PAGE 1
OTC FUND
PROSPECTUS
MAY 1, 1994
T. ROWE PRICE
OTC FUND, INC.
Investment Summary
The Fund seeks long-term growth of capital through investments in
securities traded in the U.S. over-the-counter ("OTC") market. The Fund
will invest primarily in securities of smaller growth and value-oriented
companies.
T. Rowe Price
100% No Load. This Fund has no sales charges, no redemption fees, and no
12b-1 fees. 100% of your investment is credited to your account.
Services. T. Rowe Price provides easy access to your money through bank
wires or telephone redemptions and offers easy exchange to other T. Rowe
Price Funds.
T. Rowe Price Associates, Inc. (T. Rowe Price) was founded in 1937 by the
late Thomas Rowe Price, Jr. As of December 31, 1993, the firm and its
affiliates managed over $50 billion for approximately three million
individual and institutional investor accounts.
This prospectus contains information you should know about the Fund before
you invest. Please keep it for future reference. A Statement of Additional
Information for the Fund (dated May 1, 1994) has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
prospectus. It is available at no charge by calling: 1-800-638-5660.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION,
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Fund Information
Investment Objective and Program 2
Summary of Fund Fees and Expenses 3
Financial Highlights 4
Investing in Small-Cap Stocks 4
Investment Policies 4
Performance Information 7
Capital Stock 7
NAV, Pricing, and Effective Date 9
Receiving Your Proceeds 9
Dividends and Distributions 10
Taxes 10
Management of the Fund 11
Expenses and Management Fee 11
How to Invest
Shareholder Services 12
Conditions of Your Purchase 13
Completing the New Account Form 14
Opening a New Account 15
Purchasing Additional Shares 15
Exchanging and Redeeming Shares 16
INVESTMENT OBJECTIVE AND PROGRAM
The Fund's investment objective is long-term growth of capital through
investments in securities traded in the U.S. OTC market, primarily common
stocks of small to medium-sized companies.
The Fund's share price will fluctuate with changing market conditions,
and your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the stock market. In
addition, stocks of small companies may be subject to more abrupt or
erratic price movements than larger company securities. The Fund cannot
guarantee it will achieve its investment objective.
The Fund expects, under normal conditions, to invest at least 80% of
its net assets in equity and equity-related securities traded in the U.S.
OTC market. OTC securities are typically not listed for trading on any
national exchange. The Fund will invest its assets primarily in securities
of smaller companies which are believed to offer either superior earnings
growth or appear undervalued based on cash flow, book value or assets per
share. Up to 20% of the Fund's assets may be invested in exchange listed-
equity securities. Current dividend or interest income is not a
prerequisite in the selection of portfolio securities.
The Fund's holdings will be widely diversified by industry and
company. Under most circumstances, the Fund's average holding will be less
than 1.5% of its net assets.
INVESTING IN EQUITY SECURITIES TRADED IN THE U.S. OTC MARKET.
Investors should realize that the very nature of investing in small
companies involves greater risk than is customarily associated with more
established companies. The Fund is designed for long-term investors who are
willing to accept greater investment risks in search of substantial
long-term rewards. Small companies often have limited product lines,
markets, or financial resources, and they may be dependent upon a small
group of inexperienced managers. The securities of small companies may have
limited-
marketability and may be subject to more abrupt or erratic market
movements than securities of larger companies or the market averages in
general. In addition, certain smaller OTC securities in which the Fund
invests may be less liquid than exchange-traded securities. However, small
companies may offer greater opportunities for capital appreciation than
larger, more established companies. In addition, small companies are often
overlooked by the investment community. Therefore, these securities may be
undervalued and provide the potential for significant capital appreciation.
The Fund's manager, T. Rowe Price Associates, Inc. (T. Rowe Price),
will rely on its proprietary research to identify attractive small company
stocks before their value is recognized by the investment community. It is
anticipated the Fund will invest in both growth and value-oriented
companies. When reviewing investments in small growth companies, T. Rowe
Price will consider the following characteristics: capable management,
attractive business niches, pricing flexibility, sound financial and
accounting practices, and a demonstrated capability to grow revenues,
earnings and cash flow in a consistent manner. Stocks will be selected when
T. Rowe Price believes: (1) the current stock price is undervalued based on
a low price to earnings ratio, projected cash flow or asset value per
share; or (2) the price to earnings ratio is attractive relative to the
security's underlying earnings growth rate; and (3) the potential for some
catalyst exists (such as increased investor attention, asset sales or a
change in management) which will cause the stock's price to increase to
reflect the company's underlying value.
Although the Fund will invest primarily in U.S. common stocks, it may
also purchase other types of securities, for example, foreign securities,
convertible securities and warrants, when considered consistent with the
Fund's investment objective and program. The Fund may also engage in a
variety of investment management practices, such as buying and selling
futures and options. Please see Investment Policies for a more complete
description of these and other permissible Fund investments.
SUMMARY OF FUND FEES AND EXPENSES
The Fund is 100% no-load...you pay no fees to purchase, exchange or redeem
shares, nor any ongoing marketing (12b-1) expenses. Lower expenses benefit
you by increasing your investment return from the Fund.
Shown below are all expenses and fees the Fund incurred during its
fiscal year. Where applicable, expenses were restated to reflect current
fees. Expenses are expressed as a percent of average Fund net assets. More
information about these expenses may be found below and under Expenses and
Management Fee and in the Statement of Additional Information under
Management Fee and Limitation on Fund Expenses.
Shareholder Transaction Expenses Annual Fund Expenses
Sales load "charge" on purchases None Management fee 0.80%
Sales load "charge" on reinvested Total other (Shareholder
dividends None servicing, custodial,
Redemption fees None auditing, etc.)<F1> 0.40%
Exchange fees None Distribution fees (12b-1) None
Total Fund Expenses 1.20%
<F1> The Fund charges a $5.00 fee for wire redemptions under $5,000,
subject to change without notice.
EXAMPLE OF FUND EXPENSES.
The following example illustrates the expenses you would incur on a $1,000
investment, assuming a 5% annual rate of return and redemption at the end
of each period shown. For example, expenses for the first year in the Fund
would be $12. This is an illustration only. Actual expenses and performance
may be more or less than shown.
1 Year-$12 3 Years-$38 5 Years-$66 10 Years-$145
Management Fee. The Fund pays T. Rowe Price an investment management fee
consisting of a flat Individual Fund Fee of 0.45% of the Fund's net assets
and a Group Fee, defined on page 11 under Expenses and Management Fee, of
0.35% as of December 31, 1993. Thus, the total combined management fee for
the Fund would be 0.80% of net assets. Because the investment program of
the Fund is more costly to implement and maintain, the total combined
management fee is higher than that paid by many other investment companies.
Transfer Agent, Shareholder Servicing, and Administrative Costs. The Fund
paid fees to: (i) T. Rowe Price Services, Inc. (TRP Services) for transfer
and dividend disbursing agent functions and shareholder services for all
accounts; (ii) T. Rowe Price Retirement Plan Services, Inc. for
subaccounting and recordkeeping services for certain retirement accounts;
and (iii) T. Rowe Price for calculating the daily share price and
maintaining the portfolio and general accounting records of the Fund. These
fees totaled approximately $350,000, $200, and $85,000, respectively.
FINANCIAL HIGHLIGHTS
The following table provides information about the Fund's financial
history. It is based on a single share outstanding throughout each fiscal
year (which ends on the last day of December). The table is part of the
Fund's financial statements which are included in the Fund's annual report
and incorporated by reference into the Statement of Additional Information,
which is available to shareholders. The financial highlights for the years
ended December 31, 1992 and 1993, presented below, is included in financial
statements audited by the Fund's independent accountants, Coopers &
Lybrand, whose reports thereon were unqualified. The information presented
below for the years 1984-1991 has been examined by Sanville & Company,
independent accountants, whose respective reports thereon were unqualified.
<TABLE>
<CAPTION>
Investment Activities Distributions End of Period
Net Total Ratio of
Realized Total Return Ratio of Net In-
Net and Un- from Net (Includes Expenses vestment Port-
Asset Net realized Invest- Net Asset Rein- to Income folio
Year Value, Invest- Gain(Loss) ment Invest- Net Total Value, vested Net Average to Avg. Turn-
Ended, Beginning ment on Invest- Activi- ment Realized Distri- End of Divi- Assets Net Net over
Dec. 31 of Period Income ments ties Income Gain butions Period dends) ($000s) Assets Assets Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1984 $16.81 $.16 $(.56) $(.40) $(.10) $(1.38) $(1.48) $14.93 (2.6)% $84,340 1.28% 1.07 % 21.6%
1985 14.93 .14 4.895 5.035 (.15) (1.135) (1.285) 18.68 35.4% 147,535 1.25% 0.75 % 31.2%
1986 18.68 .20 .79 .99 (.06) (2.57) (2.63) 17.04 4.7% 247,676 0.85% 0.95 % 30.7%
1987 17.04 .15 (2.17) (2.02) (.32) (1.51) (1.83) 13.19 (12.5)% 212,319 1.00% 0.80 % 49.0%
1988 13.19 .11 3.47 3.58 (.13) (2.50)<F1> (2.63) 14.14 (27.2)% 292,104 1.55% 0.69 % 27.2%
1989 14.14 .09 2.61 2.70 (.13) (0.48) (0.61) 16.23 19.1% 315,939 1.45% 0.63 % 33.1%
1990 16.23 .11 (3.43) (3.32) (.09) (0.10) (0.19) 12.72 (20.5)% 215,299 1.47% 0.73 % 34.8%
1991 12.72 .07 4.84 4.91 (.09) (0.68) (0.77) 16.86 38.6% 266,584 1.34% 0.48 % 31.2%
1992 16.86 .02 2.20 2.22 (.07) (4.64) (4.71) 14.37 13.9% 186,838 1.32% 0.03 % 30.7%
1993 14.37 - 2.60 2.60 - (1.58) (1.58) 15.39 18.4% 204,609 1.20% (0.01)% 40.8%
<FN>
<F1>Return of capital distribution.
</FN>
</TABLE>
INVESTING IN SMALL-CAP STOCKS
Common stocks of large and small companies offer a way to invest for
long-term growth of capital. As the U.S. economy has expanded, corporate
profits have grown, and share values have risen. Small companies often grow
faster than large and can generate greater earnings increases.
Prices of small-company shares have risen over time, but this rise has
been punctuated by periodic declines. As with large stocks, prices of even
the best managed, most profitable small companies are subject to market
risk, which means they can fluctuate widely. In the short run,
small-company stocks tend to be more volatile than large for a number of
reasons relating to their marketplace and their business environment. In
addition, swings in investor psychology and/or significant trading by large
institutional investors can result in price fluctuations. For this reason,
investors in these stocks should have a long-term horizon and be willing to
wait out bear markets.
INVESTMENT POLICIES
This section takes a detailed look at some of the types of securities the
Fund may hold in its portfolio and the various kinds of investment
practices that may be used in day-to-day portfolio management. The Fund's
investment program is subject to further restrictions and risks described
in the Statement of Additional Information.
Shareholder approval is required to substantively change the Fund's
objective and certain investment restrictions noted in the following
section as "fundamental policies." The managers also follow certain
"operating policies" which can be changed without shareholder approval.
However, significant changes are discussed with shareholders in Fund
reports.
Types of Portfolio Securities
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES
AND SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS
OBJECTIVE.
In seeking to meet its investment objective, the Fund may invest in any
type of security whose investment characteristics are consistent with the
Fund's investment program. These and some of the other investment
techniques the Fund may use are described in the following pages.
Fundamental Policy. The Fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of the issuer or more than 10% of the
voting securities of the issuer would be held by the Fund.
Common and Preferred Stocks. Stocks represent shares of ownership in
a company. Generally, preferred stock has a specified dividend and ranks
after bonds and before common stocks in its claim on income for dividend
payments and on assets should the company be liquidated. After other claims
are satisfied, common stockholders participate in company profits on a pro
rata basis; profits may be paid out in dividends or reinvested in the
company to help it grow. Increases and decreases in earnings are usually-
reflected in a company's stock price, so common stocks generally have the
greatest appreciation and depreciation potential of all corporate
securities. While most preferred stocks pay a dividend, the Fund may
purchase preferred stock where the issuer has omitted, or is in danger of
omitting, payment of its dividend. Such investments would be made primarily
for their capital appreciation potential.
Convertible Securities and Warrants. The Fund may invest in debt or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation
of the underlying stock into which they are convertible, but to a lesser
degree. In recent years, convertibles have been developed which combine
higher or lower current income with options and other features. Warrants
are options to buy a stated number of shares of common stock at a specified
price any time during the life of the warrants (generally, two or mor e
years).
Foreign Securities. The Fund may invest in foreign securities. These
include non-dollar denominated securities traded outside of the U.S. and
dollar denominated securities traded in the U.S. (such as ADRs). Such
investments increase a portfolio's diversification and may enhance return,
but they also involve some special risks such as exposure to potentially
adverse local political and economic developments; nationalization and
exchange controls; potentially lower liquidity and higher volatility;
possible problems arising from accounting, disclosure, settlement, and
regulatory practices that differ from U.S. standards; and the chance that
fluctuations in foreign exchange rates will decrease the investment's value
(favorable changes can increase its value).
Operating Policy. The Fund may invest up to 10% of its total assets in
foreign securities.
Fixed Income Securities. The Fund may invest in debt securities of any
type without regard to quality or rating. Such securities would be
purchased in companies which meet the investment criteria for the Fund. The
price of a bond fluctuates with changes in interest rates, rising when
interest rates fall and falling when interest rates rise.
High Yield/High Risk Investing. The total return and yield of lower
quality (high yield/high risk) bonds, commonly referred to as junk bonds,
can be expected to fluctuate more than the total return and yield of higher
quality, shorter-term bonds, but not as much as common stocks. Junk bonds
are regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments.
Operating Policy. The Fund will not purchase a non-investment grade debt
security (or junk bond) if immediately after such purchase the Fund would
have more than 10% of its total assets invested in such securities.
Hybrid Instruments. These instruments can combine the characteristics of
securities, futures and options. For example, the principal amount,
redemption or conversion terms of a security could be related to the market
price of some commodity, currency or securities index. Such securities may
bear interest or pay dividends at below market (or even relatively nominal)
rates. Under certain conditions, the redemption value of such an investment
could be zero. Hybrids can have volatile prices and limited liquidity and
their use by the Fund may not be successful.
Operating Policy. The Fund may invest up to 10% of its total assets in
hybrid instruments.
Private Placements (Restricted Securities). These securities are sold
directly to a small number of investors, usually institutions. Unlike
public offerings, such securities are not registered with the SEC. Although
certain of these securities may be readily sold, for example, under Rule
144A, the sale of others may involve substantial delays and additional
costs.
Operating Policy. The Fund will not invest more than 15% of its net assets
in illiquid securities.
Types of Management Practices
Cash Position. The Fund will hold a certain portion of its assets in money
market securities, including repurchase agreements, in the two highest
rating categories, maturing in one year or less. For temporary, defensive
purposes, the Fund may invest without limitation in such securities. This
reserve position provides flexibility in meeting redemptions, expenses, and
the timing of new investments, and serves as a short-term defense during
periods of unusual market volatility.
Borrowing Money and Transferring Assets. The Fund can borrow money from
banks as a temporary measure for emergency purposes, to facilitate
redemption requests, or for other purposes consistent with the Fund's
investment objective and program. Such borrowings may be collateralized
with Fund assets, subject to restrictions.
Fundamental Policy. Borrowings may not exceed 33 1/3% of total Fund assets.
Operating Policies. The Fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the Fund's
total assets. The Fund may not purchase additional securities when
borrowings exceed 5% of total assets.
Futures and Options. Futures are often used to manage risk, because they
enable the investor to buy or sell an asset in the future at an agreed upon
price. Options give the investor the right, but not the obligation, to buy
or sell an asset at a predetermined price in the future. The Fund may buy
and sell futures contracts (and options on such contracts) to manage its
exposure to changes in securities prices and foreign currencies and as an
efficient means of adjusting its overall exposure to certain markets. The
Fund may purchase, sell, or write call and put options on securities,
financial indices, and foreign currencies.
Futures contracts and options may not always be successful hedges;
their prices can be highly volatile; using them could lower the Fund's
total return; and the potential loss from the use of futures can exceed the
Fund's initial investment in such contracts.
Operating Policies. Futures: Initial margin deposits and premiums on
options used for non-hedging purposes will not equal more than 5% of the
Fund's net asset value. Options on securities: The total market value of
securities against which the Fund has written call or put options may not
exceed 25% of its total assets. The Fund will not commit more than 5% of
its total assets to premiums when purchasing call or put options.
Managing Foreign Currency Risk. Investors in foreign securities may
"hedge" their exposure to potentially unfavorable currency changes by
purchasing a contract to exchange one currency for another on some future
date at a specified exchange rate. In certain circumstances, a "proxy
currency" may be substituted for the currency in which the investment is
denominated, a strategy known as "proxy hedging." Although foreign currency
transactions will be used primarily to protect the Fund's foreign
securities from adverse currency movements relative to the dollar, they
involve the risk that anticipated currency movements will not occur and the
Fund's total return could be reduced.
Lending of Portfolio Securities. Like other mutual funds, the Fund may
lend securities to broker-dealers, other institutions, or other persons to
earn additional income. The principal risk is the potential insolvency of
the broker-dealer or other borrower. In this event, the Fund could
experience delays in recovering its securities and possibly capital losses.
Fundamental Policy. The value of loaned securities may not exceed 33 1/3% of
the Fund's total assets.
Portfolio Transactions. The Fund will not generally trade in securities
for short-term profits but, when circumstances warrant, securities may be
purchased and sold without regard to the length of time held. The Fund's
portfolio turnover rates for the years 1993, 1992, and 1991 were 40.8%,
30.7%, and 31.2%, respectively.
PERFORMANCE INFORMATION
Total Return. The Fund may advertise total return figures on both a
cumulative and compound average annual basis and compare them to various
indices (e.g., the S&P 500), other mutual funds or other performance
measures. (The total return of the Fund consists of the change in its net
asset value per share and the net income it earns.) Cumulative total return
compares the amount invested at the beginning of a period with the amount
redeemed at the end of the period, assuming the reinvestment of all
dividends and capital gain distributions. The compound average annual total
return indicates a yearly compound average of the Fund's performance,
derived from the cumulative total return. The annual compound rate of
return for the Fund may vary from any average. Further information about
the Fund's performance is contained in its annual report which is available
free of charge.
