually more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of the securities of
such issuer;"
<PAGE>
As changed, the Fund's operating policy in the area of ownership of
portfolio securities by officers and directors would be as follows:
"[As a matter of operating policy, the Fund may not:] Purchase or retain
the securities of any issuer if, to the knowledge of the Fund's
management, those officers and directors of the Fund, and of its
investment manager, who each own beneficially more than .5% of the
outstanding securities of such issuer, together own beneficially more than
5% of such securities."
The Board of Directors recommends that shareholders vote FOR the proposal.
N. PROPOSAL TO CHANGE THE DESIGNATION OF THE FUND'S FUNDAMENTAL INVESTMENT
POLICY REGARDING THE PURCHASE OF ILLIQUID SECURITIES
The Board of Directors has proposed that the Fund's Fundamental Investment
Policy on purchasing unmarketable securities be changed from a fundamental
policy to an operating policy. Fundamental policies may be changed only by
shareholder vote, while operating policies may be changed by the Board of
Directors without shareholder approval. If the proposed change is approved by
shareholders, the Board of Directors of the Fund intends to adopt an operating
policy which would (1) allow the Fund to invest up to 15% of its net assets in
illiquid securities and (2) conform the Fund's operating policy in this area
to one which is expected to become standard for all T. Rowe Price Funds,
except the T. Rowe Price money market funds. The Fund's current fundamental
policy in this area is not required by applicable law and the proposed change
should provide the Fund with greater flexibility in responding to market and
regulatory developments. The Board has directed that such change be submitted
to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of purchasing illiquid
securities is as follows:
"[As a matter of fundamental policy, the Fund may not:] Knowingly purchase
restricted securities or invest more than 5% of its total assets in equity
securities of issuers that are not readily marketable. This policy does
not limit the purchase of restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933 which the Board of
Directors or the investment manager has determined, under Board approved
guidelines, are liquid securities."
As changed, the operating policy on investing in illiquid securities, to
be adopted by the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:] Purchase illiquid
securities and securities of unseasoned issuers if, as a result, more than
15% of its net assets would be invested in such securities, provided that
the Fund will not invest more than 5% of its total assets in restricted
securities and not more than 5% in securities of unseasoned issuers.
Securities eligible for resale under Rule 144A of the Securities Act of
1933 are not included in the 5% limitation but are subject to the 15%
limitation;"
<PAGE>
ILLIQUID SECURITIES
As an open-end investment company, the Fund may not hold a significant
amount of illiquid securities because such securities may present problems of
accurate valuation and it is possible the Fund could have difficulty
satisfying redemptions within seven days as required under the 1940 Act. In
general, the SEC defines an illiquid security as one which cannot be sold in
the ordinary course of business within seven days at approximately the value
at which the Fund has valued the security. Illiquid securities have included
restricted securities (which the Fund is prohibited from purchasing) as well
as other securities which are not readily marketable.
The securities markets, however, are evolving and new types of instruments
have developed. In light of these developments, the Fund's fundamental
investment restriction, by prohibiting the purchase of restricted securities
and limiting the Fund to investing only 5% of its assets in unmarketable
securities, may be overbroad and unnecessarily restrictive. For example, the
markets for various types of securities--repurchase agreements, commercial
paper, and some corporate bonds and notes--are almost exclusively
institutional. These instruments are often either exempt from registration or
sold in transactions not requiring registration. Although these securities may
be legally classified as "restricted," institutional investors will often
justifiably rely either on the issuer's ability to honor a demand for
repayment in less than seven days or on an efficient institutional market in
which the unregistered security can be readily resold. The fact that the
securities may be restricted because of legal or contractual restrictions on
resale to the general public will, therefore, not be dispositive of the
liquidity of such investments.
If this proposal is approved by shareholders, the specific types of
securities that may be deemed to be illiquid will be determined from time to
time by T. Rowe Price under the supervision of the Directors, with reference
to legal, regulatory and market developments. By making the Fund's policy on
illiquid securities non-fundamental, the Fund will be able to respond more
quickly to such developments because no shareholder vote will be required to
redefine what types of securities may be deemed illiquid. In accordance with
the Fund's policy prohibiting the Fund from acting as an underwriter, the Fund
will not purchase restricted securities for the purpose of subsequent
distribution in a manner which would cause the Fund to be deemed an
underwriter.
PERCENTAGE LIMITATIONS
The Fund's fundamental policy prohibits the Fund from purchasing any
restricted securities and limits it to investing no more than 5% of the value
of its total assets in unmarketable securities. The new operating policy to be
adopted by the Board of Directors, if shareholders approve elimination of the
fundamental policy, would allow the Fund to invest up to 15% of its net assets
in illiquid securities. The 15% limitation represents a higher percentage than
the Fund was previously allowed to invest in illiquid securities and is the
result of a 1992 liberalization by the SEC in this area. If the fundamental
policy is changed to an operating policy, the Fund will, without the necessity
of any further shareholder vote, be able to take advantage of any future
changes in SEC policy in this area.
<PAGE>
Notwithstanding the 15% limitation, in conformity with various state laws,
the Fund's new operating policy would limit the Fund to investing no more than
5% of its assets in restricted securities (other than Rule 144A securities)
and no more than 5% of its assets in the securities of unseasoned issuers (as
defined). Shareholders are being asked separately to eliminate the Fund's
fundamental policy on investing in unseasoned issuers. If that action is
approved, the Directors intend to incorporate the Fund's policy on investing
in unseasoned issuers with the Fund's policy on investing in illiquid
securities.
