<PAGE>1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to Section 240.14a-11(c) or
Section 240.14a-12
T. Rowe Price OTC Fund, Inc.
_________________________________________________________________
(Name of Registrant as Specified in its Charter)
T. Rowe Price OTC Fund, Inc.
_________________________________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies:
_________________________________________________________
2) Aggregate number of securities to which transaction
applies:
_________________________________________________________
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: (1)
_________________________________________________________
4) Proposed maximum aggregate value of transaction:
_________________________________________________________
1 Set forth the amount on which the filing fee is calculated and
state how it was determined.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing,<PAGE>
<PAGE>2
1) Amount previously paid:
_________________________________________________________
2) Form, schedule, or Registration Statement no.:
_________________________________________________________
3) Filing party:
_________________________________________________________
4) Date filed:
_________________________________________________________<PAGE>
<PAGE>3
PRELIMINARY PROXY
T. ROWE PRICE
_________________________________________________________________
T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore,
MD 21202
James S. Riepe
Managing Director
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. <PAGE>
<PAGE>4
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,
James S. Riepe
Director,
Mutual Funds Division
CUSIP#779572106/fund#065<PAGE>
<PAGE>5
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, Inc. ("the Fund"), a Maryland corporation, 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 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;
CUSIP#779572106/fund#065<PAGE>
<PAGE>6
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;
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>
<PAGE>7
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, Inc. (the
"Fund"), a Maryland corporation, for use at the Annual Meeting of
Shareholders of the Fund to be held on April 20, 1994, and at any
adjournments thereof.
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<PAGE>
<PAGE>8
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.
VOTE REQUIRED: A PLURALITY OF ALL VOTES CAST AT THE
MEETING IS SUFFICIENT TO APPROVE PROPOSAL 1 FOR THE FUND. A
MAJORITY OF THE SHARES PRESENT IN PERSON OR BY PROXY AT THE
MEETING IS SUFFICIENT TO APPROVE PROPOSAL 3 FOR THE FUND.
APPROVAL OF ALL REMAINING PROPOSALS OF THE FUND 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 any of the proposed amendments to the
Fund's fundamental investment policies are not approved, the
policies 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.
<PAGE>
<PAGE>9
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 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. <PAGE>
<PAGE>10
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Year Owned, Shares
of Directly Beneficially
Original or Owned
Name, Address Election Indirectly, Directly
and Date of Birth Principal as as of as of
of Nominee Occupations(1) Director 1/31/94(2) 1/31/94
_________________________________________________________________
Leo C. Bailey Retired; Director 1992
3396 S. Placita of the following T. Rowe
Fabula Price Funds: Growth Stock,
Green Valley, AZ New Era, Science & Technology,
85614 Index Trust (since inception),
3/3/24 Balanced (since inception),
Mid-Cap Growth (since inception),
Dividend Growth (since inception),
Blue Chip Growth (since inception),
International, and Institutional
International (since inception)
Donald W. Dick, Partner, Overseas 1992
Jr. Partners, Inc., a
375 Park Avenue financial investment firm;
Suite 3505 formerly (6/65-3/89)
New York, NY Director and Vice President-
10152 Consumer Products Division,
1/27/43 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)<PAGE>
<PAGE>11
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Year Owned, Shares
of Directly Beneficially
Original or Owned
Name, Address Election Indirectly, Directly
and Date of Birth Principal as as of as of
of Nominee Occupations(1) Director 1/31/94(2) 1/31/94
_________________________________________________________________
David K. Fagin Chairman, Chief 1992
One Norwest Executive Officer
Center and Director, Golden
1700 Lincoln Star Resources, Ltd.;
Street formerly (1986-7/91)
Suite 1950 President, Chief Operating
Denver, CO Officer and Director,
80203 Homestake Mining Company;
4/9/38 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 1992
441 Vine Street, management; President
#2310 and Director, Thomas
Cincinnati, OH Emery's Sons, Inc. and
45202-2913 Emery Group, Inc.; Director/
1/12/24 Trustee, 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>
<PAGE>12
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Year Owned, Shares
of Directly Beneficially
Original or Owned
Name, Address Election Indirectly, Directly
and Date of Birth Principal as as of as of
of Nominee Occupations(1) Director 1/31/94(2) 1/31/94
_________________________________________________________________
*John H. Laporte Chairman of the 1994
100 East Pratt Board and member of
Street the Executive Committee
Baltimore, MD of 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 1992
126 E. 26 Place Board and President,
Tulsa, OK KCMA 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)
<PAGE>
<PAGE>13
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Year Owned, Shares
of Directly Beneficially