On September 2, 1992, T. Rowe Price became investment manager to the
OTC Fund. All performance data prior to September 2, 1992, is the result of
other investment managers. Prior to this date, the Fund had a sales load
which is not included in the performance data, but if deducted, the Fund's
total return would have been lower.
CAPITAL STOCK
The Fund was originally incorporated in Delaware in 1955 and was the first
mutual fund to invest principally in equity securities traded in the OTC
market. The Fund was reincorporated in Pennsylvania in 1985 and was
reorganized as a series of a Maryland corporation in 1988. The Fund is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a diversified, open-end investment company, commonly
known as a "mutual fund." A mutual fund, such as the Fund, enables
shareholders to: (1) obtain professional management of investments,
including T. Rowe Price's proprietary research; (2) diversify their
portfolio to a greater degree than would be generally possible if they were
investing as individuals and thereby reduce, but not eliminate risks; and
(3) simplify the recordkeeping and reduce transaction costs associated with
investments. The Fund is a series fund and has the authority to issue other
series in addition to the one currently in existence. Because the Fund
currently issues only one series, however, the term "Fund" as used in the
prospectus refers to that series only.
The Fund has an Investment Advisory Committee composed of the
following members: Gregory A. McCrickard, Chairman, Preston G. Athey and
James A. C. Kennedy. The Committee Chairman has day-to-day responsibility
for managing the Fund and works with the Committee in developing and
executing the Fund's investment program. Mr. McCrickard has been Chairman
of the Committee since 1992. He joined T. Rowe Price in 1986 and has been
managing investments since 1988.
Shareholder Rights. The Fund issues one class of capital stock, all shares
of which have equal rights with regard to voting, redemptions, dividends,
distributions, and liquidations. Fractional shares have voting rights and
participate in any distributions and dividends. Shareholders have no
preemptive or conversion rights; nor do they have cumulative voting rights.
When the Fund's shares are issued, they are fully paid and nonassessable.
The Fund does not routinely hold annual meetings of shareholders. However,
if shareholders representing at least 10% of all votes of the Fund entitled
to be cast so desire, they may call a special meeting of shareholders of
the Fund for the purpose of voting on the question of the removal of any
director(s). The total authorized capital stock of the Fund consists of
200,000,000 shares, each having a par value of $.50. As of December 31,
1993, there were 19,115 shareholders in the Fund and a total of 3,073,906
shareholders in the other 56 T. Rowe Price Funds.
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED
COPY:
Information appearing in all capital letters before a paragraph in the
Edgar filing will appear, in the printed copy, as call-outs in the left
margin.
</CONTENT>
</DOCUMENT
FUND OPERATIONS AND SERVICES
The following sections apply to this Fund and all T. Rowe Price Equity
Funds.
NAV, PRICING, AND EFFECTIVE DATE
Net Asset Value Per Share (NAV). The NAV per share, or share price, for the
Fund is normally determined as of 4:00 pm Eastern Time (ET) each day the
New York Stock Exchange is open. The Fund's share price is calculated by
subtracting its liabilities from its total assets and dividing the result
by the total number of shares outstanding. Among other things, the Fund's
liabilities include accrued expenses and dividends payable, and its total
assets include portfolio securities valued at market as well as income
accrued but not yet received.
IF YOUR ORDER IS RECEIVED IN GOOD ORDER BEFORE 4:00 PM ET, YOU WILL RECEIVE
THAT DAY'S NAV.
Purchased shares are priced at that day's NAV if your request is
received before 4:00 pm ET in good order. (See Completing the New Account
Form and Opening a New Account.) If received later than 4:00 pm ET, shares
will be priced at the next business day's NAV.
Redemptions are priced at that day's NAV if your request is received
before 4:00 pm ET in good order at the transfer agent's offices at T. Rowe
Price Account Services, P.O. Box 89000, Baltimore, MD 21289-0220. If
received after 4:00 pm ET, shares will be priced at the next business day's
NAV.
Also, we cannot accept requests which specify a particular date for
purchase or redemption or which specify any special conditions. If your
redemption request cannot be accepted, you will be notified and given
further instructions.
Exchanges are normally priced in the same manner as purchases and
redemptions. However, if you are exchanging into a bond or money fund and
the release of your exchange proceeds is delayed for the allowable five
business days (see Receiving Your Proceeds), you will not begin to earn
dividends until the sixth business day after the exchange.
The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the New York Stock Exchange closes
at a time other than 4:00 pm ET or an emergency exists.
RECEIVING YOUR PROCEEDS
Redemption proceeds are mailed to the address, or sent by wire or ACH
transfer to the bank account, designated on your New Account Form. They are
generally sent the next business day after your redemption request is
received in good order. Proceeds sent by bank wire should be credited to
your bank account the next business day and proceeds sent by ACH transfer
should be credited the second day after the sale. In addition, under
certain conditions and when deemed to be in the best interest of the Fund,
redemption proceeds may not be sent for up to five business days after your
request is received to allow for the orderly liquidation of securities.
Requests by mail for wire redemptions (unless previously authorized) must
have a signature guarantee.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes all net investment income and capital gains to
shareholders. Dividends from net investment income and distributions from
capital gains, if any, are normally declared in December and paid in
January. However, dividends from net investment income for the Balanced,
Growth & Income, Equity Income, and Dividend Growth Funds will be declared
and paid quarterly. Dividends and distributions declared by the Fund will
be reinvested unless you choose an alternative payment option on the New
Account Form. Dividends not reinvested are paid by check or transmitted to
your bank account via ACH. If the U.S. Postal Service cannot deliver your
check, or if your check remains uncashed for six months, the Fund reserves
the right to reinvest your distribution check in your account at the then
current NAV and to reinvest all subsequent distributions in shares of the
Fund.
TAXES
FORM 1099-DIV WILL BE MAILED TO YOU IN JANUARY.
Dividends and Distributions. In January, the Fund will mail you Form
1099-DIV indicating the federal tax status of your dividends and capital
gain distributions. Generally, dividends and distributions are taxable in
the year they are paid. However, any dividends and distributions paid in
January but declared during the prior three months are taxable in the year
they are declared. Dividends and distributions are taxable to you
regardless of whether they are taken in cash or reinvested. Dividends and
short-term capital gain distributions are taxable as ordinary income;
long-term capital gain distributions are taxable as long-term capital
gains. The capital gain holding period is determined by the length of time
the Fund has held the securities, not the length of time you have owned
Fund shares.
Shares Sold. A redemption or exchange of Fund shares is treated as a sale
for tax purposes which will result in a short or long-term capital gain or
loss, depending on how long you have owned the shares. In January, the Fund
will mail you Form 1099-B indicating the trade date and proceeds from all
sales and exchanges.
Undistributed Income and Gains. At the time of purchase, the share price of
the Fund may reflect undistributed income, capital gains or unrealized
appreciation of securities. Any income or capital gains from these amounts
which are later distributed to you are fully taxable.
Foreign Transactions. Distributions resulting from the sale of certain
foreign currencies and debt securities, to the extent of foreign exchange
gains, are taxed as ordinary income or loss. If the Fund pays nonrefundable
taxes to foreign governments during the year, the taxes will reduce the
Fund's dividends.
Corporations. All or part of the Fund's dividends will be eligible for the
70% deduction for dividends received by corporations.
Tax-Qualified Retirement Plans. Tax-qualified retirement plans generally
will not be subject to federal tax liability on either distributions from
the Fund or redemption of shares of the Fund. Rather, participants in such
plans will be taxed when they begin taking distributions from the plans.
MANAGEMENT OF THE FUND
Investment Manager. T. Rowe Price is responsible for selection and
management of the Fund's portfolio investments. T. Rowe Price serves as
investment manager to a variety of individual and institutional investors,
including limited and real estate partnerships and other mutual funds.
Board of Directors/Trustees. The management of the Fund's business and
affairs is the responsibility of the Fund's Board of Directors/Trustees.
Portfolio Transactions. Decisions with respect to the purchase and sale of
the Fund's portfolio securities are made by T. Rowe Price. The Fund's Board
of Directors/Trustees has authorized T. Rowe Price to utilize certain
brokers indirectly related to T. Rowe Price in the capacity of broker in
connection with the execution of the Fund's portfolio transactions.
Investment Services. T. Rowe Price Investment Services, Inc., a
wholly-owned subsidiary of T. Rowe Price, is the distributor for this Fund
as well as all other T. Rowe Price Funds.
Transfer and Dividend Disbursing Agent, Shareholder Servicing and
Administrative. TRP Services, a wholly-owned subsidiary of T. Rowe Price,
serves the Fund as transfer and dividend disbursing agent. T. Rowe Price
Retirement Plan Services, Inc., a wholly-owned subsidiary of T. Rowe Price,
performs subaccounting and recordkeeping services for shareholder accounts
in certain retirement plans investing in the Price Funds. T. Rowe Price
calculates the daily share price and maintains the portfolio and general
accounting records of the Fund. The address for TRP Services and T. Rowe
Price Retirement Plan Services, Inc. is 100 East Pratt Street, Baltimore,
Maryland 21202.
EXPENSES AND MANAGEMENT FEE
The Fund bears all expenses of its operations other than those incurred by
T. Rowe Price under its Investment Management Agreement with T. Rowe Price.
Fund expenses include: the management fee; shareholder servicing fees and
expenses; custodian and accounting fees and expenses; legal and auditing
fees; expenses of preparing and printing prospectuses and shareholder
reports; registration fees and expenses; proxy and annual meeting expenses,
if any; and directors'/trustees' fees and expenses.
Management Fee. The Fund pays T. Rowe Price an investment management fee
consisting of an Individual Fund Fee and a Group Fee. See Summary of Fund
Fees and Expenses for the Individual Fund Fee. The Group Fee varies and is
based on the combined net assets of all mutual funds sponsored and managed
by T. Rowe Price and Rowe Price-Fleming International, Inc., excluding
T.Rowe Price Spectrum Fund, Inc., and any institutional or private label
mutual funds, and distributed by T. Rowe Price Investment Services, 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. The table below shows the annual Group Fee rate at various asset
levels of the combined Price Funds:
0.480% First $1 billion 0.350% Next $ 2 billion
0.450% Next $1 billion 0.340% Next $ 5 billion
0.420% Next $1 billion 0.330% Next $10 billion
0.390% Next $1 billion 0.320% Next $10 billion
0.370% Next $1 billion 0.310% Thereafter
0.360% Next $2 billion
Based on combined Price Funds' assets of approximately $34.7 billion at
December 31, 1993, the Group Fee was 0.35%.
SHAREHOLDER SERVICES
The following is a brief summary of services available to shareholders in
the T. Rowe Price Funds, some of which may be restricted or unavailable to
retirement plan accounts. You must authorize most of these services on a
New Account or Shareholder Services Form. Services may be modified or
withdrawn at any time without notice. Please verify all transactions on
your confirmation statements promptly after receiving them. Any
discrepancies must be reported to Shareholder Services immediately.
Automatic Asset Builder. You can have us move $50 or more on the same day
each month from your bank account or invest $50 or more from your paycheck
into any T. Rowe Price Fund.
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
Discount Brokerage Service. You can trade stocks, bonds, options, CDs,
Treasury Bills, and precious metals at substantial savings through our
Discount Brokerage Service. Call Investor Services for more information.
Exchange Service. You can move money from one account to an existing
identically registered account or open a new identically registered
account. Remember that, for tax purposes, an exchange is treated as a
redemption and a new purchase. Exchanges into a state tax-free fund are
limited to investors residing in states where those funds are qualified for
sale. Some of the T. Rowe Price Funds may impose a redemption fee of
.50-2%, payable to such Funds, on shares held for less than twelve months,
or in some Funds, six months.
Retirement Plans. For details on IRAs, please call Investor Services at
1-800-638-5660. For details on all other retirement plans, please call our
Trust Company at 1-800-492-7670.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
Telephone Services. The following services are explained fully in the
Services Guide, which is mailed to new T. Rowe Price investors. If you
don't have a copy, please call Shareholder Services. (All telephone calls
to Shareholder Services and Investor Services are recorded in order to
protect you, the Fund, and its agents.)
24-Hour Service. Tele*Access(R) provides information on
yields, prices, latest dividends, account balances, and last
transaction as well as the ability to request prospectuses
and account forms and initiate purchase, redemption and
exchange orders (if you have established Telephone Services).
Just call 1-800-638-2587 and press the appropriate codes into
your touch-tone phone. PC*Access(R) provides the same
information as Tele*Access, but on a personal computer.
Electronic Transfers. We offer three free methods for
purchasing or redeeming Fund shares in amounts of $100 to
$100,000 through ACH transfers between your bank and Fund
accounts:
- By calling Shareholder Services during business hours
(Tele-Connect(R));
- By touch-tone phone any day, any time (Tele*Access);
- By personal computer any day, any time (PC*Access).
If your bank checking and Fund account are not identically
registered, you will need a signature guarantee to establish
this service.
Wire Transfers. Wire transfers can be processed through bank
wires (a $5 charge applies to redemption amounts under
$5,000, and your bank may charge you for receiving wires).
While this is usually the quickest transfer method, the Fund
reserves the right to temporarily suspend wires under unusual
circumstances.
CONDITIONS OF YOUR PURCHASE
Account Balance. If your account drops below $1,000 for three months or
more, the Fund has the right to close your account, after giving 60 days'
notice, unless you make additional investments to bring your account value
to $1,000 or more.
Broker-Dealers. Purchases or redemptions through broker-dealers, banks, and
other institutions may be subject to service fees imposed by those
entities. No such fees are charged by T. Rowe Price Investment Services or
the Fund if shares are purchased or redeemed directly from the Fund.
Excessive Trading and Exchange Limitations. To protect Fund shareholders
against disruptions in portfolio management which might occur as a result
of too frequent buy and sell activity and to minimize Fund expenses
associated with such transaction activity, the Fund prohibits excessive
trading in any account (or group of accounts managed by the same person).
Within any 120 consecutive-day period, investors may not exchange between
Price Funds more than twice or buy and sell the Price Funds more than once,
if the transactions involve substantial assets or a substantial portion of
the assets in the account or accounts. This policy is applied on a
multi-fund basis. Any transactions above and beyond these guidelines will
be considered to be excessive trading, and the investor may be prohibited
from making additional purchases or exercising the exchange privilege.
This policy does not apply to exchanges solely between, or purchases and
sales solely of, the Price Money Funds, nor does it apply to simple
redemptions from any Fund.
Nonpayment. If your check, wire or ACH transfer does not clear, or if
payment is not received for any telephone purchase, the transaction will be
cancelled and you will be responsible for any loss the Fund or Investment
Services incurs. If you are already a shareholder, the Fund can redeem
shares from any identically registered account in this Fund or any other T.
Rowe Price Fund as reimbursement for any loss incurred. You may be
prohibited or restricted from making future purchases in any of the T. Rowe
Price Funds.
U.S. Dollars. All purchases must be paid for in U.S. dollars, and checks
must be drawn on U.S. banks.
Redemptions in Excess of $250,000. Redemption proceeds are normally paid in
cash. However, if you redeem more than $250,000, or 1% of the Fund's net
assets, in any 90-day period, the Fund may in its discretion: (1) pay the
difference between the redemption amount and the lesser of these two
figures with securities of the Fund or (2) delay the transmission of your
proceeds for up to five business days after your request is received.
Signature Guarantees. A signature guarantee is designed to protect you and
the Fund by verifying your signature. You will need one to:
(1) Establish certain services after the account is opened.
(2) Redeem over $50,000 by written request (unless you have
authorized Telephone Services).
(3) Redeem shares when proceeds are: (i) being mailed to an
address other than the address of record, (ii) made payable
to other than the registered owner(s), or (iii) being sent
to a bank account other than the bank account listed on
your fund account.
(4) Transfer shares to another owner.
(5) Send us written instructions asking us to wire redemption
proceeds (unless previously authorized).
(6) Establish Electronic Transfers when your bank checking and
fund account are not identically registered.
These requirements may be waived or modified in certain instances.
Acceptable guarantors are all eligible guarantor institutions as
defined by the Securities Exchange Act of 1934 such as: commercial banks
which are FDIC members, trust companies, firms which are members of a
domestic stock exchange, and foreign branches of any of the above. We
cannot accept guarantees from institutions or individuals who do not
provide reimbursement in the case of fraud, such as notaries public.
Telephone Exchange and Redemption. Telephone exchange and redemption are
established automatically when you sign the New Account Form unless you
check the box which states that you do not want these services. The Fund
uses reasonable procedures (including shareholder identity verification) to
confirm that instructions given by telephone are genuine. If these
procedures are not followed, it is the opinion of certain regulatory
agencies that the Fund may be liable for any losses that may result from
acting on the instructions given. All conversations are recorded, and a
confirmation is sent within five business days after the telephone
transaction.
Ten-Day Hold. The mailing of proceeds for redemption requests involving any
shares purchased by personal, corporate or government check, or ACH
transfer is generally subject to a 10-day delay to allow the check or
transfer to clear. The 10-day clearing period does not affect the trade
date on which your purchase or redemption order is priced, or any dividends
and capital gain distributions to which you may be entitled through the
date of redemption. If your redemption request was sent by mail or
mailgram, proceeds will be mailed no later than the seventh calendar day
following receipt unless the check or ACH transfer has not cleared. The
10-day hold does not apply to purchases made by wire, Automatic Asset
Builder- Paycheck, or cashier's, treasurer's, or certified checks.
The Fund and its agents reserve the right to: (1) reject any purchase or
exchange, cancel any purchase due to nonpayment, or reject any exchange or
redemption where the Fund has not received payment; (2) waive or lower the
investment minimums; (3) accept initial purchases by telephone or mailgram;
(4) waive the limit on subsequent purchases by telephone; (5) reject any
purchase or exchange prior to receipt of the confirmation statement; (6)
redeem your account (see Tax Identification Number); (7) modify the
conditions of purchase at any time; and (8) reject any check not made
directly payable to the Fund or T. Rowe Price (call Shareholder Services
for more information).
COMPLETING THE NEW ACCOUNT FORM
YOU MUST PROVIDE YOUR TAX ID NUMBER AND SIGN THE NEW ACCOUNT FORM.