The Board of Directors recommends that shareholders vote FOR the proposal.
O. PROPOSAL TO ELIMINATE THE FUND'S FUNDAMENTAL INVESTMENT POLICY ON SHORT
SALES
The Fund's Board of Directors has proposed that the Fund's Fundamental
Investment Policy on effecting short sales be eliminated and replaced with a
substantially similar operating policy. Fundamental policies may be changed
only by shareholder vote, while operating policies may be changed by the Board
of Directors without shareholder approval. The current policy of the Fund is
not required by applicable law to be fundamental. The purpose of the proposal
is to provide the Fund with greater flexibility in pursuing its investment
objective and program. The Board has directed that the proposal be submitted
to shareholders for approval or disapproval.
The Fund's current fundamental policy in the area of effecting short sales
of securities is as follows:
"[As a matter of fundamental policy, the Fund may not:] Sell securities
short;"
The operating policy on short sales, to be adopted by the Fund, would be
as follows:
"[As a matter of operating policy, the Fund may not:] Effect short sales
of securities;"
The current fundamental policy was formerly required by certain states to
be fundamental. This is no longer the case and the replacement of the policy
with an operating policy will adequately protect the Fund while providing
greater flexibility to the Fund to respond to market or regulatory
developments by allowing the Board of Directors the authority to make changes
in this policy without seeking further shareholder approval.
In a short sale, an investor, such as the Fund, sells a borrowed security
and must return the same security to the lender. Although the Board has no
current intention of allowing the Fund to engage in short sales, if the
proposed amendment is adopted, the Board would be able to authorize the Fund
to engage in short sales at any time without further shareholder action. In
such a case, the Fund's prospectus would be amended and a description of short
sales and their risks would be set forth therein.
The Board of Directors recommends that shareholders vote FOR the proposal.
<PAGE>
P. PROPOSAL TO CHANGE THE DESIGNATION OF THE FUND'S FUNDAMENTAL INVESTMENT
POLICY ON INVESTING IN UNSEASONED ISSUERS
The Board of Directors has proposed that the Fund's Fundamental Investment
Policy on investing in the securities of unseasoned issuers be eliminated and
replaced by a substantially similar operating policy. Fundamental policies may
only be changed with shareholder approval, while operating policies may be
changed by vote of the Board of Directors without shareholder approval. The
proposed change should provide the Fund with greater flexibility in responding
to market and regulatory developments without the necessity of seeking further
shareholder approval. The new restriction would also conform the Fund's policy
on investing in unseasoned issuers to one which is expected to become standard
for all T. Rowe Price Funds. The Board believes that standardized policies
will assist the Fund and T. Rowe Price in monitoring compliance with the
various investment restrictions to which the T. Rowe Price Funds are subject.
The Board has directed that such change be submitted to shareholders for
approval or disapproval.
The Fund's current fundamental policy in the area of investing in
unseasoned issuers is as follows:
"[As a matter of fundamental policy, the Fund may not:] Invest more than
5% of its total assets in securities of issuers, including their
predecessors, which, at the time of purchase, have been in operation for
less than three years;"
The operating policy on investing in unseasoned issuers, to be adopted by
the Fund, would be as follows:
"[As a matter of operating policy, the Fund may not:] Purchase a security
(other than obligations issued or guaranteed by the U.S., any foreign,
state or local government, their agencies or instrumentalities) if, as a
result, more than 5% of the value of the Fund's total assets would be
invested in the securities of issuers which at the time of purchase had
been in operation for less than three years (for this purpose, the period
of operation of any issuer shall include the period of operation of any
predecessor or unconditional guarantor of such issuer). This restriction
does not apply to securities of pooled investment vehicles or mortgage or
asset-backed securities;"
Like the current policy, the new policy allows the Fund to invest up to 5%
of its total assets in unseasoned issuers but the new policy excludes from the
definition of an unseasoned issuer any securities issued or guaranteed by the
U.S., any foreign, state or local government, their agencies or
instrumentalities, securities of pooled investment vehicles and mortgage or
asset-backed securities. In addition, the new operating policy clarifies that
the period of operation of an unconditional guarantor of an issuer would be
included in determining whether the issuer is unseasoned (i.e., whether the
issuer has been operating for less than three years).
The Board of Directors recommends that shareholders vote FOR the proposal.
<PAGE>
3. RATIFICATION OR REJECTION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The selection by the Board of Directors of the firm of Coopers & Lybrand
as the independent accountants for the Corporation, on behalf of the Fund, for
the fiscal year 1994 is to be submitted for ratification or rejection by the
shareholders at the Shareholders Meeting. The firm of Coopers & Lybrand has
served the Corporation as independent accountants since 1992. The independent
accountants have advised the Corporation that they have no direct or material
indirect financial interest in the Corporation or the Fund. Representatives of
the firm of Coopers & Lybrand are expected to be present at the Shareholders
Meeting and will be available to make a statement, if they desire to do so,
and to respond to appropriate questions which the shareholders may wish to
address to them.
INVESTMENT MANAGER
The Fund's investment manager is T. Rowe Price, a Maryland corporation,
100 East Pratt Street, Baltimore, Maryland 21202. The principal executive
officer of T. Rowe Price is George J. Collins, who together with Thomas H.