Original or Owned
Name, Address Election Indirectly, Directly
and Date of Birth Principal as as of as of
of Nominee Occupations(1) Director 1/31/94(2) 1/31/94
_________________________________________________________________
Hanne M. Retail business consultant;
Merriman formerly, President and Chief
655 15th Street Operating Officer (1991-92),
Suite 300 Nan Duskin, Inc., a women's
Washington, specialty store, Director
D.C. 20005 (1984-90) and Chairman
11/16/41 (1989-90) Federal Reserve Bank
of Richmond, and President
and Chief Executive Officer
(1988-89), Honeybee, Inc.,
a division of Spiegel, Inc.;
Director, Central Illinois
Public Service Company, CIPSCO
Incorporated, The Rouse Company,
State Farm Mutual Automobile
Insurance Company and USAir
Group, Inc.<PAGE>
<PAGE>14
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Year Owned, Shares
of Directly Beneficially
Original or Owned
Name, Address Election Indirectly, Directly
and Date of Birth Principal as as of as of
of Nominee Occupations(1) Director 1/31/94(2) 1/31/94
_________________________________________________________________
*James S. Riepe Vice President 1992
100 East Pratt and member of the
Street Executive Committee
Baltimore, MD of the Fund; Managing
21202 Director, T. Rowe Price
6/25/43 Associates, 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.
<PAGE>
<PAGE>15
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Year Owned, Shares
of Directly Beneficially
Original or Owned
Name, Address Election Indirectly, Directly
and Date of Birth Principal as as of as of
of Nominee Occupations(1) Director 1/31/94(2) 1/31/94
_________________________________________________________________
Hubert D. Vos President, 1992
1231 State Stonington Capital
Street Corporation, a private
Suite 210 investment company;
Santa Barbara, Director/Trustee of the
CA 93190-0409 following T. Rowe Price
8/2/33 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>
<PAGE>16
_________________________________________________________________
Fund All Other
Shares Price
Beneficially Funds'
Year Owned, Shares
of Directly Beneficially
Original or Owned
Name, Address Election Indirectly, Directly
and Date of Birth Principal as as of as of
of Nominee Occupations(1) Director 1/31/94(2) 1/31/94
_________________________________________________________________
Paul M. Wythes Founding General 1992
755 Page Mill Partner, Sutter Hill
Road Ventures, a venture
Suite A200 capital limited partnership
Palo Alto, CA providing equity capital to
94304 young high technology companies
6/23/33 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 Price Associates.
* 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
_____ 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 _______ shares owned by the T. Rowe
Price Associates, Inc. Profit Sharing Trust.
<PAGE>
<PAGE>17
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 independent directors of the Corporation.
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 members are Anthony W. Deering and Donald W. Dick, Jr.
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.
<PAGE>
<PAGE>18
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 election or 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.
<PAGE>
<PAGE>19
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 Fund's Board of
Directors 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.
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 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
<PAGE>20
mutual 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
mutual 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 (see page 6 of
prospectus); 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."
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
other than 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
<PAGE>21
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 pruchase securities from a bank or
broker-dealer (counterparty) with the understanding 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
<PAGE>22
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.
B. PROPOSAL TO AMEND CERTAIN FUNDAMENTAL POLICIES OF THE FUND TO
PERMIT THE UTILIZATION OF FUTURES CONTRACTS OR OPTIONS ON
SUCH CONTRACTS
The Board of Directors, has proposed amendments to the
Fundamental 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.
<PAGE>23
"[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 positions would exceed 5% of the
Fund's net asset value (the "New Operating Policy").
A description of the proposed transactions in futures
transactions 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").
Stock index futures contracts may be used to provide a
hedge for a portion of the Fund's portfolio, as a cash management
tool, or as an efficient way for T. Rowe Price to implement
either an increase or decrease in portfolio market exposure in
response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the
Fund must enter into futures contacts with respect to indices or
subindices whose movements will have a significant correlation
with movements in the prices of the Fund's portfolio
securities.
Interest rate or currency futures contracts may be used as a
hedge against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more definitely the
effective return on securities or currencies held or intended to
be acquired by the Fund. In this regard, the Fund could sell
interest rate or currency futures as an offset against the effect
of expected increases in interest rates or currency exchange
rates and purchase such futures as an offset against the effect
of expected declines in interest rates or currency exchange
rates.