Tax Identification Number. We must have your correct social security or
corporate tax identification number and a signed New Account Form or W-9
Form. Otherwise, federal law requires the Fund to withhold a percentage
(currently 31%) of your dividends, capital gain distributions, and
redemptions, and may subject you to an IRS penalty. You also will be
prohibited from opening another account by exchange. If this information is
not received within 60 days after your account is established, your account
may be redeemed, priced at the NAV on the date of redemption.
Unless you otherwise request, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same
zip code and to those shareholders who have requested that their accounts
be combined with someone else's for financial reporting.
Account Registration. If you own other T. Rowe Price Funds, make certain
the registration (name and account type) is identical to your other funds
for easy exchange. Remember to sign the form exactly as the name appears in
the registration section.
Services. By signing up for services on the New Account Form, rather than
after the account is opened, you will avoid having to complete a separate
form and obtain a signature guarantee (see Conditions of Your Purchase).
OPENING A NEW ACCOUNT
Minimum initial investment: $2,500; $1,000 for retirement plans and gifts
or transfers to minors (UGMA/UTMA) accounts; $50 per month for Automatic
Asset Builder accounts-see Shareholder Services
CHECKS PAYABLE TO T. ROWE PRICE FUNDS.
By Mail Send your New Account Form and check to:
Regular Mail Mailgram, Express,
Registered, or Certified Mail
T. Rowe Price Account Services T. Rowe Price Account Services
P.O. Box 17300 10090 Red Run Boulevard
Baltimore, MD 21298-9353 Owings Mills, MD 21117
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
By Wire Call Investor Services for an account number and use Wire
Address below. Then, complete the New Account Form and mail it
to one of the addresses above. (Not applicable to retirement
plans.)
Wire Address Morgan Guaranty Trust Company
of New York
(to give to your bank): ABA #021000238
T. Rowe Price
(fund name)/AC-00153938
Account name(s) and
account number
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Exchange Call Shareholder Services. The new account will have the same
registration as the account from which you are exchanging.
Services for the new account may be carried over by telephone
request if preauthorized on the existing account. See
Excessive Trading and Exchange Limitations under Conditions of
Your Purchase.
In Person Drop off your New Account Form and obtain a receipt at a
T. Rowe Price Investor Center:
101 East Lombard Street T. Rowe Price Financial Center
First Floor First Floor
Baltimore, MD 10090 Red Run Boulevard
Owings Mills, MD
Farragut Square ARCO Tower
First Floor 31st Floor
900 17th Street, NW 515 South Flower Street
Washington, DC Los Angeles, CA
PURCHASING ADDITIONAL SHARES
Minimum: $100 ($50 for retirement plans)
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
By Wire Call Shareholder Services or use the Wire Address (see Opening
a New Account).
By Mail Indicate your account number and the Fund name on your check.
Mail the check to us at the address below either with a
reinvestment slip or a note indicating the Fund and account
number in which you wish to purchase shares.
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD 21289-1500
By ACH Use Tele*Access, PC*Access or call Shareholder Services (if
Transfer you have established Telephone Services) for ACH transfers.
By Automatic Fill out the Automatic Asset Builder section on the New
Asset Builder Account or Shareholder Services Form.
Minimum: $5,000
By Phone Call Shareholder Services.
EXCHANGING AND REDEEMING SHARES
By Phone Call Shareholder Services. If you find our phones busy during
unusually volatile markets, please consider placing your order
by express mail, mailgram, Tele*Access or PC*Access if you
have authorized Telephone Services. For exchange policy, see
Excessive Trading and Exchange Limitations under Conditions of
Your Purchase.
Redemption proceeds can be mailed, sent by ACH transfer, or
wired to your bank. The Fund charges a $5.00 fee for wire
redemptions under $5,000, subject to change without notice.
Your bank may also charge you for receiving wires.
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
T. ROWE PRICE TRUST COMPANY
1-800-492-7670
1-410-625-6585
By Mail Indicate account name(s) and numbers, fund name(s), and
exchange or redemption amount. For exchanges, indicate the
accounts you are exchanging from and to along with the amount.
We require the signature of all owners exactly as registered,
and possibly a signature guarantee (see Signature Guarantees
under Conditions of Your Purchase).
Note: Distributions from retirement accounts, including IRAs,
must be in writing. Please call Shareholder Services to obtain
an IRA Distribution Request Form. For employer-sponsored
retirement accounts, call T. Rowe Price Trust Company or your
plan administrator for instructions. Shareholders holding
previously issued certificates must conduct transactions by
mail. If you lose a stock certificate, you may incur an
expense to replace it. Call Shareholder Services for further
information.
Mailing addresses:
Regular Mail Mailgram, Express,
Registered, or Certified Mail
Non-Retirement All Accounts
and IRA Accounts T. Rowe Price Account Services
T. Rowe Price Account Services 10090 Red Run Boulevard
P.O. Box 89000 Owings Mills, MD 21117
Baltimore, MD 21289-0220
Employer-Sponsored
Retirement Accounts
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED
COPY:
Information appearing in all capital letters before a paragraph in the
Edgar filing will appear, in the printed copy, as call-outs in the left
margin.
</CONTENT>
</DOCUMENT
PAGE 1
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE OTC FUND, INC.
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
(collectively the "Funds" and individually the "Fund")
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the appropriate Fund's prospectus dated May 1,
1994, which may be obtained from T. Rowe Price Investment Services, Inc., 100
East Pratt Street, Baltimore, Maryland 21202.
If you would like a prospectus for a Fund of which you are not a
shareholder, please call 1-800-638-5660. A prospectus with more complete
information, including management fees and expenses will be sent to you.
Please read it carefully.
The date of this Statement of Additional Information is May 1, 1994.
PAGE 2
TABLE OF CONTENTS
Page Page
Asset-Backed Securities. . . . . .12 Lending of Portfolio
Capital Stock. . . . . . . . . . .71 Securities. . . . . . . . . . . .14
Custodian. . . . . . . . . . . . .49 Management of Fund . . . . . . . .34
Distributor for Fund . . . . . . .48 Mortgage-Related
Dividends and Distributions. . . .57 Securities. . . . . . . . . . . .10
Federal and State Net Asset Value Per Share. . . . .56
Registration of Shares. . . . . .73 Options. . . . . . . . . . . . . .15
Foreign Currency Organization of the Fund . . . . .72
Transactions. . . . . . . . . . .27 Portfolio Management Practices . .14
Foreign Futures and Options. . . .27 Portfolio Transactions . . . . . .49
Foreign Securities . . . . . . . . 4 Pricing of Securities. . . . . . .56
Futures Contracts. . . . . . . . .21 Principal Holders of
Hybrid Instruments . . . . . . . . 8 Securities. . . . . . . . . . . .41
Independent Accountants. . . . . .73 Ratings of Corporate
Illiquid or Restricted Debt Securities . . . . . . . . .77
Securities. . . . . . . . . . . . 7 Repurchase Agreements. . . . . . .14
Investment Management Risk Factors . . . . . . . . . . . 3
Services. . . . . . . . . . . . .42 Tax Status . . . . . . . . . . . .57
Investment Objectives Taxation of Foreign
and Polices . . . . . . . . . . . 2 Shareholders. . . . . . . . . . .58
Investment Performance . . . . . .59 Warrants . . . . . . . . . . . . . 8
Investment Program . . . . . . . . 7 When-Issued Securities and Forward
Investment Restrictions. . . . . .30 Commitment Contracts. . . . . . . 9
Legal Counsel. . . . . . . . . . .73 Yield Information. . . . . . . . .59
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in each Fund's prospectus. The
Funds will not make a material change in their investment objectives without
obtaining shareholder approval. Unless otherwise specified, the investment
programs and restrictions of the Funds are not fundamental policies. Each
Fund's operating policies are subject to change by each Board of
Directors/Trustees without shareholder approval. However, shareholders will
be notified of a material change in an operating policy. Each Fund's
fundamental policies may not be changed without the approval of at least a
majority of the outstanding shares of the Fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the holders of 50% or
more of the shares are represented.
Throughout this Statement of Additional Information, "the Fund" is
intended to refer to each Fund listed on the cover page, unless otherwise
indicated.
RISK FACTORS
General
Because of its investment policy, the Fund may or may not be suitable or
appropriate for all investors. The Fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. The Fund will normally have substantially all (for the Balanced
Fund 50-70%) of its assets in equity securities (e.g., common stocks). This
portion of the Fund's assets will be subject to all of the risks of investing
PAGE 3
in the stock market. There is risk in all investment. The value of the
portfolio securities of the Fund will fluctuate based upon market conditions.
Although the Fund seeks to reduce risk by investing in a diversified
portfolio, such diversification does not eliminate all risk. There can, of
course, be no assurance that the Fund will achieve its investment objective.
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the Fund.
Balanced, Blue Chip Growth, Capital Appreciation, Dividend Growth, Equity
Income, Growth & Income, New Era, OTC, and Small-Cap Value Funds
Debt Obligations
Although substantially all of the Fund's assets are invested in common
stocks (for the Balanced Fund 50-70%), the Fund may invest in convertible
securities, corporate debt securities and preferred stocks which hold the
prospect of contributing to the achievement of the Fund's objectives. Yields
on short, intermediate, and long-term securities are dependent on a variety of
factors, including the general conditions of the money and bond markets, the
size of a particular offering, the maturity of the obligation, and the credit
quality and rating of the issue. Debt securities with longer maturities tend
to have higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and
lower yields. The market prices of debt securities usually vary, depending
upon available yields. An increase in interest rates will generally reduce
the value of portfolio investments, and a decline in interest rates will
generally increase the value of portfolio investments. The ability of the
Fund to achieve its investment objective is also dependent on the continuing
ability of the issuers of the debt securities in which the Fund invests to
meet their obligations for the payment of interest and principal when due.
The Fund's investment program permits it to purchase below investment grade
securities. Since investors generally perceive that there are greater risks
associated with investment in lower quality securities, the yields from such
securities normally exceed those obtainable from higher quality securities.
However, the principal value of lower-rated securities generally will
fluctuate more widely than higher quality securities. Lower quality
investments entail a higher risk of default--that is, the nonpayment of
interest and principal by the issuer than higher quality investments. Such
securities are also subject to special risks, discussed below. Although the
Fund seeks to reduce risk by portfolio diversification, credit analysis, and
attention to trends in the economy, industries and financial markets, such
efforts will not eliminate all risk. There can, of course, be no assurance
that the Fund will achieve its investment objective.
After purchase by the Fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, T.
Rowe Price will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies contained
in the prospectus.
Special Risks of High Yield Investing
The Fund may invest in low quality bonds commonly referred to as "junk
bonds." Junk bonds are regarded as predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments.
PAGE 4
Because investment in low and lower-medium quality bonds involves greater
investment risk, to the extent the Fund invests in such bonds, achievement of
its investment objective will be more dependent on T. Rowe Price's credit
analysis than would be the case if the Fund was investing in higher quality
bonds. High yield bonds may be more susceptible to real or perceived adverse
economic conditions than investment grade bonds. A projection of an economic
downturn, or higher interest rates, for example, could cause a decline in high
yield bond prices because the advent of such events could lessen the ability
of highly leverage issuers to make principal and interest payments on their
debt securities. In addition, the secondary trading market for high yield
bonds may be less liquid than the market for higher grade bonds, which can
adversely affect the ability of a Fund to dispose of its portfolio securities.
Bonds for which there is only a "thin" market can be more difficult to value
inasmuch as objective pricing data may be less available and judgment may play
a greater role in the valuation process.
All Funds, Except Equity Index Fund
Foreign Securities
The Fund may invest in U.S. dollar-denominated and non U.S. dollar-
denominated securities of foreign issuers.
Risk Factors of Foreign Investing
There are special risks in foreign investing. Certain of these risks
are inherent in any international mutual fund while others relate more to the
countries in which the Funds will invest. Many of the risks are more
pronounced for investments in developing or emerging countries, such as many
of the countries of Southeast Asia, Latin America, Eastern Europe and the
Middle East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
initial stages of its industrialization cycle with a per capita gross national
product of less than $8,000.
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy
in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as
stable as in the United States. For example, in 1991, the existing government
in Thailand was overthrown in a military coup. In 1992, there were two
military coup attempts in Venezuela and in 1992 the President of Brazil was
impeached. In addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim sovereignty of one
another and there is a demilitarized border between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
Currency Fluctuations. The Funds will invest in securities denominated
in various currencies. Accordingly, a change in the value of any such
PAGE 5
currency against the U.S. dollar will result in a corresponding change in the
U.S. dollar value of the Funds' assets denominated in that currency. Such
changes will also affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of the Fund's
securities denominated in that currency will rise. When a given currency
depreciates against the dollar (the dollar strengthens) the value of the
Funds' securities denominated in that currency would be expected to
decline.
Investment and Repatriation of Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may limit at times and preclude
investment in certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a variety of
restrictions in many developing countries. These restrictions may take the
form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including in
some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics. It is contemplated that most foreign
securities, other than Latin American securities, will be purchased in
over-the-counter markets or on stock exchanges located in the countries in
which the respective principal offices of the issuers of the various
securities are located, if that is the best available market. Currently, it
is anticipated that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock markets are generally not as
developed or efficient as, and may be more volatile than, those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets and the Funds' portfolio securities may be less liquid and
subject to more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and such levels may
not be sustainable. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on United States exchanges,
although the Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government supervision
and regulation of foreign stock exchanges, brokers and listed companies than
in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences may include delays beyond periods customary in the United States
and practices, such as delivery of securities prior to receipt of payment,
which increase the likelihood of a "failed settlement." Failed settlements
can result in losses to a Fund.
Investment Funds. The Funds may invest in investment funds which have
been authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. If the Funds invest in such
investment funds, the Funds' shareholders will bear not only their
proportionate share of the expenses of the Funds (including operating expenses
and the fees of the investment manager), but also will bear indirectly similar
expenses of the underlying investment funds. In addition, the securities of
these investment funds may trade at a premium over their net asset value.
PAGE 6
Information and Supervision. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies. It also may be more difficult to keep currently informed of
corporate actions which affect the prices of portfolio securities.
Taxes. The dividends and interest payable on certain of the Funds'
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Funds'
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction for U.S. federal income tax purposes for his or her proportionate
share of such foreign taxes paid by the Funds. (See "Tax Status," page 57.)
Other. With respect to certain foreign countries, especially developing
and emerging ones, there is the possibility of adverse changes in investment
or exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect investments
by U.S. persons in those countries.
Eastern Europe and Russia. Changes occurring in Eastern Europe and
Russia today could have long-term potential consequences. As restrictions
fall, this could result in rising standards of living, lower manufacturing
costs, growing consumer spending, and substantial economic growth. However,
investment in the countries of Eastern Europe and Russia is highly speculative
at this time. Political and economic reforms are too recent to establish a
definite trend away from centrally-planned economies and state owned
industries. In many of the countries of Eastern Europe and Russia, there is
no stock exchange or formal market for securities. Such countries may also
have government exchange controls, currencies with no recognizable market
value relative to the established currencies of western market economies,
little or no experience in trading in securities, no financial reporting
standards, a lack of a banking and securities infrastructure to handle such
trading, and a legal tradition which does not recognize rights in private
property. In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the country's national
interest. Further, the governments in such countries may require governmental
or quasi-governmental authorities to act as custodian of a Fund's assets
invested in such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive relief from
such Act may be required. All of these considerations are among the factors
which could cause significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company located in, or a
government of, Eastern Europe and Russia, if it believes the potential return
justifies the risk. To the extent any securities issued by companies in
Eastern Europe and Russia are considered illiquid, each Fund will be required
to include such securities within its 15% restriction on investing in illiquid
securities.
INVESTMENT PROGRAM
Types of Securities
Set forth below is additional information about certain of the
investments described in the Fund's prospectus.
PAGE 7
Illiquid or Restricted Securities
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Fund's Board of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid securities,
the Fund should be in a position where more than 15% of the value of its net
assets is invested in illiquid assets, including restricted securities, the
Fund will take appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. T. Rowe Price under the supervision of
the Fund's Board of Directors/Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Fund's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not
is a question of fact. In making this determination, T. Rowe Price will
consider the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, T. Rowe Price could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market, and (4) the
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if
as a result of changed conditions it is determined that a Rule 144A security
is no longer liquid, the Fund's holdings of illiquid securities would be
reviewed to determine what, if any, steps are required to assure that the Fund
does not invest more than 15% of its net assets in illiquid securities.
Investing in Rule 144A securities could have the effect of increasing the
amount of the Fund's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
Hybrid Instruments
Hybrid Instruments have recently been developed and combine the elements
of futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid
Instruments are indexed to the price of a commodity, particular currency, or a
domestic or foreign debt or equity securities index. Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the value
of a currency, or convertible securities with the conversion terms related to
a particular commodity.
PAGE 8
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures, options, and forward contracts herein for a discussion
of these risks. Further, the prices of the Hybrid Instrument and the related
commodity or currency may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instrument,
the creditworthiness of the counter party to the transaction would be a risk
factor which the Fund would have to consider. Hybrid Instruments also may not
be subject to regulation of the Commodities Futures Trading Commission
("CFTC"), which generally regulates the trading of commodity futures by U.S.
persons, the SEC, which regulates the offer and sale of securities by and to
U.S. persons, or any other governmental regulatory authority.
Warrants
The Fund may invest in warrants. Warrants are pure speculation in
that they have no voting rights, pay no dividends and have no rights with
respect to the assets of the corporation issuing them. Warrants basically are
options to purchase equity securities at a specific price valid for a specific
period of time. They do not represent ownership of the securities, but only
the right to buy them. Warrants differ from call options in that warrants are
issued by the issuer of the security which may be purchased on their exercise,
whereas call options may be written or issued by anyone. The prices of
warrants do not necessarily move parallel to the prices of the underlying
securities.
Balanced, Blue Chip Growth, Capital Appreciation, Dividend Growth, Equity
Income, Growth & Income, New Era, OTC, and Small-Cap Value Funds
Fixed income securities in which the Fund may invest include, but are
not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; and the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and
other short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
PAGE 9
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating
or variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and
other short-term debt obligations of savings and loan associations.
Supranational Agencies. Securities of certain supranational entities,
such as the International Development Bank.