Broadus, Jr., James E. Halbkat, Jr., Carter O. Hoffman, Henry H. Hopkins,
James S. Riepe, George A. Roche, John W. Rosenblum, Charles H. Salisbury, Jr.,
Robert L. Strickland, M. David Testa, and Philip C. Walsh, constitute its
Board of Directors. The address of each of these persons, with the exception
of Messrs. Halbkat, Rosenblum, Stickland and Walsh, is 100 East Pratt Street,
Baltimore, Maryland 21202, and, with the exception of Messrs. Halbkat,
Rosenblum, Strickland, and Walsh, all are employed by T. Rowe Price. Mr.
Halbkat is President of U.S. Monitor Corporation, a provider of public
response systems, P.O. Box 23109, Hilton Head Island, South Carolina 29925.
Mr. Rosenblum, whose address is P.O. Box 6550, Charlottesville, Virginia
22906, is the Tayloe Murphy Professor at the University of Virginia, and a
director of: Chesapeake Corporation, a manufacturer of paper products; Cadmus
Communications Corp., a provider of printing and communication services;
Comdial Corporation, a manufacturer of telephone systems for businesses; and
Cone Mills Corporation, a textiles producer. Mr. Strickland is Chairman of
Lowe's Companies, Inc., a retailer of specialty home supplies, 604 Two
Piedmont Plaza Building, Winston-Salem, North Carolina 27104. Mr. Walsh, whose
address is Blue Mill Road, Morristown, New Jersey 07960, is a consultant to
Cyprus Amax Minerals Company, Englewood, Colorado, and a director of Piedmont
Mining Company, Charlotte, North Carolina.
The officers of the Fund (other than the nominees for election or
reelection as directors) and their positions with T. Rowe Price are as
follows:
- ------------------------------------------------------------------------------
Officer Position with Fund Position with Manager
- ------------------------------------------------------------------------------
Greg McCrickard* President Vice President
Marcy L. Fisher Vice President Assistant Vice President
Henry H. Hopkins Vice President Managing Director
James A. C. Kennedy, III Vice President Managing Director
Brian D. Stansky Vice President Vice President
Richard T. Whitney Vice President Vice President
Lenora V. Hornung Secretary Vice President
Carmen F. Deyesu Treasurer Vice President
David S. Middleton Controller Vice President
Roger L. Fiery Assistant Vice President Employee
Edward T. Schneider Assistant Vice President Employee
Ingrid I. Vordemberge Assistant Vice President Employee
* Mr. McCrickard's date of birth is October 19, 1958 and he has been employed
by T. Rowe Price since July 21, 1986.
<PAGE>
The Fund has an Underwriting Agreement with T. Rowe Price Investment
Services, Inc. ("Investment Services"), a Transfer Agency Agreement with T.
Rowe Price Services, Inc. ("Price Services"), and an Agreement with T. Rowe
Price Retirement Plan Services, Inc. ("Retirement Services"), which are
wholly-owned subsidiaries of T. Rowe Price. In addition, the Fund has an
Agreement with T. Rowe Price to perform fund accounting services. James S.
Riepe, a Vice President and Director of the Fund, is Chairman of the Board of
Price Services and Retirement Services and President and Director of
Investment Services. Henry H. Hopkins, a Vice President of the Fund, is a Vice
President and Director of both Investment Services and Price Services and a
Vice President of Retirement Services. Edward T. Schneider, an Assistant Vice
President of the Fund, is a Vice President of Price Services. Certain officers
of the Fund own shares of the common stock of T. Rowe Price, its only class of
securities.
The following information pertains to transactions involving common stock
of T. Rowe Price, par value $.20 per share ("Stock"), during the period
January 1, 1993 through Decem- ber 31, 1993. There were no transactions during
the period by any director or officer of the Fund, or any director or officer
of T. Rowe Price which involved more than 1% of the outstanding Stock of T.
Rowe Price. These transactions did not involve, and should not be mistaken
for, transactions in the stock of the Fund.
During the period, the holders of certain options purchased a total of
343,525 shares of common stock at varying prices from $0.67 to $18.75 per
share. Pursuant to the terms of T. Rowe Price's Employee Stock Purchase Plan,
eligible employees of T. Rowe Price and its subsidiaries purchased an
aggregate of 96,931 shares at fair market value. Such shares were purchased in
the open market during this period for employees' accounts.
The Company's Board of Directors has approved the repurchase of shares of
its common stock in the open market. During 1993, the Company purchased 80,000
common shares under this plan, leaving 1,432,000 shares authorized for future
repurchase at December 31, 1993.
During the period, T. Rowe Price issued 1,154,000 common stock options
with an exercise price of $28.13 per share to certain employees under terms of
the 1990 and 1993 Stock Incentive Plans.
An audited consolidated balance sheet of T. Rowe Price as of December 31,
1993, is included in this Proxy Statement.
INVESTMENT MANAGEMENT AGREEMENT
T. Rowe Price serves as investment manager to the Fund pursuant to an
Investment Management Agreement dated August 31, 1992 (the "Management
Agreement"). By its terms, the Management Agreement will continue in effect
from year to year as long as it is approved annually by the Fund's Board of
Directors (at a meeting called for that purpose) or by vote of a majority of
the Fund's outstanding shares. In either case, renewal of the Management
Agreement must be approved by a majority of the Fund's independent directors.