<PAGE>
<PAGE>24
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
identified margin deposits), will be 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.
<PAGE>
<PAGE>25
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.
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.
<PAGE>
<PAGE>26
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).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and
anticipated changes in the market and interest rates, which in
turn are affected by fiscal and monetary policies and national
and international policies and economic events.
<PAGE>27
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>28
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
<PAGE>29
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.
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
<PAGE>30
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>31
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
Commission 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
<PAGE>32
advised by T. Rowe Price or Rowe Price-Fleming International,
Inc. (the "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
mutual 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
mutual 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:
"[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 Price mutual funds. The nature of this
program and the risks associated with the Fund's participation
are set forth under "Borrowing from Other Price Funds" beginning
on page ____. Shareholders are being asked to consider, and vote
<PAGE>33
separately, on the Fund's participation in the interfund lending
program as a borrower and as a lender.
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 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 Price
Funds.
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., debt 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 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.
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
<PAGE>34
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 private
placements or 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 ____ for a discussions 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 Price Funds will help promote its
operational efficiencies and facilitate monitoring of the
compliance with the Fund's investment restrictions.
<PAGE>35
The Board of Directors recommends that shareholders vote FOR
the proposal.
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 exemption to the Fund's general
prohibition against making loans.
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 Investment Company Act of 1940
(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:
<PAGE>36
"[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;"
The proposed amendments will not affect the status of the
Fund as a diversified investment company under the 1940 Act.
However, the proposed amendments 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 Restrictions 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
<PAGE>37
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);"
The proposed amendments will not affect the status of the
Fund as a diversified investment company under the 1940 Act.
However, the proposed amendments 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 Price
<PAGE>38
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.
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 policy on issuing senior securities
which would allow the Fund to invest in senior securities to the
extent permitted under the Investment Company Act of 1940. The
new policy, if adopted, would provide the Fund with greater
<PAGE>39
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
<PAGE>40
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.
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;"
<PAGE>41
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;"
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, (1) to investing no more than 10%
of its total assets in the securities of other investment
companies; (2) to owning no more than 3% of the total outstanding
voting stock of any other investment company; and (3) to 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
<PAGE>42
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 mutual 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 mutual 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
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;"
<PAGE>43
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 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 purpose of the proposal is to provide the Fund with greater
flexibility in pursuing its investment objective and program.
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 mutual 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 mutual funds are subject.
The Board has directed that the proposal be submitted to
shareholders for approval or disapproval.
<PAGE>44
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 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
<PAGE>45
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 mutual 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 mutual 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:
"[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 this 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) "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 Associates, Inc. ("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
<PAGE>46
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. 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 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 calls and
puts, the value of purchased calls and puts on identical
securities or currencies with identical maturity dates.
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
<PAGE>47
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
<PAGE>48
currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency
for delivery in accordance with an exercise notice of a call
option assigned to it, rather than delivering such security or
currency from its portfolio. In such cases, additional costs may
be incurred.
The Fund will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more than the premium received from the writing of the option.
Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the
Fund.
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
<PAGE>49
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, can not
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.
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
<PAGE>50
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.
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
<PAGE>51
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 their
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>52
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.
<PAGE>53
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 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.
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.
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
<PAGE>54
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;"
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 can not 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,
<PAGE>55
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 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.
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.
<PAGE>56
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 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
<PAGE>57
description of short sales and their risks would be set forth
therein.
The Board of Directors recommends that shareholders vote FOR
the proposal.
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 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 mutual 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 mutual 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;"
<PAGE>58
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.
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 year 1994 is to be
submitted for ratification or rejection by the shareholders at
the Shareholder 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 Shareholder
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
<PAGE>59
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
reelection as directors) and their positions with T. Rowe Price
are as follows:
Position Position with
Officer with Fund 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 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 Employee
President
Edward T. Schneider Assistant Vice Employee
President
Ingrid I. Vordemberge Assistant Vice Employee
President
* Mr. McCrickard's date of birth is _______. He has been
President of the Fund since 1993 and has been employed by T. Rowe
Price since _______.
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.
<PAGE>60
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 December 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
<PAGE>61
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.
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
<PAGE>62
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 $204,609,039, and a management fee of $1,547,061 was
paid by the Fund to T. Rowe Price.
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
<PAGE>63
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.