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or delayed delivery
basis ("When-Issueds") and may purchase securities on a forward commitment
basis ("Forwards"). Any or all of the Fund's investments in debt securities
may be in the form of When-Issueds and Forwards. The price of such
securities, which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment take place at a later
date. Normally, the settlement date occurs within 90 days of the purchase for
When-Issueds, but may be substantially longer for Forwards. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The purchase of these securities will
result in a loss if their value declines prior to the settlement date. This
could occur, for example, if interest rates increase prior to settlement. The
longer the period between purchase and settlement, the greater the risks are.
At the time the Fund makes the commitment to purchase these securities, it
will record the transaction and reflect the value of the security in
determining its net asset value. The Fund will cover these securities by
maintaining cash and/or liquid, high-grade debt securities with its custodian
bank equal in value to commitments for them during the time between the
purchase and the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not available to
the Fund (to the extent of the securities used for cover). Such securities
either will mature or, if necessary, be sold on or before the settlement
date.
Mortgage-Related Securities
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the Fund. This
is in contrast to traditional bonds where principal is normally paid back at
maturity in a lump sum. Unscheduled prepayments of principal shorten the
securities' weighted average life and may lower their total return. (When a
mortgage in the underlying mortgage pool is prepaid, an unscheduled principal
prepayment is passed through to the Fund. This principal is returned to the
Fund at par. As a result, if a mortgage security were trading at a premium,
its total return would be lowered by prepayments, and if a mortgage security
PAGE 10
were trading at a discount, its total return would be increased by
prepayments.) The value of these securities also may change because of
changes in the market's perception of the creditworthiness of the federal
agency that issued them. In addition, the mortgage securities market in
general may be adversely affected by changes in governmental regulation or tax
policies.
Collateralized Mortgage Obligations (CMOs)
CMOs are bonds that are collateralized by whole loan mortgages or
mortgage pass-through securities. The bonds issued in a CMO deal are divided
into groups, and each group of bonds is referred to as a "tranche." Under the
traditional CMO structure, the cash flows generated by the mortgages or
mortgage pass-through securities in the collateral pool are used to first pay
interest and then pay principal to the CMO bondholders. The bonds issued
under a CMO structure are retired sequentially as opposed to the pro rata
return of principal found in traditional pass-through obligations. Subject to
the various provisions of individual CMO issues, the cash flow generated by
the underlying collateral (to the extent it exceeds the amount required to pay
the stated interest) is used to retire the bonds. Under the CMO structure,
the repayment of principal among the different tranches is prioritized in
accordance with the terms of the particular CMO issuance. The "fastest-pay"
tranche of bonds, as specified in the prospectus for the issuance, would
initially receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are retired. The
sequential retirement of bond groups continues until the last tranche, or
group of bonds, is retired. Accordingly, the CMO structure allows the issuer
to use cash flows of long maturity, monthly-pay collateral to formulate
securities with short, intermediate and long final maturities and expected
average lives.
In recent years, new types of CMO structures have evolved. These
include floating rate CMOs, planned amortization classes, accrual bonds and
CMO residuals. These newer structures affect the amount and timing of
principal and interest received by each tranche from the underlying
collateral. Under certain of these new structures, given classes of CMOs have
priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which the Fund
invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the
timing of cash flows. For CMOs, the primary risk results from the rate of
prepayments on the underlying mortgages serving as collateral. An increase or
decrease in prepayment rates (resulting from a decrease or increase in
mortgage interest rates) will affect the yield, average life and price of
CMOs. The prices of certain CMOs, depending on their structure and the rate
of prepayments, can be volatile. Some CMOs may also not be as liquid as other
securities.
Stripped Agency Mortgage-Backed Securities
Stripped Agency Mortgage-Backed securities represent interests in a pool
of mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities may be issued
by U.S. Government Agencies or by private issuers similar to those described
PAGE 11
below with respect to CMOs and privately-issued mortgage-backed certificates.
As interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other mortgage-backed
securities described herein, like other debt instruments, will tend to move in
the opposite direction compared to interest rates. Under the Internal Revenue
Code of 1986, as amended (the "Code"), POs may generate taxable income from
the current accrual of original issue discount, without a corresponding
distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower
than anticipated prepayments of principal, the price on a PO class will be
affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the Securities and Exchange Commission has advised the Fund
that it believes the Fund should treat IOs and POs, other than
government-issued IOs or POs backed by fixed rate mortgages, as illiquid
securities and, accordingly, limit its investments in such securities,
together with all other illiquid securities, to 15% of the Fund's net assets.
Under the Staff's position, the determination of whether a particular
government-issued IO and PO backed by fixed rate mortgages may be made on a
case by case basis under guidelines and standards established by the Fund's
Board of Directors/Trustees. The Fund's Board of Directors/Trustees has
delegated to T. Rowe Price the authority to determine the liquidity of these
investments based on the following guidelines: the type of issuer; type of
collateral, including age and prepayment characteristics; rate of interest on
coupon relative to current market rates and the effect of the rate on the
potential for prepayments; complexity of the issue's structure, including the
number of tranches; size of the issue and the number of dealers who make a
market in the IO or PO. The Fund will treat non-government-issued IOs and POs
not backed by fixed or adjustable rate mortgages as illiquid unless and until
the Securities and Exchange Commission modifies its position.
Asset-Backed Securities
The credit quality of most asset-backed securities depends primarily on
the credit quality of the assets underlying such securities, how well the
entity issuing the security is insulated from the credit risk of the
originator or any other affiliated entities and the amount and quality of any
credit support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
PAGE 12
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support".
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the related
asset-backed securities.
Methods of Allocating Cash Flows. While many asset-backed securities
are issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple
class asset-backed securities are issued for two main reasons. First,
multiple classes may be used as a method of providing credit support. This is
accomplished typically through creation of one or more classes whose right to
payments on the asset-backed security is made subordinate to the right to such
payments of the remaining class or classes. See "Types of Credit Support".
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of
each other and from those of the underlying assets. Examples include so-
called "strips" (asset-backed securities entitling the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of non-asset-
backed securities, such as floating interest rates (i.e., interest rates which
adjust as a specified benchmark changes) or scheduled amortization of
principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Fund may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Fund.
Types of Credit Support. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two classes: liquidity protection and protection against
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that scheduled payments on the underlying pool are
made in a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising out of the
structure of the transaction include "senior-subordinated securities"
PAGE 13
(multiple class asset-backed securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have "reserve funds"
(where cash or investments, sometimes funded from a portion of the initial
payments on the underlying assets, are held in reserve against future losses)
or that have been "over collateralized" (where the scheduled payments on, or
the principal amount of, the underlying assets substantially exceeds that
required to make payment of the asset-backed securities and pay any servicing
or other fees). The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that
anticipated could adversely affect the return on an investment in an asset-
backed security.
Automobile Receivable Securities. The Fund may invest in Asset Backed
Securities which are backed by receivables from motor vehicle installment
sales contracts or installment loans secured by motor vehicles ("Automobile
Receivable Securities"). Since installment sales contracts for motor vehicles
or installment loans related thereto ("Automobile Contracts") typically have
shorter durations and lower incidences of prepayment, Automobile Receivable
Securities generally will exhibit a shorter average life and are less
susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of
its obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not
amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the Automobile Receivable Securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle owner the
right to assert against the holder of the owner's Automobile Contract certain
defenses such owner would have against the seller of the motor vehicle. The
assertion of such defenses could reduce payments on the Automobile Receivable
Securities.
Credit Card Receivable Securities. The Fund may invest in Asset Backed
Securities backed by receivables from revolving credit card agreements
("Credit Card Receivable Securities"). Credit balances on revolving credit
card agreements ("Accounts") are generally paid down more rapidly than are
Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen
the maturity of Credit Card Receivable Securities, most such securities
provide for a fixed period during which only interest payments on the
underlying Accounts are passed through to the security holder and principal
payments received on such Accounts are used to fund the transfer to the pool
of assets supporting the related Credit Card Receivable Securities of
PAGE 14
additional credit card charges made on an Account. The initial fixed period
usually may be shortened upon the occurrence of specified events which signal
a potential deterioration in the quality of the assets backing the security,
such as the imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying accounts during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other Asset
Backed Securities, Accounts are unsecured obligations of the cardholder.
Other Assets. T. Rowe Price anticipates that Asset Backed Securities
backed by assets other than those described above will be issued in the
future. The Fund may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the Fund reserves the right
to invest in these securities.
All Funds
PORTFOLIO MANAGEMENT PRACTICES
Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional investors
or other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The Fund has a right to call each loan and obtain the securities 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
firms deemed by T. Rowe Price to be of good standing and will not be made
unless, in the judgment of T. Rowe Price, the consideration to be earned from
such loans would justify the risk.
PAGE 15
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission and certain
state regulatory agencies, the Fund may make loans to, or borrow funds from,
other mutual funds sponsored or advised by T. Rowe Price or Price-Fleming
(collectively, "Price Funds"). The Fund has no current intention of engaging
in these practices at this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service,
Inc., or the equivalent rating by T. Rowe Price. At that time, the bank or
securities dealer agrees to repurchase the underlying security at the same
price, plus specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. Repurchase agreements which do
not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements where (i) the
underlying securities are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase directly, (ii) the
market value of the underlying security, including interest accrued, will be
at all times equal to or exceed the value of the repurchase agreement, and
(iii) payment for the underlying security is made only upon physical delivery
or evidence of book-entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of
a repurchase agreement, the Fund could experience both delays in liquidating
the underlying security and losses, including: (a) possible decline in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto; (b) possible subnormal levels of income and lack
of access to income during this period; and (c) expenses of enforcing its
rights.
All Funds, Except Equity Index Fund
Options
Writing Covered Call Options
The Fund may write (sell) American or European style "covered" call
options and purchase options to close out options previously written by a
Fund. In writing covered call options, the Fund expects to generate
additional premium income which should serve to enhance the Fund's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in T. Rowe Price's opinion, are not expected
to have any major price increases or moves in the near future but which, over
the long term, are deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price) at expiration
of the option (European style) or at any time until a certain date (the
expiration date) (American style). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
PAGE 16
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.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is
a conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, a Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security or
currency above the exercise price, but conversely retains the risk of loss
should the price of the security or currency decline. Unlike one who owns
securities or currencies not subject to an option, the Fund has no control
over when it may be required to sell the underlying securities or currencies,
since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Fund has
written expires, the Fund will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market value of the
underlying security or currency during the option period. If the call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security or currency. The Fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the Fund's
policy which limits the pledging or mortgaging of its assets.
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.
PAGE 17
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at favorable prices. If the Fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the Fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Fund may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to
it, rather than delivering such security or currency from its portfolio. In
such cases, additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security or currency, any loss resulting from the repurchase of
a call option is likely to be offset in whole or in part by appreciation of
the underlying security or currency owned by the Fund.
In order to comply with the requirements of several states, the Fund
will not write a covered call option if, as a result, the aggregate market
value of all portfolio securities or currencies covering call or put options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating the 25% limit,
the Fund will offset, against the value of assets covering written calls and
puts, the value of purchased calls and puts on identical securities or
currencies with identical maturity dates.
Writing Covered Put Options
The Fund may write American or European style covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period (American style) or at the expiration
of the option (European style). So long as the obligation of the writer
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to make payment of the exercise price
against delivery of the underlying security or currency. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
PAGE 18
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to
or greater than the exercise price of the "covered" option at all times while
the put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.)
The Fund would generally write covered put options in circumstances
where T. Rowe Price wishes to purchase the underlying security or currency for
the Fund's portfolio at a price lower than the current market price of the
security or currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the Fund. In addition, the
Fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or
currencies.
In order to comply with the requirements of several states, the Fund
will not write a covered put option if, as a result, the aggregate market
value of all portfolio securities or currencies covering put or call options
exceeds 25% of the market value of the Fund's net assets. Should these state
laws change or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. In calculating the 25% limit,
the Fund will offset, against the value of assets covering written 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 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
PAGE 19
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 its 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 style call options. As the
holder of a call option, the Fund has the right to purchase the underlying
security or currency at the exercise price at any time during the option
period (American style) or at the expiration of the option (European style).
The Fund may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. The Fund may purchase call
options for the purpose of increasing its current return or avoiding tax
consequences which could reduce its current return. The Fund may also
purchase call options in order to acquire the underlying securities or
currencies. Examples of such uses of call options are provided 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
PAGE 20
call and put options. Should these state laws change or should the Fund
obtain a waiver of its application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities or currencies it owns in order
to protect unrealized gains on call options previously written by it. A call
option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction.
Call options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the option
to perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the Fund may be unable to
liquidate a dealer option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund. For example, since the Fund must maintain a secured position with
respect to any call option on a security it writes, the Fund may not sell the
assets which it has segregated to secure the position while it is obligated
under the option. This requirement may impair a Fund's ability to sell
portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written 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 illiquid securities. If the SEC changes its position on
the liquidity of dealer options, the Fund will change its treatment of such
instrument accordingly.
Equity Index Fund
The only option activity the Fund currently may engage in is the
purchase of S&P 500 call options. Such activity is subject to the same risks
PAGE 21
described above under "Purchasing Call Options". The Fund reserves the right
to engage in other options activity, however.
All Funds
Futures Contracts
Transactions in Futures
The Fund may enter into futures contracts, including stock index,
interest rate and currency futures ("futures or futures contracts"). The New
Era Fund may also enter into futures on commodities related to the types of
companies in which it invests, such as oil and gold futures. The Equity Index
Fund may only enter into stock index futures, such as the S&P 500 stock index,
to provide an efficient means of maintaining liquidity while being invested in
the market, to facilitate trading or to reduce transaction costs. It will not
use futures for hedging purposes. Otherwise the nature of such futures and
the regulatory limitations and risks to which they are subject are the same as
those described below.
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for T. Rowe Price to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. The Fund may
purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard,
the Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national
or foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. 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 futures contracts and options thereon only for
bona fide hedging, yield enhancement, and risk management purposes, in each
case in accordance with rules and regulations of the CFTC and applicable state
law.
The Fund may not purchase or sell futures contracts or related options
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits and
PAGE 22
premiums paid on those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options". This policy may be
modified by the Board of Directors/Trustees without a shareholder vote and
does not limit the percentage of the Fund's assets at risk to 5%.
In accordance with the rules of the State of California, the Fund may
have to apply the above 5% test without excluding the value of initial margin
and premiums paid for bona fide hedging positions.
The Fund's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the Fund,
an amount of cash, U.S. government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be identified in an account
with the Fund's custodian to cover the position, or alternative cover (such as
owning an offsetting position) will be employed. Assets used as cover or held
in an identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of a Fund's assets to
cover or identified accounts could impede portfolio management or the fund's
ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Fund would comply with such
new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated 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
PAGE 23
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual
future delivery of and payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date.
Closing out an open futures contract purchase or sale is effected by entering
into an offsetting futures contract sale or purchase, respectively, for the
same aggregate amount of the identical securities and the same delivery date.
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which
the contract is terminated. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
the market and interest rates, which in turn are affected by fiscal and
monetary policies and national and international political and economic
events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
PAGE 24
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 financial 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.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Fund would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of underlying instruments, if any,
might partially or completely offset losses on the futures contract. However,
as described 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
PAGE 25
subject of the hedge. T. Rowe Price will, however, attempt to reduce this
risk by entering into futures contracts whose movements, in its judgment, will
have a significant correlation with movements in the prices of the Fund's
underlying instruments sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the underlying
instruments held in the Fund's portfolio might decline. If this were to
occur, the Fund would lose money on the futures and also would experience a
decline in value in its underlying instruments. However, while this might
occur to a certain degree, T. Rowe Price believes that over time the value of
the Fund's portfolio will tend to move in the same direction as the market
indices used to hedge the portfolio. It is also possible that if the Fund
were to hedge against the possibility of a decline in the market (adversely
affecting the underlying instruments held in its portfolio) and prices instead
increased, the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it would have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements
of futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets, and as a result the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of 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
The Fund may purchase and sell options on the same types of futures in
which it may invest.
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
PAGE 26
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on stock
indices. Such options would be used in a manner similar to the use of options
on futures contracts. From time to time, a single order to purchase or sell
futures contracts (or options thereon) may be made on behalf of the Fund and
other T. Rowe Price Funds. Such aggregated orders would be allocated among
the Funds 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 on Futures
Contracts" are substantially the same as the risks of using options on
futures. In addition, where the Fund seeks to close out an option position by
writing or buying an offsetting option covering the same index, underlying
instrument or contract and having the same exercise price and expiration date,
its ability to establish and close out positions on such options will be
subject to the maintenance of a liquid secondary market. Reasons for the
absence of a liquid secondary market on an exchange include the following: (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.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in futures or
options transactions other than those described above, it reserves the right
to do so. Such futures and options trading might involve risks which differ
from those involved in the futures and options described above.
Foreign Futures and Options
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
PAGE 27
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.
All Funds, Except Equity Index Fund
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
has no deposit requirement, and no commissions are charged at any stage for
trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
First, when the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
PAGE 28
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under normal circumstances, consideration of
the prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, T. Rowe Price believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best
interests of the Fund will be served.
The Fund may enter into forward contacts for any other purpose
consistent with the Fund's investment objective and program. However, the
Fund will not enter into a forward contract, or maintain exposure to any such
contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Fund's holdings of liquid, high-grade debt
securities and currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, the Fund may net
offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
PAGE 29
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
or securities indexes and, in some cases, currencies, held for less than three
months, must be limited to less than 30% of the Fund's annual gross income.
In order to avoid realizing excessive gains on securities or currencies held
less than three months, the Fund may be required to defer the closing out of
option, futures or foreign forward exchange contracts) beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on Section 1256 option, futures and foreign forward exchange contracts,
which have been open for less than three months as of the end of the Fund's
fiscal year and which are recognized for tax purposes, will not be considered
gains on securities or currencies held less than three months for purposes of
the 30% test.