On March 1, 1994, the directors of the Fund, including all of the independent
directors, voted to extend the Management Agreement for an additional period
of one year, commencing May 1, 1994, and terminating April 30, 1995. The
Management Agreement is subject to termination by either party without penalty
on 60 days' written notice to the other and will terminate automatically in
the event of assignment.
<PAGE>
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 objective, program, and restrictions as provided in its
prospectus and Statement of Additional Information. T. Rowe Price is also
responsible for effecting all securities 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, corporate records, and registering
and qualifying Fund shares under federal and state 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.
The Management Agreement provides that the Fund will bear all expenses of
its operations not specifically assumed by T. Rowe Price. However, in
compliance with certain state regulations, T. Rowe Price will reimburse the
Fund for any expenses (excluding interest, taxes, brokerage, other
expenditures which are capitalized in accordance with generally accepted
accounting principles, and extraordinary expenses) which in any year exceed
the limits prescribed by any state in which the Fund's shares are qualified
for sale. Presently, the most restrictive expense ratio limitation imposed by
any state is 2.5% of the first $30 million of the Fund's average daily net
assets, 2% of the next $70 million of such assets, and 1.5% of net assets in
excess of $100 million. For the purpose of determining whether the Fund is
entitled to reimbursement, the expenses of the Fund are calculated on a
monthly basis. If the Fund is entitled to reimbursement, that month's
management fee will be reduced or postponed, with any adjustment made after
the end of the year. Prior to September 1, 1992, the Fund was managed by
another investment adviser and a different investment management agreement
with a different fee schedule in effect. The expense ratio paid by the Fund
under such other agreement for 1991 was 1.34%. For the years ended December
31, 1993 and December 31, 1992, the ratios of operating expenses to average
net assets of the Fund were 1.20% and 1.32%, respectively.
For its services to the Fund under the Management Agreement, T. Rowe Price
is paid a management fee ("Management Fee") consisting of two elements: a
"group" fee ("Group Fee") and an "individual" fund fee ("Individual Fund
Fee"). The Group Fee varies and is based on the combined net assets of all of
the Price Funds distributed by T. Rowe Price Investment Services, Inc., other
than institutional or "private label" products. For this purpose, the Price
Funds include all Funds managed and sponsored by T. Rowe Price as well as
those Funds managed and sponsored by Rowe Price-Fleming International, Inc.
The Fund pays, as its portion of the Group Fee, an amount equal to the ratio
of its daily net assets to the daily net assets of all the Price Funds. In
addition, the Fund pays a flat Individual Fund Fee of 0.45% based on the net
assets of the Fund. Based on combined Price Funds' assets of approximately
$34.7 billion at December 31, 1993, the Group Fee was 0.35% and the total
management fee for the year would have been an annual rate of 0.80% of net
assets. At December 31, 1993, the net assets of the Fund were $204,609,000,
and a management fee of $1,547,000 was paid by the Fund to T. Rowe Price.
<PAGE>
PORTFOLIO TRANSACTIONS
INVESTMENT OR BROKERAGE DISCRETION
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
HOW BROKERS AND DEALERS ARE SELECTED
EQUITY SECURITIES
In purchasing and selling the Fund's portfolio securities, it is T. Rowe
Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided by
them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
FIXED INCOME SECURITIES
Fixed income securities are generally purchased from the issuer or a
primary market-maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by the client. 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.
<PAGE>
HOW EVALUATIONS ARE MADE OF THE OVERALL REASONABLENESS OF BROKERAGE
COMMISSIONS PAID
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
DESCRIPTION OF RESEARCH SERVICES RECEIVED FROM BROKERS AND DEALERS
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries, groups
of securities, individual companies, statistical information, accounting and
tax law interpretations, political developments, legal developments affecting
portfolio securities, technical market action, pricing and appraisal services,
credit analysis, risk measurement analysis, performance analysis and analysis
of corporate responsibility issues. These services provide both domestic and
international perspective. Research services are received primarily in the
form of written reports, computer generated services, telephone contacts and
personal meetings with security analysts. In addition, such services may be
provided in the form of meetings arranged with corporate and industry
spokespersons, economists, academicians and government representatives. In
some cases, research services are generated by third parties but are provided
to T. Rowe Price by or through broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price'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.
<PAGE>
COMMISSIONS TO BROKERS WHO FURNISH RESEARCH SERVICES
Certain brokers who provide quality execution services also furnish
research services to T. Rowe Price. In order to be assured of continuing to
receive research services considered of value to its clients, 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.
INTERNAL ALLOCATION PROCEDURES
T. Rowe Price has a policy of not precommitting a specific amount of
business to any broker or dealer over any specific time period. Historically,
the majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion of
its discretionary client brokerage business where special needs do not exist,
or where the business may be allocated among several brokers which are able to
meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers, 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
and make judgments as to the level of business which would recognize such
services. In addition, brokers sometimes suggest a level of business they
would like to receive in return for the various brokerage and research
services they provide. Actual brokerage received by any firm may be less than
the suggested allocations but can, and often does, exceed the suggestions,
because the total brokerage business is allocated on the basis of all the
considerations described above. In no case is a broker excluded from receiving
business from T. Rowe Price because it has not been identified as providing
research services.
MISCELLANEOUS
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers through
which T. Rowe Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe Price.