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
<PAGE>64
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
<PAGE>65
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers who provide quality 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
<PAGE>66
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.
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
<PAGE>67
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 International Holdings Limited, a subsidiary of
JFG. JFG is 50% owned by Robert Fleming Holdings and 50% owned
by Jardine Matheson Holdings Limited. Orders for the Fund's
portfolio transactions placed with affiliates of Robert Fleming
Holdings and JFG will result in commissions being received by
such affiliates.
The Board of Directors of the Fund has authorized T. Rowe
Price to utilize certain affiliates of Robert Fleming and JFG in
the capacity of broker in connection with the execution of the
Fund's portfolio transactions. These affiliates include, but are
not limited to, Jardine Fleming (Securities) Limited ("JFS"), a
wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
<PAGE>68
("RF&Co."), Jardine Fleming Australia Securities Limited, and
Robert Fleming, Inc. (a New York brokerage firm). Other
affiliates of Robert Fleming Holdings and JFG also may be used.
Although it does not believe that the Fund's use of these brokers
would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of 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--31.0%.
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
_________________, representing ____.___% 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
<PAGE>69
such accounts, nor in any other account for which it may serve as
trustee or custodian.
As of December 31, 1993, approximately _______________
shares of the Fund, representing approximately ___.___% 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.
As of December 31, 1993, the officers and directors of
the Fund, as a group, beneficially owned, directly or indirectly,
_______ shares, representing approximately .__% of the Fund's
outstanding stock. The ownership of the officers and directors
reflects their proportionate interests, if any, in _____ 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
______ 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.
Shareholders should refer to the Annual Report for the Fund's
performance record.
ANNUAL MEETINGS
Under Maryland General Corporation Law, any corporation
registered under the Investment Company Act of 1940 ("the Act")
is not required to hold an annual meeting in any year in which
the Act does not require action by shareholders on the election
of directors. The Board of Directors of the Fund 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 Act
<PAGE>70
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 Fund'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 10, 1994.
FINANCIAL STATEMENT OF INVESTMENT MANAGER
The audited consolidated balance sheet of T. Rowe Price
which follows is required by the Investment Company Act of 1940,
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>
PAGE 71
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>
PAGE 72
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>
PAGE 73
T. ROWE PRICE ASSOCIATES, INC.
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
The Company has historically accounted for its investments in
stock and bond mutual funds at the lower of aggregate cost or
market. 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>
PAGE 74
T. ROWE PRICE ASSOCIATES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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>
PAGE 75
T. ROWE PRICE ASSOCIATES, INC.
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) include:
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>
PAGE 76
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
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."
<PAGE>
PAGE 77
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
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.
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.
<PAGE>
PAGE 78
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
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
Unexer- Options Unexer- Exer-
cised Options Granted cised cisable
Options Exer- (Canceled) Options at
Year at Decem- cised During Decem- Decem- Exer-
of ber 31, During ber 31, ber 31, ber 31, cise
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.
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.<PAGE>
PAGE 79
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
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. Other assets at December 31, 1992 includes a
receivable from the venture of $3,485,000 for leasehold
improvements made by the Company and reimbursed by the venture in
1993.
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>
PAGE 80
T. ROWE PRICE ASSOCIATES, INC.
NOTES TO CONSOLIDATED BALANCE SHEET (Continued)
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>
PAGE 81
T. ROWE PRICE (LOGO) PROXY
_______________________________________________________________
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 PRROXY 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
(Front)<PAGE>
<PAGE>85
T. ROWE PRICE (LOGO) WE NEED YOUR PROXY VOTE BEFORE APRIL 20,
1994
_________________________________________________________________
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.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1. Election of FOR all nominees / /WITHHOLD AUTHORITY / /1.
directors. listed below (except to vote for all
as marked to the nominees listed below
contrary)
(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 fundamental policies.
FOR each policy / / ABSTAIN / / 2.
listed below (except as
marked to the contrary)
If you do NOT (underscored) wish to approve a policy change,
please check the appropriate box below:
/ /A. Borrowing / /G. Senior Securities / /N. Illiquid
/ /B. Commodities & / /H. Portfolio Companies Securi-
Futures / /I. Investment Companies ties
/ /C. Lending / /J. Purchasing on Margin / /O. Short
/ /D. Single Issuer / /K. Oil and Gas Sales
/ /E. Voting Securities / /L. Options / /P. Unsea-
/ /F. Real Estate / /M. Ownership of Securities soned
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
(BACK)