PAGE 30
INVESTMENT RESTRICTIONS
Fundamental policies may not be changed without the approval of the
lesser of (1) 67% of the Fund's shares present at a meeting of shareholders if
the holders of more than 50% of the outstanding shares are present in person
or by proxy or (2) more than 50% of the Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
Fund's Board of Directors/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may (i) borrow
for non-leveraging, temporary or emergency purposes and (ii)
engage in reverse repurchase agreements and make other
investments or engage in other transactions, which may
involve a borrowing, in a manner consistent with the Fund's
investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such
other percentage permitted by law. Any borrowings which
come to exceed this amount will be reduced in accordance
with applicable law. The Fund may borrow from banks, other
Price Funds or other persons to the extent permitted by
applicable law;
(2) Commodities. Purchase or sell physical commodities; except
that it may enter into futures contracts and options
thereon;
(3) Industry Concentration. Purchase the securities of any
issuer if, as a result, more than 25% of the value of the
Fund's total assets would be invested in the securities of
issuers having their principal business activities in the
same industry;
(4) Loans. Make loans, although the Fund may (i) lend portfolio
securities and participate in an interfund lending program
with other Price Funds provided that no such loan may be
made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter into
repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and
purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer.
Purchase a security if, as a result, with respect to 75% of
the value of its total assets, more than 5% of the value of
the Fund's total assets would be invested in the securities
of a single issuer, except securities issued or guaranteed
by the U.S. Government or any of its agencies or
instrumentalities;
PAGE 31
(6) Percent Limit on Share Ownership of Any One Issuer.
Purchase a security if, as a result, with respect to 75% of
the value of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by
the Fund (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities);
(7) Real Estate. Purchase or sell real estate 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);
(8) Senior Securities. Issue senior securities except in
compliance with the Investment Company Act of 1940; or
(9) Underwriting. Underwrite securities issued by other
persons, except to the extent that the Fund may be deemed to
be an underwriter within the meaning of the Securities Act
of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its
investment program.
NOTES
The following notes should be read in connection with the above-
described fundamental policies. The notes are not fundamental
policies.
With respect to investment restrictions (1) and (4), the Fund
will not borrow from or lend to any other Price Fund unless each
Fund applies for and receives an exemptive order from the SEC or
the SEC issues rules permitting such transactions. The Fund has no
current intention of engaging in any such activity and there is no
assurance the SEC would grant any order requested by the Fund or
promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Fund does not
consider currency contracts or hybrid investments to be
commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not
considered an industry. Industries are determined by reference to
the classifications of industries set forth in the Fund's semi-
annual and annual reports.
For purposes of investment restriction (4), the Fund will
consider the acquisition of a debt security to include the
execution of a note or other evidence of an extension of credit
with a term of more than nine months.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional securities
when money borrowed exceeds 5% of its total assets;
PAGE 32
(2) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(3) Futures Contracts. Purchase a futures contract or an option
thereon if, with respect to positions in futures or options
on futures which do not represent bona fide hedging, the
aggregate initial margin and premiums on such options would
exceed 5% of the Fund's net asset value;
(4) Illiquid Securities. Purchase illiquid securities 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;
(5) Investment Companies. 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;
(6) Margin. Purchase securities on margin, except (i) for use
of short-term credit necessary for clearance of purchases of
portfolio securities and (ii) it may make margin deposits in
connection with futures contracts or other permissible
investments;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any
manner, transfer any security owned by the Fund as security
for indebtedness except as may be necessary in connection
with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3%
of the Fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs. Purchase participations or other
direct interests in or enter into leases with respect to,
oil, gas, or other mineral exploration or development
programs;
(9) Options, Etc. Invest in puts, calls, straddles, spreads, or
any combination thereof, except to the extent permitted by
the prospectus and Statement of Additional Information;
(10) Ownership of Portfolio Securities by Officers and
Directors/Trustees. 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 owns beneficially more than .5%
of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities;
(11) Short Sales. Effect short sales of securities;
(12) Unseasoned Issuers. Purchase a security (other than
obligations issued or guaranteed by the U.S., any foreign,
state or local government, their agencies or
PAGE 33
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; or
(13) Warrants. Invest in warrants if, as a result thereof, more
than 2% of the value of the total assets of the Fund would
be invested in warrants which are not listed on the New York
Stock Exchange, the American Stock Exchange, or a recognized
foreign exchange, or more than 5% of the value of the total
assets of the Fund would be invested in warrants whether or
not so listed. For purposes of these percentage
limitations, the warrants will be valued at the lower of
cost or market and warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
Blue Chip Growth Fund
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Fund may invest all of its assets in a
single investment company or a series thereof in connection with a "master-
feeder" arrangement. Such an investment would be made where the Fund (a
"Feeder"), and one or more other Funds with the same investment objective and
program as the Fund, sought to accomplish its investment objective and program
by investing all of its assets in the shares of another investment company
(the "Master"). The Master would, in turn, have the same investment objective
and program as the Fund. The Fund would invest in this manner in an effort to
achieve the economies of scale associated with having a Master fund make
investments in portfolio companies on behalf of a number of Feeder funds. In
the event that the Fund exercises its right to convert to a Master Fund/Feeder
Fund structure, it will do so in compliance with the Guidelines for
Registration of a Master Fund/Feeder Fund as established by the North American
Securities Administrators Association, Inc. ("NASAA").
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's directors who
are considered "interested persons" of T. Rowe Price as defined under
Section 2(a)(19) of the Investment Company Act of 1940 are noted with an
asterisk (*). These directors are referred to as inside directors by virtue
of their officership, directorship, and/or employment with T. Rowe Price.
All Funds
Independent Directors/Trustees
LEO C. BAILEY, Retired; Address: 3396 South Placita Fabula, Green Valley,
Arizona 85614
DONALD W. DICK, JR., Principal, Overseas Partners, Inc., a financial
investment firm; Director, Waverly Press, Inc., Baltimore, Maryland; Address:
375 Park Avenue, Suite 2201, New York, New York 10152
PAGE 34
DAVID K. FAGIN, Chairman, Chief Executive Officer and Director, Golden Star
Resources, Ltd.; formerly (1986-7/91) President, Chief Operating Officer and
Director, Homestake Mining Company; Address: One Norwest Center, 1700 Lincoln
Street, Suite 1950, Denver, Colorado 80203
ADDISON LANIER, Financial management; President and Director, Thomas Emery's
Sons, Inc., and Emery Group, Inc.; Director, Scinet Development and Holdings,
Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio 45202-2913
JOHN K. MAJOR, Chairman of the Board and President, KCMA Incorporated, Tulsa,
Oklahoma; Address: 126 E. 26 Place, Tulsa, Oklahoma 74114-2422
HANNE M. MERRIMAN, Retail business consultant; formerly, President and Chief
Operating Officer, Nan Duskin, Inc., a women's specialty store, Director and
Chairman Federal Reserve Bank of Richmond, and President and Chief Executive
Officer, Honeybee, Inc., a division of Spiegel, Inc; Director, Ann Taylor
Stores Corporation, Central Illinois Public Service Company, CIPSCO
Incorporated, The Rouse Company, State Farm Mutual Automobile Insurance
Company and USAir Group, Inc., Member, National Women's Forum; Trustee,
American-Scandinavian Foundation; Address: One James Center, 901 East Cary
Street, Richmond, Virginia 23219-4030
HUBERT D. VOS, President, Stonington Capital Corporation, a private investment
company; Address: 1231 State Street, Suite 210, Santa Barbara, CA 93190-0409
PAUL M. WYTHES, Founding General Partner, Sutter Hill Ventures, a venture
capital limited partnership providing equity capital to young high technology
companies throughout the United States; Director, Teltone Corporation,
Interventional Technologies Inc., and Stuart Medical, Inc.; Address: 755 Page
Mill Road, Suite A200, Palo Alto, California 94304
Officers
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe Price; Vice
President and Director, T. Rowe Price Investment Services, Inc., T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company; Vice President, Rowe Price-
Fleming International, Inc. and T. Rowe Price Retirement Plan Services, Inc.
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T. Rowe Price
Services, Inc., and T. Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President, T. Rowe Price
and Rowe Price-Fleming International, Inc.
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice President, T.
Rowe Price and Vice President, T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
Balanced Fund
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Trust Company; President and Director,
T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Vice President and Director--Managing Director of T. Rowe
Price; Chairman of the Board, Rowe Price-Fleming International, Inc.; Vice
President and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst
RICHARD T. WHITNEY, President--Vice President of T. Rowe Price and T. Rowe
Price Trust Company
STEPHEN W. BOESEL, Vice President--Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
JONATHAN M. GREENE, Vice President--Vice President of T. Rowe Price and T.
Rowe Price Trust Company
JAMES A.C. KENNEDY, III, Vice President--Managing Director of T. Rowe Price
PAGE 35
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price and T. Rowe
Price Trust Company
DONALD J. PETERS, Vice President--Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price; Vice
President of Rowe Price-Fleming International, Inc. and T. Rowe Price Trust
Company
Blue Chip Growth Fund
*THOMAS H. BROADUS, JR., President and Director--Managing Director, T. Rowe
Price; Chartered Financial Analyst and Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc
Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
STEPHANIE C. CLANCY, Assistant Vice President--Employee, T. Rowe Price
Capital Appreciation Fund
*GEORGE J. COLLINS, Chairman of the Board--President, Chief Executive Officer
and Managing Director, T. Rowe Price; Director, Rowe Price-Fleming
International, Inc., T. Rowe Price Retirement Plan Services, Inc. and T. Rowe
Price Trust Company; Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Trustee--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., T. Rowe Price Trust Company; President and Director, T.
Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
*GEORGE A. ROCHE, Director--Managing Director and Chief Financial Officer, T.
Rowe Price; Vice President and Director, Rowe Price-Fleming International,
Inc.
RICHARD P. HOWARD, President--Vice President of T. Rowe Price; Chartered
Financial Analyst
ARTHUR B. CECIL, III, Vice President--Vice President of T. Rowe Price
CHARLES A. MORRIS, Vice President--Vice President of T. Rowe Price
DAVID A. REA, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President of T. Rowe Price
Dividend Growth Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc
Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
WILLIAM J. STROMBERG, Executive Vice President--Vice President, T. Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
DAVID J. WALLACK, Vice President--Vice President; formerly (9/88-7/90)
Citibank, Private Banking Group
STEPHANIE C. CLANCY, Assistant Vice President--Employee, T. Rowe Price
PAGE 36
Equity Income Fund
*THOMAS H. BROADUS, JR., Vice President and Trustee--Managing Director, T.
Rowe Price; Chartered Financial Analyst and Chartered Investment Counselor
*JAMES S. RIEPE, Vice President and Trustee--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc. and T. Rowe Price Trust Company; President and Director,
T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Trustee--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
DENISE S. JEVNE, Vice President--Vice President, T. Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price; formerly
(1987-1992) Investment Analyst, Massachusetts Financial Services, Inc.,
Boston, Massachusetts
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe Price
MARK J. VASELKIV, Vice President--Vice President, T. Rowe Price
Growth & Income Fund
*STEPHEN W. BOESEL, President and Director--Vice President, T. Rowe Price
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Trust Company; President and Director,
T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
ARTHUR B. CECIL, III, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
BRENT W. CLUM, Vice President--Vice President, T. Rowe Price
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe Price
LARRY J. PUGLIA, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
Growth Stock Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
*M. DAVID TESTA, Chairman of the Board--Managing Director, T. Rowe Price;
Chairman of the Board, Rowe Price-Fleming International, Inc.; Vice President
and Director, T. Rowe Price Trust Company; Chartered Financial Analyst
JOHN D. GILLESPIE, President--Vice President, T. Rowe Price
CARTER O. HOFFMAN, Vice President--Managing Director, T. Rowe Price; Chartered
Investment Counselor
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
JAMES A.C. KENNEDY, Vice President--Managing Director, T. Rowe Price
DENISE S. JEVNE, Vice President--Vice President, T. Rowe Price
BRIAN C. ROGERS, Vice President--Managing Director, T. Rowe Price
PAGE 37
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price; formerly
(1987-1992) Investment Analyst, Massachusetts Financial Services, Inc.;
Boston, Massachusetts
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
Equity Index Fund
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc. and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst
RICHARD T. WHITNEY, President--Vice President, T. Rowe Price
KRISTEN D. FARROW, Vice President--Assistant Vice President, T. Rowe
Price
JONATHAN M. GREENE, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
Mid-Cap Growth Fund
*JOHN H. LAPORTE, JR., Director--Managing Director, T. Rowe Price; Chartered
Financial Analyst
*JAMES A. C. KENNEDY, III, Director--Managing Director, T. Rowe Price
*JAMES S. RIEPE, Chairman of the Board--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Trust Company; President and Director,
T. Rowe Price Investment Services, Inc; Director, Rhone-Poulenc Rorer, Inc.
BRIAN W. H. BERGHUIS, Executive Vice President--Vice President, T. Rowe Price
BRENT W. CLUM, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T. Rowe Price
JOSEPH KLEIN, III, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe Price
New America Growth Fund
*JOHN H. LAPORTE, JR., President and Trustee--Managing Director of T. Rowe
Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Trustee--Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price Retirement
Plan Services, Inc., and T. Rowe Price Trust Company; President and Director,
T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc Rorer, Inc.
BRIAN W. H. BERGHUIS, Executive Vice President--Vice President, T. Rowe Price
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
JOHN WAKEMAN, Vice President--Vice President, T. Rowe Price
New Era Fund
*GEORGE J. COLLINS, Director--President, Managing Director, and Chief
Executive Officer, T. Rowe Price; Director, Rowe Price-Fleming International,
Inc., T. Rowe Price Trust Company, and T. Rowe Price Retirement Plan Services,
Inc.; Chartered Investment Counselor
*CARTER O. HOFFMAN, Director--Managing Director, T. Rowe Price; Chartered
Investment Counselor
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and
PAGE 38
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
*GEORGE A. ROCHE, President and Director--Managing Director and Chief
Financial Officer, T. Rowe Price; Vice President and Director, Rowe
Price-Fleming International, Inc.
STEPHEN W. BOESEL, Vice President--Vice President, T. Rowe Price
HUGH M. EVANS, III, Vice President--Employee, T. Rowe Price; formerly (7/1/88-
7/1/90) Analyst, Morgan Stanley & Co., Inc., New York, New York
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
JAMES A.C. KENNEDY, III, Vice President--Managing Director, T. Rowe Price
CHARLES M. OBER, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID L. REA, Vice President--Vice President, T. Rowe Price
ALAN R. STUART, Vice President--Vice President, T. Rowe Price
DAVID J. WALLACK, Vice President--Vice President, T. Rowe Price; formerly
(9/89-7/90) Citibank, Private Banking Group
New Horizons Fund
*JOHN H. LAPORTE, President and Director--Managing Director of T. Rowe Price;
Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
*M. DAVID TESTA, Director--Managing Director, T. Rowe Price; Chairman of the
Board, Rowe Price-Fleming International, Inc.; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst
PRESTON G. ATHEY, Vice President--Vice President of T. Rowe Price
BRIAN W. H. BERGHUIS, Vice President--Vice President of T. Rowe Price
LISE J. BUYER, Vice President--Vice President, T. Rowe Price; formerly (4/91-
4/92) PC Analyst, Cowen & Co., (2/90-4/92) PC Analyst, Needham & Co., and
(2/87-1/90) Analyst, Prudential Bache Securities
BRENT W. CLUM, Vice President--Vice President, T. Rowe Price
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T. Rowe Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
DENISE E. JEVNE, Vice President--Vice President, T. Rowe Price
JOSEPH KLEIN, III, Vice President--Vice President, T. Rowe Price
CHARLES A. MORRIS, Vice President--Vice President, T. Rowe Price
ROBERT W. SMITH, Vice President--Vice President, T. Rowe Price; formerly
(1987-1992) Investment Analyst, Massachusetts Financial Services, Inc.,
Boston, Massachusetts
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President--Vice President, T. Rowe Price
OTC Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director of T. Rowe
Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc. and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
GREGORY A. McCRICKARD, President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T. Rowe Price
JAMES A. C. KENNEDY, III, Vice President--Managing Director of T. Rowe Price
PAGE 39
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe Price; Chartered
Financial Analyst
Science & Technology Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director, T. Rowe
Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
CHARLES A. MORRIS, President--Vice President, T. Rowe Price
LISE J. BUYER, Vice President--Vice President, T. Rowe Price; formerly (4/91-
4/92) PC Analyst, Cowen & Co., (2/90-4/92) PC Analyst, Needham & Co., and
(2/87-1/90) Analyst, Prudential Bache Securities
GREGORY V. DONOVAN, Vice President--Vice President, T. Rowe Price MARCY L.
FISHER, Vice President--Assistant Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant Vice President, T. Rowe
Price
JILL L. HAUSER, Vice President--Vice President, T. Rowe Price
JOSEPH KLEIN, III, Vice President--Vice President, T. Rowe Price
BRIAN D. STANSKY, Vice President--Vice President, T. Rowe Price
Small-Cap Value Fund
*JOHN H. LAPORTE, JR., Chairman of the Board--Managing Director of T. Rowe
Price; Chartered Financial Analyst
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc. and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Poulenc
Rorer, Inc.
*GEORGE A. ROCHE, Director--Managing Director and Chief Financial Officer, T.
Rowe Price; Vice President and Director, Rowe Price-Fleming International,
Inc.
PRESTON G. ATHEY, President--Vice President, T. Rowe Price
HUGH M. EVANS, III, Vice President--Employee, T. Rowe Price; formerly
(7/1/88-7/1/90) Analyst, Morgan Stanley & Co., Inc., New York, New York
MARCY L. FISHER, Vice President--Assistant Vice President, T. Rowe Price
JONATHAN M. GREENE, Vice President--Vice President of T. Rowe Price and T.
Rowe Price Trust Company
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe Price and T. Rowe
Price Trust Company; Chartered Financial Analyst
The Fund's Executive Committee, consisting of the Fund's interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the Fund in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
PAGE 40
As of December 31, 1993, the following shareholders beneficially owned
more than 5% of the outstanding shares of the Growth Stock, New Era, New
Horizons and Growth & Income Funds, respectively: Pirateline & Co., FBO
Spectrum Growth Fund Acct., Attn.: Mark White, State Street Bank & Trust Co.,
1776 Heritage Drive - 4W, North Quincy, Massachusetts 02171-2197; Small Cap
Value and Science & Technology Funds, respectively: Charles Schwab & Co. Inc.,
Reinvest. Account, Attn.: Mutual Fund Dept., 101 Montgomery Street, San
Francisco, California 94104-4122; Equity Index Fund: Northern Trust Co. Tr.,
Intermountain Healthcare, Savings Plan Trust, P.O. Box 92956, Chicago,
Illinois 60690-9209; and the OTC Fund, Sigler & Co. CF Smithsonian Int.,
Wellington Trust Co., Chemical Bank, Attn.: Voila Diacumakos, 4 New York
Plaza, 4th Floor, New York, New York 10004-2413.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price provides the Fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the Fund in accordance with
the Fund's investment objectives, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
Fund, including the negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these services, T. Rowe
Price provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal 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.