Conversely, research services received from brokers which execute transactions
for the Fund are not necessarily used by T. Rowe Price exclusively in
connection with the management of the Fund.
<PAGE>
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 Price Funds) if, as a result of such purchases, 10%
or more of the outstanding common stock of such company would be held by its
clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
TRANSACTIONS WITH RELATED BROKERS AND DEALERS
As provided in the Investment Management Agreement between the Fund and T.
Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary, owns 25% of the
common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an investment
adviser registered under the Investment Advisers Act of 1940. Fifty percent of
the common stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by Jardine Fleming
Holdings Limited, a subsidiary of JFG. JFG is 50% owned by Robert Fleming
Holdings and 50% owned by Jardine Matheson Holdings Limited. Orders for the
Fund's portfolio transactions placed with affiliates of Robert Fleming
Holdings and JFG will result in commissions being received by such affiliates.
<PAGE>
The Board of Directors of the Fund has authorized T. Rowe Price to utilize
certain affiliates of Robert Fleming Holdings and JFG in the capacity of
broker in connection with the execution of the Fund's portfolio transactions.
These affiliates include, but are not limited to, Jardine Fleming (Securities)
Limited ("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co.
Limited ("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert
Fleming, Inc. (a New York brokerage firm). Other affiliates of Robert Fleming
Holdings and JFG also may be used. Although it does not believe that the
Fund's use of these brokers would be subject to Section 17(e) of the 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.
OTHER
For the years ended December 31, 1993, 1992 and 1991, the total brokerage
commissions paid by the Fund, including the discounts received by securities
dealers in connection with underwritings, were approximately $776,000,
$120,000 and $51,000, respectively. Of these commissions, approximately 6.7%
and 35.8% in 1993 and 1992, respectively, and none in 1991, were paid to firms
which provided research, statistical, or other services to T. Rowe Price in
connection with the management of the Fund, or in some cases, to the Fund.
The portfolio turnover rate for the Fund for each of the last three years
has been as follows: 1993--40.8%; 1992--30.7%; and 1991--31.2%.
OTHER BUSINESS
The management of the 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 such proxy in accordance with their judgment
on such matters.
GENERAL INFORMATION
As of December 31, 1993, there were 13,296,602 shares of the capital stock
of the Fund outstanding, each with a par value of $0.50. Of those shares,
approximately 2,770,141, representing 20.8% of the outstanding stock, were
registered to the T. Rowe Price Trust Company as Trustee for participants in
the T. Rowe Price Funds Retirement Plan for Self-Employed (Keogh), as Trustee
for participants in T. Rowe Price Funds 401(k) plans, as Custodian for
participants in the T. Rowe Price Funds Individual Retirement Account (IRA),
as Custodian for participants in various 403(b)(7) plans, and as Custodian for
various Profit Sharing and Money Purchase plans. The T. Rowe Price Trust
Company has no beneficial interest in such accounts, nor in any other account
for which it may serve as trustee or custodian.
As of December 31, 1993, approximately 65,952 shares of the Fund,
representing approximately 0.5% of the outstanding stock, were owned by
various private counsel clients of T. Rowe Price, as to which T. Rowe Price
has discretionary authority. Accordingly, such shares are deemed to be owned
beneficially by T. Rowe Price only for the limited purpose as that term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934. T. Rowe Price
disclaims actual beneficial ownership of such shares. In addition, as of
December 31, 1993, a wholly-owned subsidiary of T. Rowe Price owned directly
110,063 shares of the Fund, representing approximately 0.83% of the
outstanding stock.
<PAGE>
As of December 31, 1993, the officers and directors of the Fund, as a
group, beneficially owned, directly or indirectly, 12,502 shares, representing
approximately 0.09% of the Fund's outstanding stock. The ownership of the
officers and directors reflects their proportionate interests, if any, in
7,879 shares of the Fund which are owned by a wholly-owned subsidiary of the
Fund's investment manager, T. Rowe Price, and their interests in 2,111 shares
owned by the T. Rowe Price Associates, Inc. Profit Sharing Trust.
A copy of the Annual Report of the Fund for the year ended December 31,
1993, including financial statements, has been mailed to shareholders of
record at the close of business on that date and to persons who became
shareholders of record between that time and the close of business on February
18, 1994, the record date for the determination of the shareholders who are
entitled to be notified of and to vote at the meeting.
ANNUAL MEETINGS
Under Maryland General Corporation Law, any corporation registered under
the 1940 Act is not required to hold an annual meeting in any year in which
the 1940 Act does not require action by shareholders on the election of
directors. The Board of Directors of the Corporation has determined that in
order to avoid the significant expense associated with holding annual
meetings, including legal, accounting, printing and mailing fees incurred in
preparing proxy materials, the Fund will take advantage of these Maryland law
provisions. Accordingly, no annual meetings shall be held in any year in which
a meeting is not otherwise required to be held by the 1940 Act for the
election of Directors unless the Board of Directors otherwise determines that
there should be an annual meeting. However, special meetings will be held in
accordance with applicable law or when otherwise determined by the Board of
Directors. The Corporation's By-Laws reflect this policy.
SHAREHOLDER PROPOSALS
If a shareholder wishes to present a proposal to be included in the Proxy
Statement for the next Annual Meeting, and if such Annual Meeting is held in
April, 1995, such proposal must be submitted in writing and received by the
Corporation's Secretary at its Baltimore office prior to November 9, 1994.