All Funds Except Equity Index Fund
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of two
components: a Group Management Fee ("Group Fee") and an Individual Fund Fee
("Fund Fee"). The Fee is paid monthly to T. Rowe Price on the first business
day of the next succeeding calendar month and is calculated as described
below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily
Group Fee accruals ("Daily Group Fee Accruals") for each month. The Daily
Group Fee Accrual for any particular day is computed by multiplying the Price
Funds' group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily Price Funds'
Group Fee Accrual for any particular day is calculated by multiplying the
fraction of one (1) over the number of calendar days in the year by the
PAGE 41
annualized Daily Price Funds' Group Fee Accrual for that day as determined in
accordance with the following schedule:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the Price Funds include all
the mutual funds distributed by T. Rowe Price Investment Services, Inc.,
(excluding T. Rowe Price Spectrum Fund, Inc. and any institutional or private
label mutual funds). For the purpose of calculating the Daily Price Funds'
Group Fee Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund
Fee accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate and multiplying this product by the net assets of the Fund for that day,
as determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for business.
The individual fund fees for each Fund are listed in the chart below:
Individual Fund Fees
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
Growth & Income Fund 0.15%
Growth Stock Fund 0.25%
Equity Index Fund 0.20%
Mid-Cap Growth Fund 0.35%
New America Growth Fund 0.35%
New Era Fund 0.25%
New Horizons Fund 0.35%
OTC Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
The following chart sets forth the total management fees, if any, paid to
T. Rowe Price by each Fund, during the last three years:
PAGE 42
Fund 1993 1992 1991
Balanced $ 1,169,038 $ 158,000 **
Blue Chip Growth ** * *
Capital Appreciation 2,740,545 1,539,000 1,119,000
Dividend Growth ** * *
Equity Income 15,154,800 10,430,000 6,829,000
Growth & Income 5,209,477 3,693,000 2,991,000
Growth Stock 11,117,706 11,217,000 9,367,000
Mid-Cap Growth 152,853 ** *
New America Growth 3,988,797 2,385,000 1,166,000
New Era 4,365,990 4,337,000 4,660,000
New Horizons 10,367,727 9,589,000 8,089,000
OTC 1,547,061 1,858,000 2,126,495
Science & Technology 2,841,791 1,479,000 809,000
Small-Cap Value 2,963,580 1,165,000 119,000
* Prior to commencement of operations.
** Due to each Fund's expense limitation in effect at that time, no
management fees were paid by the Funds to T. Rowe Price.
Limitation on Fund Expenses
The Management Agreement between the Fund and T. Rowe Price provides that
the Fund will bear all expenses of its operations not specifically assumed by
T. Rowe Price. However, in compliance with certain state regulations, T. Rowe
Price will reimburse the Fund for certain 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 the Fund's assets, and 1.5% of net
assets in excess of $100 million. Reimbursement by the Fund to T. Rowe Price
of any expenses paid or assumed under a state expense limitation may not be
made more than two years after the end of the fiscal year in which the
expenses were paid or assumed.
Balanced, Blue Chip Growth, Capital Appreciation, Dividend Growth, Equity
Index, Mid-Cap Growth, New America Growth, Science & Technology and Small-Cap
Value Funds
The following chart sets forth expense ratio limitations and the periods
for which they are effective. For each, T. Rowe Price has agreed to bear any
Fund expenses which would cause the Fund's ratio of expenses to average net
assets to exceed the indicated percentage limitations. The expenses borne by
T. Rowe Price are subject to reimbursement by the Fund through the indicated
reimbursement date, provided no reimbursement will be made if it would result
in the Fund's expense ratio exceeding its applicable limitation.
Expense
Limitation Ratio Reimbursement
Fund Period Limitation Date
Balanced+ January 1, 1993- 1.00% December 31, 1996
December 31, 1994
Blue Chip Growth June 30, 1993- 1.25% December 31, 1996
December 31, 1994
Capital
Appreciation January 1, 1990- 1.25% December 31, 1995
December 31, 1993
PAGE 43
Dividend Growth December 30, 1992- 1.00% December 31, 1996
December 31, 1994
Equity Index++ January 1, 1994- 0.45% December 31, 1997
December 31, 1995
Mid-Cap Growth* January 1, 1994- 1.25% December 31, 1997
December 31, 1995
New America
Growth January 1, 1990- 1.25% December 31, 1995
December 31, 1993
Science &
Technology January 1, 1992- 1.25% December 31, 1995
December 31, 1993
Small-Cap
Value January 1, 1992- 1.25% December 31, 1995
December 31, 1993
+ The Balanced Fund previously operated under a 1.00% limitation that
expired December 31, 1992. The reimbursement period for this limitation
extends through December 31, 1994.
++ The Equity Index Fund previously operated under a 0.45% limitation that
expired December 31, 1993. The reimbursement period for this limitation
extends through December 31, 1995.
* The Mid-Cap Growth Fund previously operated under a 1.25% limitation that
expired December 31, 1993. The reimbursement period for this limitation
extends through December 31, 1995.
Each of the above-referenced Fund's Management Agreement also provides that
one or more additional expense limitation periods (of the same or different
time periods) may be implemented after the expiration of the current expense
limitation, and that with respect to any such additional limitation period,
the Fund may reimburse T. Rowe Price, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional expense
limitation.
Pursuant to the Balanced Fund's current expense limitation, $280,000 of
management fees were not accrued by the Fund for the year ended December 31,
1993. Pursuant to the previous expense limitation, $571,000 remains subject
to reimbursement through December 31, 1994.
Pursuant to the Blue Chip Growth Fund's current expense limitation,
$53,000 of management fees were not accrued by the Fund for the period ended
December 31, 1993, and $30,000 of other expenses were borne by T. Rowe Price
and subject to further reimbursement.
Pursuant to the Dividend Growth Fund's current expense limitation,
$145,000 of management fees were not accrued by he Fund for the period ended
December 31, 1993, and $84,000 of other Fund expenses borne by T. Rowe Price
and are subject to future reimbursement.
Pursuant to the Equity Index Fund's current expense limitation, $293,000
of management fees were not accrued by the Fund for the year ended December
31, 1993, and $20,000 of other expenses were borne by T. Rowe Price.
Additionally, $338,000 of unaccrued fees and expenses remain subject to future
reimbursement. Pursuant to a previous expense limitation, $421,000 of
unaccrued fees and expenses from 1990-1991 have been permanently waived.
Pursuant to Mid-Cap Growth Fund's current expense limitation, $136,000 of
management fees were not accrued by the Fund for the year ended December 31,
1993. Additionally, $92,000 of unaccrued fees and expenses from 1992 are
subject to future reimbursement.
PAGE 44
For New America Growth Fund, during the year ended December 31, 1987,
$326,000 of management fees were not accrued by the Fund pursuant to an annual
state limitation. In 1988, the Fund obtained a variance from this limitation
which permitted the 1987 fees to be reimbursed to T. Rowe Price. The
unaccrued fees from 1987 were to be reimbursed to T. Rowe Price only to the
extent that doing so would not cause the Fund's ratio of expenses to average
net assets to exceed any expense limitation then in effect. Pursuant to these
provisions, the remaining $278,000 of fees were reimbursed to T. Rowe Price
during the year ended December 31, 1993.
Pursuant to Science & Technology Fund's previous expense limitation,
$264,000 of unaccrued 1990-1991 fees were repaid during the year ended
December 31, 1993, and $170,000 of 1990-1991 fees have been permanently
waived.
Pursuant to Small-Cap Value Fund's current and previous expense
limitations, $180,000 of unaccrued 1990-1991 fees, representing the entire
unaccrued balance, were reimbursed to the Manager during the year ended
December 31, 1993.
Capital Appreciation Fund
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of three
components: a Group Management Fee ("Group Fee"), an Individual Fund Fee
("Fund Fee") and a performance fee adjustment ("Performance Fee Adjustment")
based on the performance of the Fund relative to the Standard & Poor's 500
Stock Index (the "Index"). The Fee is paid monthly to T. Rowe Price on the
first business day of the next succeeding calendar month and is calculated as
described below. The performance adjustment for the year ended December 31,
1993, decreased management fees by $220,000.
The Monthly Group Fee and Monthly Fund Fee are combined (the "Combined
Fee") and are subject to a Performance Fee Adjustment, depending on the total
return investment performance of the Fund relative to the total return
performance of the Standard & Poor's 500 Stock Composite Index (the "Index")
during the previous thirty-six (36) months. The Performance Fee Adjustment is
computed as of the end of each month and if an adjustment results, is added
to, or subtracted from the Combined Fee. No Performance Fee Adjustment is
made to the Combined Fee unless the investment performance ("Investment
Performance") of the Fund (stated as a percent) exceeds, or is exceeded by,
the investment record ("Investment Record") of the Index (stated as a percent)
by at least one full point. (The difference between the Investment
Performance and Investment Record will be referred to as the Investment
Performance Differential.) The Performance Fee Adjustment for any month is
calculated by multiplying the rate of the Performance Fee Adjustment
("Performance Fee Adjustment") (as determined below) achieved for the 36-month
period, times the average daily net assets of the Fund for such 36-month
period and dividing the product by 12. The Performance Fee Adjustment Rate is
calculated by multiplying the Investment Performance Differential (rounded
downward to the nearest full point) times a factor of .02%. Regardless of the
Investment Performance Differential, the Performance Fee Adjustment Rate shall
not exceed .30%. the same period.
Example
For example, if the Investment Performance Differential was 11.6, it
would be rounded to 11. The Investment Performance Differential of
11 would be multiplied by .02% to arrive at the Performance Fee
PAGE 45
Adjustment Rate of .22%. The .22% Performance Fee Adjustment Rate would
be multiplied by the fraction of 1/12 and that product would be
multiplied by the Fund's average daily net assets for the 36-month period
to arrive at the Performance Fee Adjustment.
The computation of the Investment Performance of the Fund and the
Investment Record of the Index will be made in accordance with Rule 205-1
under the Investment Advisers Act of 1940 or any other applicable rule as,
from time to time, may be adopted or amended. These terms are currently
defined as follows:
The Investment Performance of the Fund is the sum of: (i) the change in
the Fund's net asset value per share during the period; (ii) the value of the
Fund's cash distributions per share having an exdividend date occurring within
the period; and (iii) the per share amount of any capital gains taxes paid or
accrued during such period by the Fund for undistributed, realized long-term
capital gains.
The Investment Record of the Index is the sum of: (i) the change in the
level of the Index during the period; and (ii) the value, computed
consistently with the Index, of cash distributions having an exdividend date
occurring within the period made by companies whose securities comprise the
Index.
Equity Index Fund
Management Fee
The Fund pays T. Rowe Price an annual investment management fee in
monthly installments of .20% of the average daily net asset value of the Fund.
Due to the effect of the Fund's expense limitation, for the years ended
December 31, 1993, December 31, 1992, and December 31, 1991, the Fund did not
pay T. Rowe Price an investment management fee.
Equity Income, Growth & Income, Growth Stock, New Era, and New Horizons Funds
T. Rowe Price Spectrum Fund, Inc.
The Fund is a party to a Special Servicing Agreement ("Agreement")
between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum Fund"), T. Rowe
Price, T. Rowe Price Services, Inc. and various other T. Rowe Price funds
which, along with the Fund, are funds in which Spectrum Fund invests
(collectively all such funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors/Trustees of any
Underlying Price Fund determines that such Underlying Fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been invested directly
in the Underlying Price Funds and the resulting reduction in shareholder
servicing costs. Although such cost savings are not certain, the estimated
savings to the Underlying Price Funds generated by the operation of Spectrum
Fund are expected to be sufficient to offset most, if not all, of the expenses
incurred by Spectrum Fund.
PAGE 46
All Funds
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Fund's distributor. Investment Services is registered as
a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. The offering of the
Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: registering and
qualifying its shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of confirming
purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling Fund shares; preparing, setting in
type, printing, and mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and offering and
selling Fund shares, except for those fees and expenses specifically assumed
by the Fund. Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with the
sale of its shares in all states in which the shares are qualified and in
which Investment Services is qualified as a broker-dealer. Under the
Underwriting Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the Fund.
All Funds
CUSTODIAN
State Street Bank and Trust Company is the custodian for the Fund's
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust Corporation.
The Fund (other than Equity Index Fund) has entered into a Custodian Agreement
with The Chase Manhattan Bank, N.A., London, pursuant to which portfolio
securities which are purchased outside the United States are maintained in the
custody of various foreign branches of The Chase Manhattan Bank and such other
custodians, including foreign banks and foreign securities depositories as are
approved by the Fund's Board of Directors/Trustees in accordance with
regulations under the Investment Company Act of 1940. The Bank's main office
is at 225 Franklin Street, Boston, Massachusetts 02110. The address for The
Chase Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London,
EC2P 2HD, England.
PAGE 47
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is T. Rowe
Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided by
them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a
primary market-maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by the client although the price
usually includes an undisclosed compensation. Transactions placed through
dealers serving as primary market-makers reflect the spread between the bid
and asked prices. Securities may also be purchased from underwriters at
prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe Price may
effect principal transactions on behalf of the Fund with a broker or dealer
who furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in fixed price offerings.
How Evaluations are Made of the Overall Reasonableness of Brokerage
Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, 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
PAGE 48
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Description of Research Services Received from Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to
T. Rowe Price's own research effort and, when utilized, are subject to
internal analysis before being incorporated by T. Rowe Price into its
investment process. As a practical matter, it would not be possible for T.
Rowe Price's Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays cash for
certain research services received from external sources. T. Rowe Price also
allocates brokerage for research services which are available for cash. While
receipt of research services from brokerage firms has not reduced T. Rowe
Price's normal research activities, the expenses of T. Rowe Price could be
materially increased if it attempted to generate such additional information
through its own staff. To the extent that research services of value are
provided by brokers or dealers, T. Rowe Price may be relieved of expenses
which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in return
for products or services other than brokerage or research services. In
accordance with the provisions of Section 28(e) of the Securities Exchange Act
of 1934, T. Rowe Price may from time to time receive services and products
which serve both research and non-research functions. In such event, T. Rowe
Price makes a good faith determination of the anticipated research and non-
research use of the product or service and allocates brokerage only with
respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would have
charged for effecting the same transaction, if the adviser determines in good
faith that the commission paid is reasonable in relation to the value of the
brokerage and research services provided. The determination may be viewed in
PAGE 49
terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the total
brokerage and research services provided by each particular broker. T. Rowe
Price may receive research, as defined in Section 28(e), in connection with
selling concessions and designations in fixed price offerings in which the
Funds participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of
business to any broker or dealer over any specific time period. Historically,
the majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion of
its discretionary client brokerage business where special needs do not exist,
or where the business may be allocated among several brokers or dealers which
are able to meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of business
which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return for
the various brokerage and research services they provide. Actual brokerage
received by any firm may be less than the suggested allocations but can, and
often does, exceed the suggestions, because the total business is allocated on
the basis of all the considerations described above. In no case is a broker
or dealer excluded from receiving business from T. Rowe Price because it has
not been identified as providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to
all its fully discretionary accounts, which represent a substantial majority
of all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-Fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the Fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis of
its sales of the Fund's shares. However, this does not mean that broker-
dealers who purchase Fund shares for their clients will not receive business
from the Fund.
Some of T. Rowe Price's other clients have investment objectives and
programs similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
PAGE 50
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution which
generally results in lower commission rates being attained. In certain cases,
where the aggregate order is executed in a series of transactions at various
prices on a given day, each participating client's proportionate share of such
order reflects the average price paid or received with respect to the total
order. T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
To the extent possible, T. Rowe Price intends to recapture solicitation
fees paid in connection with tender offers through T. Rowe Price Investment
Services, Inc., the Fund's distributor. At the present time, T. Rowe Price
does not recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate elimination of
all or a portion of the selling-group concession or underwriting discount when
purchasing tax-exempt municipal securities on behalf of its clients in
underwritten offerings.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desk T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by
Robert Fleming Holdings and 50% owned by Jardine Matheson Holdings Limited.
Orders for the Fund's portfolio transactions placed with affiliates of Robert
Fleming Holdings and JFG will result in commissions being received by such
affiliates.
The Board of Directors/Trustees 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 ("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert
Fleming, Inc. (a New York brokerage firm). Other affiliates of Robert Fleming
Holding 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
PAGE 51
Investment Company Act of 1940, the Board of Directors/Trustees 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 1993, 1992, and 1991, the total brokerage commissions paid
by each Fund, including the discounts received by securities dealers in
connection with underwritings, and the percentage of these commissions paid to
firms which provided research, statistical, or other services to T. Rowe Price
in connection with the management of each Fund, or, in some cases, to each
Fund, was as shown below.
1993 1992 1991
Fund Commissions % Commissions % Commissions %
Balanced $ 91,678 46.1% $ 162,000 46% $ 122,000 65%
Blue Chip
Growth 177,317 10% * * * *
Capital
Apprec-
iation 1,141,732 45.28% 439,000 55% 478,000 59%
Dividend
Growth 282,409 22% * * * *
Equity
Income 4,660,406 42.12% 3,419,000 37% 3,087,000 36%
Growth &
Income 2,814,544 26.9% 2,218,000 24% 2,051,000 31%
Growth
Stock 3,983,572 40.4% 3,392,000 41% 1,753,000 65%
Equity
Index 20,978 8.6% 39,000 2.8% 10,000 *
Mid-Cap
Growth 441,166 18.9% 119,000 39% * *
New America
Growth 2,345,540 17.6% 1,349,00 20% 1,435,000 24%
New Era 1,758,270 28.03% 299,000 95% 451,000 63%
New
Horizons 7,336,582 8.2% 4,810,000 13% 4,239,000 14%
OTC 776,333 6.68% 120,000 35.83% 51,000 None
Science &
Tech-
nology 2,186,853 23.97% 861,000 19% 909,000 16%
Small-Cap
Value 995,993 11.4% 661,000 26.2% 117,000 12.8%
* Prior to commencement of operations.