FINANCIAL STATEMENT OF INVESTMENT MANAGER
The audited consolidated balance sheet of T. Rowe Price which follows is
required by the 1940 Act, and should not be confused with, or mistaken for,
the financial statements of T. Rowe Price OTC Fund which are set forth in the
Annual Report for the Fund.
<PAGE>
T. ROWE PRICE ASSOCIATES,INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
(in thousands)
ASSETS
Cash and cash equivalents ................................... $ 46,218
Accounts receivable ......................................... 43,102
Investments in sponsored mutual funds
Short-term bond and money market mutual funds held as
trading securities ...................................... 27,647
Other funds held as available-for-sale securities ......... 69,423
Partnership and other investments ........................... 19,606
Property and equipment ...................................... 39,828
Goodwill and deferred expenses .............................. 9,773
Other assets ................................................ 7,803
-------------
$263,400
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses ..................... $ 15,111
Accrued retirement and other compensation costs ........... 19,844
Income taxes payable ...................................... 5,097
Dividends payable ......................................... 3,784
Debt ...................................................... 12,915
Deferred revenues ......................................... 1,548
Minority interests in consolidated subsidiaries ........... 9,148
Total liabilities ..................................... 67,447
Commitments and contingent liabilities
Stockholders' equity
Common stock, $.20 par value--authorized 48,000,000 shares;
issued and outstanding 29,095,039 shares ................ 5,819
Capital in excess of par value .............................. 1,197
Unrealized security holding gains ........................... 5,345
Retained earnings ........................................... 183,592
Total stockholders' equity ............................ 195,953
-------------
$263,400
-------------
The accompanying notes are an integral part of the consolidated balance sheet.
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Associates, Inc. and its consolidated subsidiaries (the
"Company") provide investment advisory and administrative services to
sponsored mutual funds and investment products, and to private accounts of
other institutional and individual investors.
BASIS OF PREPARATION
The Company's financial statements are prepared in accordance with generally
accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all majority
owned subsidiaries and, by virtue of the Company's controlling interest, its
50%-owned subsidiary, Rowe Price-Fleming International, Inc. ("RPFI"). All
material intercompany accounts are eliminated in consolidation.
CASH EQUIVALENTS
For purposes of financial statement disclosure, cash equivalents consist of
all short-term, highly liquid investments including certain money market
mutual funds and all overnight commercial paper investments. The cost of these
investments is equivalent to fair value.
INVESTMENTS IN SPONSORED MUTUAL FUNDS
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which requires the Company to state its mutual fund
investments at fair value and to classify these holdings as either trading
(held for only a short period of time) or available-for-sale securities.
Unrealized holding gains on available-for-sale securities at December 31, 1993
are reported net of income tax effects in a separate component of
stockholders' equity.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk as defined by SFAS No. 105 consist primarily of investments in
sponsored money market and bond mutual funds and accounts receivable. Credit
risk is believed to be minimal in that counterparties to these financial
instruments have substantial assets including the diversified portfolios under
management by the Company which aggregate $54.4 billion at December 31, 1993.
<PAGE>
PARTNERSHIP AND OTHER INVESTMENTS
The Company invests in various partnerships and ventures including those
sponsored by the Company. These investments which hold equity securities,
venture capital investments, debt securities and real estate are stated at
cost adjusted for the Company's share of the earnings or losses of the
investees subsequent to the date of investment. Because the majority of these
entities carry their investments at fair value and include unrealized gains
and losses in their reported earnings, the Company's carrying value for these
investments approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost net of accumulated depreciation and
amortization computed using the straight-line method. Provisions for
depreciation and amortization are based on the following estimated useful
lives: computer and communications equipment and furniture and other
equipment, 3 to 7 years; building, 40 years; leased land, the 50-year lease
term; and leasehold improvements, the shorter of their useful lives or the
remainder of the lease term.
<PAGE>
NOTES TO CONSOLIDATED BALANCE SHEET
NOTE 1--INVESTMENTS IN SPONSORED MUTUAL FUNDS
Investments in sponsored money market mutual funds, which are classified as
cash equivalents in the accompanying consolidated financial statements,
aggregate $45,272,000 at December 31, 1993.
The Company's investments in sponsored mutual funds held as available-for-sale
at December 31, 1993 (in thousands) includes:
Gross
unrealized Aggregate
Aggregate holding fair
cost gains value
------------------------------------------------
Stock funds ......... $34,990 $7,025 $42,015
Bond funds .......... 26,190 1,218 27,408
Total ........... $61,180 $8,243 $69,423
------------------------------------------------
The Company provides investment advisory and administrative services to the T.
Rowe Price family of mutual funds which had aggregate assets under management
at December 31, 1993 of $34.7 billion. All services rendered by the Company
are provided under contracts that set forth the services to be provided and
the fees to be charged. These contracts are subject to periodic review and
approval by each of the funds' boards of directors and, with respect to
investment advisory contracts, also by the funds' shareholders. Services
rendered to the funds accounted for 71% of 1993 revenues.