On December 31, 1993, the Balanced Fund held 38,200 shares of the common
stock of J.P. Morgan with a value of $2,650,000. In 1993, J.P. Morgan was
among the Fund's regular brokers or dealers as defined in Rule 10b-1 under the
Investment Company Act of 1940.
On December 31, 1993, the Capital Appreciation Fund held commercial paper
of the following regular brokers or dealers of the Fund Bear Stearns, BT
Securities, Goldman Sachs Group, Merrill Lynch, and Morgan Stanley Group,
respectively, with a value of $5,000,000, $5,834,000, $5,000,000, $5,000,000,
and $5,012,000, respectively. In 1993, Bear Stearns, BT Securities, Goldman
Sachs Group, Merrill Lynch, and Morgan Stanley Group were among the Fund's
PAGE 52
regular brokers or dealers as defined in Rule 10b-1 under the Investment
Company Act of 1940.
On December 31, 1993, the Equity Income Fund held 250,000 shares of the
common stock of J.P. Morgan with a value of $17,344,000. In 1993, J.P. Morgan
was among the Fund's regular brokers or dealers as defined in Rule 10b-1 under
the Investment Company Act of 1940.
On December 31, 1993, the Growth Stock Fund held 150,000 shares of the
common stock of J.P. Morgan with a value of $10,406,000. In 1993, J.P. Morgan
was among the Fund's regular brokers or dealers as defined in Rule 10b-1 under
the Investment Company Act of 1940.
On December 31, 1993, the New Era Fund held commercial paper of the
following regular brokers or dealers of the Fund BT Securities, Citicorp,
Goldman Sachs Group, Merrill Lynch, and Morgan Stanley Group, respectively,
with a value of $639,000, $4,997,000, $5,000,000, $5,000,000, and $5,000,000,
respectively. In 1993, Bear Stearns, BT Securities, Goldman Sachs Group,
Merrill Lynch, and Morgan Stanley Group were among the Fund's regular brokers
or dealers as defined in Rule 10b-1 under the Investment Company Act of 1940.
On December 31, 1993, the Science & Technology Fund held commercial paper
of the following regular brokers or dealers of the Fund Bankers Trust Company
with a value of $5,598,000. In 1993, Bankers Trust Company was among the
Fund's regular brokers or dealers as defined in Rule 10b-1 under the
Investment Company Act of 1940.
The portfolio turnover rate for each Fund for the years ended 1993, 1992,
and 1991, was as follows:
Fund 1993 1992 1991
Balanced 8.7% 207.7% 239.9%
Blue Chip Growth 89.0% * *
Capital Appreciation 39.4% 30.3% 50.7%
Dividend Growth 51.2% * *
Equity Income 31.2% 30.0% 33.5%
Growth & Income 22.4% 29.9% 47.9%
Growth Stock 35.3% 27.4% 31.8%
Equity Index 0.8% 0.1% 5.8%
Mid-Cap Growth 62.4% 51.9% *
New America Growth 43.7% 26.4% 42.3%
New Era 24.7% 16.9% 9.0%
New Horizons 49.4% 49.6% 32.5%
OTC40.8% 30.7% 31.2%
Science & Technology 163.4% 144.3% 148.2%
Small-Cap Value 11.8% 12.1% 30.5%
* Prior to commencement of operations.
All Funds
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ for all Funds except Growth Stock, New Horizons, New Era,
Growth & Income and OTC) are valued at the last quoted sales price on the day
the valuations are made. For the Growth Stock, New Horizons, New Era and
Growth & Income Funds, securities regularly traded in the over-the-counter
market are valued at the latest bid price. For the OTC Fund, such securities
PAGE 53
are valued at the mean of the latest bid and asked prices. A security which
is listed or traded on more than one exchange is valued at the quotation on
the exchange determined to be the primary market for such security. Other
equity securities and those (for all Funds other than OTC) listed securities
that are not traded on a particular day are valued at a price within the
limits of the latest bid and asked prices deemed by the Board of
Directors/Trustees, or by persons delegated by the Board, best to reflect fair
value. For the OTC Fund, listed securities not traded on a particular day are
valued at the mean of the latest bid and asked prices.
Debt securities are generally traded in the over-the-counter market and
are valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their cost in local currency which,
when combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors/Trustees.
All Funds
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting the Fund's liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Fund is normally calculated
as of the close of trading on the New York Stock Exchange ("NYSE") every day
the NYSE is open for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the Fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c), or (d) exist.
DIVIDENDS AND DISTRIBUTIONS
Unless you elect otherwise, the Fund's annual dividend and capital gain
distribution, if any, and final quarterly dividend (Balanced, Dividend Growth,
PAGE 54
Equity Income, Equity Index and Growth & Income Funds) will be reinvested on
the reinvestment date using the NAV per share of that date. The reinvestment
date normally precedes the payment date by about 10 days although the exact
timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
A portion of the dividends paid by the Fund may be eligible for the
dividends-received deduction for corporate shareholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends
equal to at least 98% of ordinary income (as of December 31) and capital gains
(as of October 31) in order to avoid a federal excise tax and distribute 100%
of ordinary income and capital gains as of December 31 to avoid federal income
tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held
by the Fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, the Fund is permitted to carry
forward its net realized capital losses, if any, for eight years and realize
net capital gains up to the amount of such losses without being required to
pay taxes on, or distribute such gains. On March 31, 1994, the books of each
Fund indicated that each Fund's aggregate net assets included undistributed
net income, net realized capital gains or losses, and unrealized appreciation
or depreciation which are listed below.
Net Realized
Undistributed Capital Gain Unrealized
Fund Net Income (Losses) Appreciation
Balanced $ 168,831 $ 2,802,039 $ 17,856,325
Blue Chip Growth 51,458 311,602 75,095
Capital Appreciation 4,307,655 9,614,383 34,679,989
Dividend Growth 10,975 968,483 3,500,445
Equity Income 132,075 36,563,108 153,387,691
Growth & Income 565,481 22,384,390 111,591,142
Growth Stock 5,622,452 77,136,174 504,675,454
Equity Index (20,432) (59,655) 0,653,704
Mid-Cap Growth (6,712) 287,896 6,617,753
New America Growth (687,076) 10,628,216 133,099,050
New Era 4,107,074 3,625,090 180,184,982
New Horizons (2,305,793) 27,512,703 447,645,857
OTC 33,240 8,428,739 39,383,793
Science & Technology (1,119,465) (906,871) 60,918,139
Small-Cap Value 1,625,923 10,031,400 78,296,913
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
Fund's distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
PAGE 55
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S.
tax. For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
Fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
All Funds Except Equity Index Fund
To the extent the Fund invests in foreign securities, the following would
apply:
Passive Foreign Investment Companies
The Fund may purchase the securities of certain foreign investment funds
or trusts called passive foreign investment companies. Capital gains on the
sale of such holdings will be deemed to be ordinary income regardless of how
long the Fund holds its investment. In addition to bearing their
proportionate share of the funds expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses of such
funds. In addition, the Fund may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains were distributed to
shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such
gains will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss
on the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the Fund will be increased; if
the result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments to reflect these gains and losses will be made at the end of the
Fund's taxable year.
Balanced Fund
YIELD INFORMATION
From time to time, the Fund may advertise a yield figure calculated in
the following manner:
An income factor is calculated for each security in the portfolio, which
in the case of bonds is based upon the security's market value at the
beginning of the period and yield-to-maturity as determined in conformity with
regulations of the Securities and Exchange Commission, and in the case of
stocks is based upon the stated dividend rate. The income factors are then
totalled for all securities in the portfolio. Next, expenses of the Fund for
PAGE 56
the period net of expected reimbursements are deducted from the income to
arrive at net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset value on the
last day of the period to produce a monthly yield which is then annualized.
Quoted yield factors are for comparison purposes only, and are not intended to
indicate future performance or forecast the dividend per share of the Fund.
All Funds
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the percentage change
between the beginning value of a static account in the Fund and the ending
value of that account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual
compound rate of return is derived from the cumulative performance of the Fund
over the time period specified. The annual compound rate of return for the
Fund over any other period of time will vary from the average.
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/93 12/31/93 12/31/93 12/31/93
S&P 500 10.07% 97.34% 301.77%
Dow Jones
Industrial Avg. 16.99 105.25 333.86
CPI 2.75 21.00 43.93
Equity Index Fund 9.42 52.02%
(3/30/90)
Lehman Brothers Aggregate Index 50.18
Salomon Brothers Broad Investment
Grade Index 50.76
Dividend Growth Fund 19.41 19.41
(12/30/92)
Blue Chip Growth Fund 14.32
(6/30/93)
Growth Stock Fund 15.56 96.73 251.42 10,472.21
(4/11/50)
New America Growth Fund 17.44 153.87 269.31
(9/30/85)
Lipper Growth
Fund Index 14.19 102.77 248.11 219.09
Equity Income Fund 14.84 74.08 220.77
(10/31/85)
Lipper Equity Income
Fund Average 13.38 78.00 160.86
PAGE 57
Growth & Income Fund 12.96 81.64 186.93 292.39
(12/21/82)
Lipper Growth and Income
Fund Index 14.86 87.67 252.07 334.61
Capital Appreciation Fund 15.66 84.41 156.43
(6/30/86)
Lipper Capital Appreciation
Funds Average 15.16 107.86 120.81
New Era Fund 15.33 53.18 194.60 1,040.50
(1/20/69)
Lipper Natural Resources
Funds Average 22.94 55.30 119.33 N/A
Science & Technology Fund 24.25 228.01 199.48
(9/30/87)
Lipper Science and
Technology Index 23.55 130.75 88.59
Russell 2000 18.90 92.39 181.47 70.46
Balanced Fund 13.35% 92.62% 253.40% 20,369.52%
(12/31/39)
Lipper Balanced
Fund Index 11.70 82.55 219.63 N/A
Lehman Brothers
Aggregate Index 9.75 70.64 206.56 N/A
Salomon Brothers Broad
Investment Grade Index 9.92 71.22 207.91 N/A
New Horizons Fund 22.01 134.34 178.05 3,587.41
(6/3/60)
OTC Fund 18.40 77.10 172.23% 14,347.80
(6/1/56)
Small-Cap Value Fund 23.30 109.51 101.51
(6/30/88)
Russell 2000 18.90 92.39 181.47 89.31
S&P 400 Mid-Cap 13.96 146.18 364.69 149.54
NASDAQ Composite 14.75 103.68 178.82 N/A
Lipper Small Company
Growth Funds Average 16.93 121.43 228.73 N/A
Mid-Cap Growth Fund 26.24 57.21
(6/30/92)
Russell 2000 18.90 92.39 181.47 40.56
S&P 400 Mid-Cap Index 13.96 146.18 364.69 32.29
NASDAQ 14.75 37.83
Lipper Growth
Fund Index 14.19 26.77
Lipper Growth Fund
Category Average 10.61 24.43
PAGE 58
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
12/31/93 12/31/93 12/31/93 12/31/93
S&P 500 10.07% 14.56% 14.92%
Dow Jones
Industrial Avg. 16.99 15.47 15.81
CPI 2.75 3.89 3.71
Equity Index Fund 9.42 11.81%
(3/30/90)
Lehman Brothers Aggregate Index 11.44
Salomon Brothers Broad Investment
Grade Index 11.56
Dividend Growth Fund 19.41 19.41
(12/30/92)
Blue Chip Growth Fund 14.32
(6/30/93)
Growth Stock Fund 15.56 14.49 13.39 11.25
(4/11/50)
New America Growth Fund 17.44 20.48 17.16
(9/30/85)
Lipper Growth
Fund Index 14.19 15.19 13.28 N/A
Equity Income Fund 14.84 11.72 15.34
(10/31/85)
Lipper Equity Income
Fund Average 13.38 12.14 12.17
Growth & Income Fund 12.96 12.68 11.12 13.20
(12/21/82)
Lipper Growth and Income
Fund Index 14.86 13.42 13.41 14.29
Capital Appreciation Fund 15.66 13.02 13.37
(6/30/86)
Lipper Capital Appreciation
Funds Average 15.16 15.24 10.59
New Era Fund 15.33 8.90 11.41 10.25
(1/20/69)
Lipper Natural Resources
Funds Average 22.94 8.98 7.72 N/A
Science & Technology Fund 24.25 26.82 19.18
(9/30/87)
Lipper Science and
Technology Index 23.55 18.20 10.68
Russell 2000 13.98 10.90 8.91
Balanced Fund 13.35 14.01 13.45 10.36
(12/31/39)
Lipper Balanced
Fund Index 11.70 12.79 12.32 N/A
PAGE 59
Lehman Brothers
Aggregate Index 9.75 11.28 11.85 N/A
Salomon Brothers Broad
Investment Grade Index 9.92 11.36 11.90 N/A
New Horizons Fund 22.01 18.57 10.77 11.34
(6/3/60)
OTC Fund 18.40 12.11 10.53 14.15
(6/1/56)
Small-Cap Value Fund 23.30 15.94 13.58
(6/30/88)
Russell 2000 13.98 10.90 12.30
S&P 400 Mid-Cap 19.74 16.60 18.08
NASDAQ Composite 14.75 15.29 10.80 N/A
Lipper Small Company
Growth Funds Average 16.93 16.76 12.16 N/A
Mid-Cap Growth Fund 26.24 35.06
(6/30/92)
Russell 2000 13.98 10.90 25.38
S&P 400 Mid-Cap Index 19.74 16.60 20.43
NASDAQ 14.75 23.78
Lipper Growth
Fund Index 14.19 17.13
Lipper Growth Fund
Category Average 10.61 15.57
Outside Sources of Information
From time to time, in reports and promotions literature: (1) the
Fund's total return performance or P/E ratio may be compared to any one or
combination of the following: (i) the Standard & Poor's 500 Stock Index so
that you may compare the Fund's results with those of a group of unmanaged
securities widely regarded by investors as representative of the stock market
in general; (ii) other groups of mutual funds, including T. Rowe Price Funds,
tracked by: (A) Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds by overall performance, investment
objectives, and assets; (B) Morningstar, Inc., another widely used independent
research firm which ranks mutual funds; or (C) other financial or business
publications, such as Business Week, Money Magazine, Forbes and Barron's,
which provide similar information; (iii) indices of stocks comparable to those
in which the Fund invests; (2) the Consumer Price Index (measure for
inflation) may be used to assess the real rate of return from an investment in
the Fund; (3) other government statistics such as GNP, and net import and
export figures derived from governmental publications, e.g., The Survey of
Current Business, may be used to illustrate investment attributes of the Fund
or the general economic, business, investment, or financial environment in
which the Fund operates; (4) various financial, economic and market statistics
developed by brokers, dealers and other persons may be used to illustrate
aspects of the Fund's performance; (5) the effect of tax-deferred compounding
on the Fund's investment returns, or on returns in general, may be illustrated
by graphs, charts, etc. where such graphs or charts would compare, at various
points in time, the return from an investment in the Fund (or returns in
general) on a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the return on a taxable
PAGE 60
basis; and (6) the sectors or industries in which the Fund invests may be
compared to relevant indices or surveys (e.g., S&P Industry Surveys) in order
to evaluate the Fund's historical performance or current or potential value
with respect to the particular industry or sector. The Balanced Fund may also
compare its performance or yield to a variety of fixed income investments
(e.g., repos, CDs, Treasury bills) and other measures of performance set forth
in financial publications maintained by persons such as the Donoghue
Organization, Merrill Lynch, Pierce Fenner & Smith, Inc., Salomon Brothers,
Inc. etc. In connection with (5) above, information derived from the
following chart may be used:
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and 28% tax
bracket.
Year Taxable Tax Deferred
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is to accumulate
personal savings for retirement. Due to the long-term nature of the
investment, even slight differences in performance will result in
significantly different assets at retirement. Mutual funds, with their
diversity of choice, can be used for IRA investments. Generally, individuals
may need to adjust their underlying IRA investments as their time to
retirement and tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available. These currently
include: the Asset Mix Worksheet which is designed to show shareholders how to
reduce their investment risk by developing a diversified investment plan; the
College Planning Guide which discusses various aspects of financial planning
to meet college expenses and assists parents in projecting the costs of a
college education for their children; the Retirement Planning Kit (also
available in a PC version) includes a detailed workbook to determine how much
money you may need for retirement and suggests how you might invest to achieve
your objectives; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggests how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
PAGE 61
presentation of historical returns of various investments using published
indices. An example of this is shown below.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/93
50 years 20 years 10 years 5 years
Small-Company Stocks 15.3% 18.8% 10.0% 13.3%
Large-Company Stocks 12.3 12.8 14.9 14.5
Foreign Stocks N/A 14.4 17.9 2.3
Long-Term Corporate Bonds 5.6 10.2 14.0 13.0
Intermediate-Term U.S.
Gov't. Bonds 5.7 9.8 11.4 11.3
Treasury Bills 4.6 7.5 6.4 5.6
U.S. Inflation 4.3 5.9 3.7 3.9
Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks reflect
performance of The Morgan Stanley Capital International EAFE Index, which
includes some 1,000 companies representing the stock markets of Europe,
Australia, New Zealand, and the Far East. This chart is for illustrative
purposes only and should not be considered as performance for, or the
annualized return of, any T. Rowe Price Fund. Past performance does not
guarantee future results.
Also included will be various portfolios demonstrating how these
historical indices would have performed in various combinations over a
specified time period in terms of return. An example of this is shown on the
next page.
Performance of Retirement Portfolios*
Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/93 $10,000
Investment
After Period
_____________________ ______________________ ____________
Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year
I. Low
Risk 40% 40% 20% 11.3% 5.4% 24.9% -9.3%$ 79,775
II. Moderate
Risk 60% 30% 10% 12.1% 6.2% 29.1% -15.6%$ 90,248
III. High
Risk 80% 20% 0% 12.9% 7.0% 33.4% -21.9%$100,031
PAGE 62
Source: T. Rowe Price Associates; data supplied by Lehman Brothers, Wilshire
Associates, and Ibbotson Associates.
* Based on actual performance for the 20 years ended 1993 of stocks (85%
Wilshire 5000 and 15% Europe, Australia, Far East [EAFE] Index), bonds
(Lehman Brothers Aggregate Bond Index from 1976-93 and Lehman Brothers
Government/Corporate Bond Index from 1974-75), and 30-day Treasury bills
from January 1974 through December 1993. Past performance does not
guarantee future results. Figures include changes in principal value and
reinvested dividends and assume the same asset mix is maintained each
year. This exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price fund.