Accounts receivable from the sponsored mutual funds aggregated $21,741,000
at December 31, 1993.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1993 (in thousands) consists of:
Computer and communications equipment $31,431
Building and leased land ............. 19,756
Furniture and other equipment ........ 13,889
Leasehold improvements ............... 4,691
-------------
69,767
Accumulated depreciation and
amortization ......................... (29,939)
-------------
$39,828
-------------
<PAGE>
NOTE 3--GOODWILL AND DEFERRED EXPENSES
On September 2, 1992, the Company acquired an investment management subsidiary
of USF&G Corporation and combined six USF&G mutual funds with aggregate net
assets of $.5 billion into the T. Rowe Price family of funds. The total
transaction cost which has been recognized using the purchase method of
accounting was approximately $11,024,000, including goodwill of $8,139,000
which is being amortized over 11 years using the straight-line method. Prepaid
non-compete and transition services agreements totaling $2,500,000 are being
amortized over their three-year life. Accumulated amortization at December 31,
1993 aggregates $2,216,000.
Goodwill of $1,980,000 from an earlier corporate acquisition is being
amortized over 40 years using the straight-line method. Accumulated
amortization was $1,039,000 at December 31, 1993.
NOTE 4--DEBT
In June 1991, the Company completed the long-term financing arrangements for
its administrative services facility. Terms of the $13,500,000 secured
promissory note with Confederation Life Insurance Company include an interest
rate of 9.77%, monthly principal and interest payments totaling $128,000 for
10 years, and a final principal payment of $9,845,000 in 2001. A prepayment
option is available under the terms of the note; however, the payment of a
substantial premium would have been required to retire the debt at December
31, 1993. Related debt issuance costs of $436,000 are included in deferred
expenses and are being amortized over the life of the loan to produce an
effective annual interest rate of 10.14%.
The outstanding principal balance for this note was $12,904,000 at
December 31, 1993. A fair value of $16,030,000 was estimated based on the cost
of risk-free assets that could be acquired to extinguish the obligation at
December 31, 1993.
A maximum of $20,000,000 is available to the Company under unused bank
lines of credit at December 31, 1993.
NOTE 5--INCOME TAXES
Deferred income taxes arise from differences between taxable income for
financial statement and income tax return purposes and are calculated using
the liability method prescribed by SFAS No. 109, "Accounting for Income
Taxes."
The net deferred tax liability of $2,596,000 included in income taxes
payable at December 31, 1993 consists of total deferred tax liabilities of
$5,609,000 and total deferred tax assets of $3,013,000. Deferred tax
liabilities include $2,898,000 arising from unrealized holding gains on
available-for-sale securities, $1,353,000 arising from unrealized capital
gains allocated from the Company's partnership investments, and $677,000 from
differences in the recognition of depreciation expense. Deferred tax assets
include $1,100,000 from differences in the recognition of the costs of the
defined benefit retirement plan and postretirement benefits.
<PAGE>
NOTE 6--COMMON STOCK AND EMPLOYEE STOCK INCENTIVE PLANS
SHARES AUTHORIZED
At December 31, 1993, the Company had reserved 8,151,315 shares of its
unissued common stock for issuance upon the exercise of stock options and
420,000 shares for issuance under an employee stock purchase plan.
SHARE REPURCHASES
The Company's board of directors has authorized the future repurchase of up to
1,432,000 common shares at December 31, 1993.
EXECUTIVE STOCK
At December 31, 1993, there were outstanding 1,226,540 shares of common stock
("Executive Stock") which were sold to certain officers of the Company in 1982
at a discount. These shares are subject to restrictions which require payment
of the discount of $.32 per share to the Company at the earlier of the sale of
such stock or termination of employment.
STOCK INCENTIVE PLANS
The following table summarizes the status of noncompensatory stock options
granted at market value to certain officers and directors of the Company.
Options
Unexercised Options Unexercised Exercisable
Options at Options Granted Options at at
Year December Exercised (Canceled) December December
of 31, During During 31, 31, Exercise
Grant 1992 1993 1993 1993 1993 Price
- ------------------------------------------------------------------------------
1983-4 53,000 (30,600) -- 22,400 22,400 $.67 & $.75
1987 309,410 (68,064) -- 241,346 241,346 $5.38 & $9.38
1988 359,000 (66,586) -- 292,414 292,414 $7.94
1989 632,280 (46,288) (5,600) 580,392 312,404 $11.38
1990 681,500 (83,387) (11,800) 586,313 141,313 $7.19 & $8.50
1991 811,450 (37,000) (14,000) 760,450 283,450 $17.00
1992 926,000 (11,600) (27,400) 887,000 168,600 $18.75
1993 -- -- 1,154,000 1,154,000 -- $28.13
--------------------------------------------------------
3,772,640 (343,525) 1,095,200 4,524,315 1,461,927
-----------------------------------------------------
The right to exercise stock options generally vests over the five-year period
following the grant. After the tenth year following the grant, the right to
exercise the related stock options lapses and the options are canceled.
<PAGE>
NOTE 7--EMPLOYEE RETIREMENT PLANS
The Company sponsors two defined contribution retirement plans: a
profit-sharing plan based on participant compensation and a 401(k) plan.
The Company also has a defined benefit plan covering those employees whose
annual base salaries do not exceed a specified salary limit. Participant
benefits are based on the final month's base pay and years of service
subsequent to January 1, 1987. The Company's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. The following table sets forth the plan's funded status and the
amounts recognized in the Company's consolidated balance sheet (in thousands)
at December 31, 1993.