** Based on inflation rate of 5.9% for the 20-year period ended 12/31/93.
Insights
From time to time, Insights, a T. Rowe Price publication of reports on
specific investment topics and strategies, may be included in the Fund's
fulfillment kit. Such reports may include information concerning:
calculating taxable gains and losses on mutual fund transactions, coping with
stock market volatility, benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds, growth stock
investing, conservative stock investing, value investing, investing in small
companies, tax-free investing, fixed income investing, investing in mortgage-
backed securities, as well as other topics and strategies.
Other Publications
From time to time, in newsletters and other publications issued by T.
Rowe Price Investment Services, Inc., reference may be made to economic,
financial and political developments in the U.S. and abroad and their effect
on securities prices. Such discussions may take the form of commentary on
these developments by T. Rowe Price mutual fund portfolio managers and their
views and analysis on how such developments could affect investments in mutual
funds.
Dividend Growth Fund
Growing income from rising dividends
Chart 1
A line graph titled "Growing income from rising dividends" which depicts
hypothetical income and yield on a original investment of $10,000 in a stock
currently yielding 3% and whose dividends grow 8% a year. The chart shows a
range of yields from 0% to 15% and income from $0 to $1,500, for five year
periods from zero to 20. The yield and income for each of the periods are
approximately as listed below.
5 Years 10 Years 15 Years 20 Years
Yield 4% 6% 9% 14%
Income $400 $600 $900 $1,400
Chart depicts hypothetical income and yield on an original investment of
$10,000 in a stock currently yielding 3% and whose dividends grow 8% a year.
PAGE 63
Example is for illustrative purposes only and is not indicative of an
investment in the T. Rowe Price Dividend Growth Fund.
New Horizons, OTC and Small-Cap Value Funds
PERFORMANCE OF LARGE VS. SMALL COMPANY
STOCKS FOLLOWING RECESSIONS
(Total Return For 12 Months After Recession)
Chart 2
Bar graph appears here comparing large and small company stocks during
eight post-recession periods.
Large Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession 5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
36% 38% 13% 11% 28% 14% 26% 11%
_________________________________________________________________
Small Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession 5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
51% 53% 18% 12% 58% 45% 44% 28%
_________________________________________________________________
Source: T. Rowe Price Associates, Inc.
Data supplied by Ibbotson Associates
The average price-earnings (p/e) ratio of the T. Rowe Price New
Horizons Fund is a valuation measure widely used by the investment community
with respect to small company stocks, and, in the opinion of T. Rowe Price,
has been a good indicator of future small-cap stock performance. The
following chart is intended to show the history of the average (unweighted)
p/e ratio of the New Horizons Fund's portfolio companies compared with the p/e
ratio of the Standard & Poor's 500 Index. Of course, the portfolio of the OTC
and Small-Cap Value Funds will differ from the portfolio of the New Horizons
Fund. Earnings per share are estimated by T. Rowe Price for each quarter end.
T. ROWE PRICE NEW HORIZONS FUND, INC.
P/E Ratio of Fund's Portfolio Securities
Relative To The S & P "500" P/E Ratio
(12 Months Forward) January 31, 1993
Chart 3
PAGE 64
This is a one line chart that shows the p/e ratio of the New Horizons Fund
relative to the p/e ratio of the S&P 500 Stock Index. The ratio between the
two p/e's is depicted quarterly from 3/61 to 12/31/93.
The horizontal axis is divided into two year periods. The vertical
axis indicates the relative p/e ratio with 0.5, 1, 1.5, 2 and 2.5
indicated by horizontal lines. The ratio at 3/61 is approximately 2,
is at the lowest point in the first quarter of 1977 at approximately
0.95, is at the highest point near the end of 1983 at approximately
2.2, and is at 1.4 on December 31, 1993.
Source: T. Rowe Price Associates, Inc.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
investors or use fund assets to finance distribution activities. These fees
are in addition to the normal advisory fees and expenses charged by all mutual
funds. There are several types of fees charged which vary in magnitude and
which may often be used in combination. A sales charge (or "load") can be
charged at the time the fund is purchased (front-end load) or at the time of
redemption (back-end load). Front-end loads are charged on the total amount
invested. Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1 plans allow for
the payment of marketing and sales expenses from fund assets. These expenses
are usually computed daily as a fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges or 12b-1
fees. No-load funds are generally sold directly to the public without the use
of commissioned sales representatives. This means that 100% of your purchase
is invested for you.
The examples in the attached table show the impact on investment
performance of the most common types of sales charges. For each example the
investor has $10,000 to invest and each fund performs at a compound annual
rate of 6% per year (net of fund expenses, including management fees) for ten
years. The "Total After 10 Years" shows the amount the investor would receive
from the fund after ten years. Net charges are the total sales fee(s) paid by
the investor or charged to the fund's assets. Figures for total return are
net of Fund expenses including management fees.
The table is for illustrative purposes and is not intended to reflect
the anticipated performance of the Fund.
If a $10,000 investment produced a 6% annual total return for ten years in
a mutual fund that has . . .
PAGE 65
A Sales 1 1.00%
Charge 12b-1
No A of 2% A Plan
Sales Redemp- With a Sales Distri-
Charge tion Fee 1% Redemp- Charge bution
"No-Load" of 1% tion Fee of 8.5% Fee
_________ ________ __________ _______ _______
Original
Investment $10,000 $10,000 $10,000 $10,000 $10,000
(Sales Charge) N/C 2 N/C (200) (850) N/C
_______ _______ _______ _______ _______
Amount Credited
to Account $10,000 $10,000 $ 9,800 $ 9,150 $10,000
Compounded at 6%
For Ten Years $17,908 $17,908 $17,550 $16,386 $16,196
Less Redemption Fee N/C (179) (176) N/C N/C
_______ _______ _______ _______ _______
Total After
10 Years $17,908 $17,729 $17,374 $16,386 $16,196
Net Charges $0 ($179) ($376) ($850) ($1,332)
1 Figures have been rounded
2 N/C - No charge
3 Net of 12b-1 plan distribution charges
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of Fund shares for securities or assets
other than cash will be limited to (1) bona fide reorganizations; (2)
statutory mergers; or (3) other acquisitions of portfolio securities that: (a)
meet the investment objective and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
Balanced Fund
On August 31, 1992, the T. Rowe Price Balanced Fund acquired
substantially all of the assets of the Axe-Houghton Fund B, a series of Axe-
Houghton Funds, Inc. As a result of this acquisition, the Securities &
Exchange Commission requires that the historical performance information of
the Balanced Fund be based on the performance of Fund B. Therefore, all
performance information of the Balanced Fund prior to September 1, 1992,
reflects the performance of Fund B and investment managers other than T. Rowe
Price. Performance information after August 31, 1992, reflects the combined
assets of the Balanced Fund and Fund B.
All Funds, Except Capital Appreciation, Equity Income and New America Growth
Funds
CAPITAL STOCK
The Fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
PAGE 66
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions, as
shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. The Board of Directors may
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the Fund has authorized to issue
without shareholder approval.
Except to the extent that the Fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class vote
unless and to the extent that such a right might be construed to exist under
Maryland law. The Charter contains no provision entitling the holders of the
present class of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics attaching to
any class of shares, including the present class of capital stock, might be
altered or eliminated, or the class might be combined with another class or
classes, by action approved by the vote of the holders of a majority of all
the shares of all classes entitled to be voted on the proposal, without any
additional right to vote as a class by the holders of the capital stock or of
another affected class or classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the Fund, a special meeting of
shareholders of the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of all the votes
of the Fund entitled to be cast at such meeting. Shareholders requesting such
a meeting must pay to the Fund the reasonably estimated costs of preparing and
mailing the notice of the meeting. The Fund, however, will otherwise assist
the shareholders seeking to hold the special meeting in communicating to the
other shareholders of the Fund to the extent required by Section 16(c) of the
Investment Company Act of 1940.
Capital Appreciation, Equity Income and New America Growth Funds
ORGANIZATION OF THE FUND
For tax and business reasons, the Funds' were organized as Massachusetts
Business Trusts (1985 for the Equity Income and New America Growth Funds and
1986 for the Capital Appreciation Fund), and are registered with the
PAGE 67
Securities and Exchange Commission under the Investment Company Act of 1940 as
diversified, open-end investment companies, commonly known as "mutual
funds."
The Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional shares of a single class. The
Declaration of Trust also provides that the Board of Trustees may issue
additional series or classes of shares. Each share represents an equal
proportionate beneficial interest in the Fund. In the event of the
liquidation of the Fund, each share is entitled to a pro rata share of the net
assets of the Fund.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of trustees (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing trustees unless and until
such time as less than a majority of the trustees holding office have been
elected by shareholders, at which time the trustees then in office will call a
shareholders' meeting for the election of trustees. Pursuant to Section 16(c)
of the Investment Company Act of 1940, holders of record of not less than two-
thirds of the outstanding shares of the Fund may remove a trustee by a vote
cast in person or by proxy at a meeting called for that purpose. Except as
set forth above, the trustees shall continue to hold office and may appoint
successor trustees. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of trustees can, if they
choose to do so, elect all the trustees of the Trust, in which event the
holders of the remaining shares will be unable to elect any person as a
trustee. No amendments may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust.
Shares have no preemptive or conversion rights; the right of redemption
and the privilege of exchange are described in the prospectus. Shares are
fully paid and nonassessable, except as set forth below. The Trust may be
terminated (i) upon the sale of its assets to another diversified, open-end
management investment company, if approved by the vote of the holders of two-
thirds of the outstanding shares of the Trust, or (ii) upon liquidation and
distribution of the assets of the Trust, if approved by the vote of the
holders of a majority of the outstanding shares of the Trust. If not so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Fund or a Trustee. The Declaration of Trust provides for indemnification from
Fund property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its
obligations, a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the Fund, the shareholders of the Fund
paying such liability will be entitled to reimbursement from the general
assets of the Fund. The Trustees intend to conduct the operations of the Fund
in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
PAGE 68
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the Securities Act of
1933, and the Fund or its shares are registered under the laws of all states
which require registration, as well as the District of Columbia and Puerto
Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman, & Goodman, whose address is 919 Third
Avenue, New York, New York 10022, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
Blue Chip Growth, Dividend Growth, Equity Income, Growth & Income, Mid-Cap
Growth, New America Growth, and New Era Funds
Price Waterhouse, 7 St. Paul Street, Suite 1700, Baltimore, Maryland
21202, are independent accountants to the Fund.
Balanced, Capital Appreciation, Growth Stock, Equity Index Fund, New Horizons,
OTC, Science & Technology, and Small-Cap Value Funds
Coopers & Lybrand, 217 East Redwood Street, Baltimore, Maryland 21202,
are independent accountants to the Fund.
Financial Statements
All Funds, except Blue Chip Growth and Dividend Growth Funds
The financial statements of the Fund for the year ended December 31,
1993, and the report of independent accountants are included in the Fund's
Annual Report for the year ended December 31, 1993. A copy of the Annual
Report accompanies this Statement of Additional Information. The following
financial statements and the report of independent accountants appearing in
the Annual Report for the year ended December 31, 1993 are incorporated into
this Statement of Additional Information by reference:
PAGE 69
CAPITAL EQUITY EQUITY GROWTH &
APPRECIATION INCOME INDEX INCOME
______________ __________ ________ __________
Report of Independent
Accountants 16 15 15 15
Statement of Net Assets,
December 31, 1993 7-10 5-9 6-11 6-9
Statement of Operations, year
ended December 31, 1993 11 10 11 10
Statement of Changes in Net
Assets, years ended December
31, 1993 and December 31, 1992 12 11 12 11
Notes to Financial Statements,
December 31, 1993 13-14 12-13 12-14 12-13
Financial Highlights 15 14 14 14
NEW
GROWTH AMERICA NEW
STOCK GROWTH ERA OTC
__________ ____________ _________ ________
Report of Independent
Accountants 15 13 14 11
Statement of Net Assets,
December 31, 1993 6-10 7-8 7-8 4-6
Statement of Operations, year
ended December 31, 1993 10 9 9 7
Statement of Changes in Net
Assets, years ended December
31, 1993 and December 31, 1992 11 10 10 8
Notes to Financial Statements,
December 31, 1993 11-13 10-11 11-12 8-9
Financial Highlights 14 12 13 10
PAGE 70
SCIENCE
NEW & SMALL-CAP
HORIZONS TECHNOLOGY VALUE
____________ ______________ ___________
Report of Independent
Accountants 18 14 15
Portfolio of Investments,
December 31, 1993 8-11 7-8 5-8
Statement of Assets and
Liabilities, December 31, 1993 12 8 9
Statement of Operations, year
ended December 31, 1993 13 9 10
Statement of Changes in Net
Assets, years ended December
31, 1993 and December 31, 1992 14 10 11
Notes to Financial Statements,
December 31, 1993 15-16 11-12 12-13
Financial Highlights 17 13 14
BALANCED
____________
Report of Independent Accountants 18
Statement of Net Assets, December 31, 1993 6-12
Statement of Operations, December 31, 1993 13
Statement of Changes in Net Assets,
year ended December 31, 1993, two-months
ended December 31, 1992 and year ended
October 31, 1992 14
Notes to Financial Statements, December 31, 1993 15-16
Financial Highlights 17
MID-CAP
GROWTH
___________
Report of Independent Accountants 11
Statement of Net Assets, December 31, 1993 5-7
Statement of Operations, December 31, 1993 7
Statement of Changes in Net Assets,
year ended December 31, 1993 and
June 30, 1992 (Commencement of Operations)
to December 31, 1992 8
Notes to Financial Statements, December 31, 1993 8-10
Financial Highlights, year ended December 31, 1993
and June 30, 1992 (Commencement of Operations)
to December 31, 1992 10
Blue Chip Growth and Dividend Growth Funds
The financial statements of the Fund for the period ended December 31,
1993, and the report of independent accountants are included in the Fund's
Annual Report for the period ended December 31, 1993. A copy of the Annual
Report accompanies this Statement of Additional Information. The following
financial statements and the report of independent accountants appearing in
the Annual Report for the period ended December 31, 1993, are incorporated
into this Statement of Additional Information by reference:
PAGE 71
BLUE CHIP
GROWTH
___________
Report of Independent Accountants 11
Statement of Net Assets, December 31, 1993 5-7
Statement of Operations, June 30, 1993
(Commencement of Operations) to December 31, 1993 7
Statement of Changes in Net Assets, June 30,
1993 (Commencement of Operations) to December 31, 1993 8
Notes to Financial Statements, December 31, 1993 8-9
Financial Highlights, June 30, 1993 (Commencement
of Operations) to December 31, 1993 10
DIVIDEND
GROWTH
____________
Report of Independent Accountants 11
Statement of Net Assets, December 31, 1993 4-6
Statement of Operations, December 30, 1992
(Commencement of Operations) to December 31, 1993 7
Statement of Changes in Net Assets, December 30,
1992 (Commencement of Operations) to December 31, 1993 8
Notes to Financial Statements, December 31, 1993 8-10
Financial Highlights, December 30, 1992 (Commencement
of Operations) to December 31, 1993 10
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Services, Inc. (Moody's)
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa-Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations.
Baa-Bonds rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
PAGE 72
B-Bonds rated B generally lack the characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
Standard & Poor's Corporation (S&P)
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, C, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other than
through changes in the money rate. The prime feature of a "AAA" bond is the
showing of earnings several times or many times interest requirements for such
stability of applicable interest that safety is beyond reasonable question
whenever changes occur in conditions. Other features may enter, such as a
wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other than
the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits
are not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
PAGE 73
APPENDIX A
Chart 1
A line graph titled "Growing income from rising dividends" which depicts
hypothetical income and yield on a original investment of $10,000 in a stock
currently yielding 3% and whose dividends grow 8% a year. The chart shows a
range of yields from 0% to 15% and income from $0 to $1,500, for five year
periods from zero to 20. The yield and income for each of the periods are
approximately as listed below.
5 Years 10 Years 15 Years 20 Years
Yield 4% 6% 9% 14%
Income $400 $600 $900 $1,400
Chart depicts hypothetical income and yield on an original investment of
$10,000 in a stock currently yielding 3% and whose dividends grow 8% a year.
Example is for illustrative purposes only and is not indicative of an
investment in the T. Rowe Price Dividend Growth Fund.
Chart 2
Bar graph appears here comparing large and small company stocks during
eight post-recession periods.
Large Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession 5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
36% 38% 13% 11% 28% 14% 26% 11%
_________________________________________________________________
Small Company Stocks
Post- 5/54- 4/58- 2/61- 11/70- 3/75- 7/80- 11/82- 3/91-
Recession 5/55 4/59 2/62 11/71 3/76 7/81 11/83 3/92
Periods
_________________________________________________________________
51% 53% 18% 12% 58% 45% 44% 28%
_________________________________________________________________
Source: T. Rowe Price Associates, Inc.
Data supplied by Ibbotson Associates
The average price-earnings (p/e) ratio of the T. Rowe Price New
Horizons Fund is a valuation measure widely used by the investment community
with respect to small company stocks, and, in the opinion of T. Rowe Price,
has been a good indicator of future small-cap stock performance. The
following chart is intended to show the history of the average (unweighted)
p/e ratio of the New Horizons Fund's portfolio companies compared with the p/e
ratio of the Standard & Poor's 500 Index. Of course, the portfolio of the OTC
and Small-Cap Value Funds will differ from the portfolio of the New Horizons
Fund. Earnings per share are estimated by T. Rowe Price for each quarter end.
PAGE 74
Chart 3
This is a one line chart that shows the p/e ratio of the New Horizons Fund
relative to the p/e ratio of the S&P 500 Stock Index. The ratio between the
two p/e's is depicted quarterly from 3/61 to 12/31/93.
The horizontal axis is divided into two year periods. The vertical
axis indicates the relative p/e ratio with 0.5, 1, 1.5, 2 and 2.5
indicated by horizontal lines. The ratio at 3/61 is approximately 2,
is at the lowest point in the first quarter of 1977 at approximately
0.95, is at the highest point near the end of 1983 at approximately
2.2, and is at 1.4 on December 31, 1993.
Source: T. Rowe Price Associates, Inc.
<PAGE>