Actuarial present value of
Accumulated benefit obligation for service rendered
Vested ...................................................... $ 780
Non-vested .................................................. 1,362
-------------
Total ....................................................... 2,142
Obligation attributable to estimated future compensation
increases ................................................... 2,594
-------------
Projected benefit obligation .................................. 4,736
Plan assets held in sponsored mutual funds, at fair value ....... 2,594
-------------
Projected benefit obligation in excess of plan assets ........... 2,142
Unrecognized loss from decreases in discount rate ............... 407
-------------
Accrued retirement costs ........................................ $1,735
-------------
-------------
Discount rate used in determining actuarial present values ...... 6.40%
-------------
NOTE 8--COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a minority partner in the joint venture which owns the land and
building in which the Company leases its corporate offices. Future minimum
rental payments under the Company's lease agreement are $3,110,000 in 1994 and
1995, $3,220,000 in 1996, $3,769,000 in 1997 and 1998, and $33,755,000 in 1999
through 2006.
The Company leases office facilities and equipment under other
noncancelable operating leases. Future minimum rental payments under these
leases aggregate $4,621,000 in 1994, $4,123,000 in 1995, $1,776,000 in 1996,
$1,259,000 in 1997, $696,000 in 1998, and $4,806,000 in later years.
At December 31, 1993, the Company had outstanding commitments to invest an
additional $6,757,000 in various investment partnerships and ventures.
The Company has contingent obligations at December 31, 1993 under a
$500,000 direct pay letter of credit expiring not later than 1999 and a
$780,000 standby letter of credit which is renewable annually.
<PAGE>
Consolidated stockholders' equity at December 31, 1993 includes
$32,635,000 which is restricted as to use under various regulations and
agreements to which the Company and its subsidiaries are subject in the
ordinary course of business.
From time to time, the Company is a party to various employment-related
claims, including claims of discrimination, before federal, state and local
administrative agencies and courts. The Company vigorously defends itself
against these claims. In the opinion of management, after consultation with
counsel, it is unlikely that any adverse determination in one or more pending
employment-related claims would have a material adverse effect on the
Company's financial position.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of T. Rowe Price Associates, Inc.
In our opinion, the accompanying consolidated balance sheet presents fairly,
in all material respects, the financial position of T. Rowe Price Associates,
Inc. and its subsidiaries at December 31, 1993 in conformity with generally
accepted accounting principles. This financial statement is the responsibility
of the Company's management; our responsibility is to express an opinion on
this financial statement based on our audit. We conducted our audit 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 audit provides a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
January 25, 1994
<PAGE>
T.ROWEPRICE PROXY
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INSTRUCTIONS:
1. Cast your vote by checking the appropriate boxes on the reverse side. If
you do not check a box, your vote will be cast FOR that proposal.
2. Sign and date the card below.
3. Please return the signed card promptly using the enclosed postage paid
envelope, even if you will be attending the meeting.
4. Please do not enclose checks or any other correspondence.
Please fold and detach card at perforation before mailing.
- ------------------------------------------------------------------------------
T. ROWE PRICE OTC FUND, INC. MEETING: 8:00 A.M. EASTERN TIME
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John H. Laporte and James S. Riepe, as
proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all shares of stock of the
Fund, which the undersigned is entitled to vote at the Annual Meeting of
Shareholders to be held on Wednesday, April 20, 1994, at the time indicated
above, at the offices of the Fund, 100 East Pratt Street, Baltimore, Maryland
21202, and at any and all adjournments thereof, with respect to the matters
set forth below and described in the Notice of Annual Meeting and Proxy
Statement dated March 9, 1994, receipt of which is hereby acknowledged.
Please sign exactly as name appears.
Only authorized officers should sign for
corporations. For information as to the
voting of stock registered in more than
one name, see page 3 of the Notice of
Annual Meeting and Proxy Statement.
Dated: ------------------------- , 1994
----------------------------------------
----------------------------------------
Signature(s)
CUSIP#779572106/fund#065
<PAGE>
T.ROWEPRICE WE NEED YOUR PROXY VOTE BEFORE APRIL 20, 1994
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Please refer to the Proxy Statement discussion of each of these matters.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ALL
PROPOSALS.
Please fold and detach card at perforation before mailing.
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1. Election of FOR all nominees WITHHOLD AUTHORITY 1.
directors listed below (except to vote for all nominees
as marked to the contrary) listed below
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE STRIKE A
LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
Leo C. Bailey Donald W. Dick, Jr. David K. Fagin Addison Lanier
John H. Laporte John K. Major Hanne M. Merriman James S. Riepe
Hubert D. Vos Paul M. Wythes
2. Approve changes to the Fund's FOR EACH POLICY LISTED ABSTAIN 2.
fundamental policies. BELOW (except as marked
to the contrary)
IF YOU DO NOT WISH TO APPROVE A POLICY CHANGE, PLEASE CHECK THE APPROPRIATE
BOX BELOW:
(A) Borrowing (E) Purchasing (I) Investment (M) Ownership of
Securities Companies Securities
(B) Commodities (F) Real Estate (J) Purchasing (N) Illiquid
& Futures on Margin Securities
(C) Lending (G) Senior Securities (K) Oil & Gas (O) Short Sales
(D) Single Issuer (H) Control (L) Options (P) Unseasoned Issuers
3. Ratify the selection of Coopers & Lybrand as independent accountants.
FOR AGAINST ABSTAIN 3.
4. I authorize the Proxies, in their discretion, to vote upon such other
business as may properly come before the meeting.
CUSIP#779572106/fund#065
