<PAGE>
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 CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. ROWE PRICE EQUITY INDEX 500 FUND
T. ROWE PRICE EXTENDED EQUITY MARKET INDEX FUND
T. ROWE PRICE TOTAL EQUITY MARKET INDEX FUND
T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE MID-CAP VALUE 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 REAL ESTATE FUND, INC.
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE VALUE FUND, INC.
and
INSTITUTIONAL EQUITY FUNDS, INC.
MID-CAP EQUITY GROWTH FUND
(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 prospectus dated May 1, 1998,
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, 1998.
C20-043 5/1/98
<PAGE>
<TABLE>
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TABLE OF CONTENTS
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Page Page
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<S> <C> <C> <C> <C>
Capital Stock 65 Legal Counsel 67
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Code of Ethics 53 Management of Funds 29
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Custodian 53 Net Asset Value Per Share 60
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Distributor for Fund 52 Organization of the Funds 66
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Dividends and Distributions 60 Portfolio Management Practices 14
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Federal Registration of 67 Portfolio Transactions 54
Shares
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Independent Accountants 67 Pricing of Securities 59
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Investment Management 47 Principal Holders of 47
Services Securities
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Investment Objectives and 2 Ratings of Corporate Debt 70
Policies Securities
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Investment Performance 62 Risk Factors 2
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Investment Program 5 Shareholder Services 53
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Investment Restrictions 26 Tax Status 61
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</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in the Fund's' prospectus.
The Funds will not make a material change in itstheir 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
-------------------------------------------------------------------------------
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.
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% and for the Capital Appreciation Fund at least 50%) 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 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.
<PAGE>
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.
Foreign Securities (All Funds other than Equity Index 500, Extended Equity
Market, and Total Equity Market Funds)
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 Fund will invest.
. Political and Economic Factors Individual foreign economies of certain
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. For example, in 1991, the existing government in Thailand was
overthrown in a military coup. In 1992, there were two military coup attempts
in Venezuela and in 1992 the President of Brazil was impeached. In 1994-1995,
the Mexican peso plunged in value setting off a severe crisis in the Mexican
economy. Asia is still coming to terms with its own crisis and recessionary
conditions sparked off by widespread currency weakness in late 1997. In
addition, significant external political risks currently affect some foreign
countries. Both Taiwan and China still claim sovereignty of one another and
there is a demilitarized border and hostile relations between North and South
Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
. Currency Fluctuations The Fund invests in securities denominated in various
currencies. Accordingly, a change in the value of any such currency against
the U.S. dollar will result in a corresponding change in the U. S. dollar
value of the Fund's assets denominated in that currency. Such changes will
also affect the Fund's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of the Fund's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens) the value of the Fund's
securities denominated in that currency would be expected to decline.
. Investment and Repatriation of Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the 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 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.
Investments in certain markets may be made through ADRs traded in the United
States. Foreign stock markets are generally not as developed or efficient as,
and more volatile than, those in the United States. While growing in volume,
they usually have substantially less volume than U.S. markets and the Fund's
portfolio securities may be less liquid and subject to more rapid and erratic
price movements than securities of comparable U.S. companies. Equity
securities
<PAGE>
may trade at price/earnings multiples higher than comparable United States
securities and such levels may not be sustainable. Commissions on foreign
stocks are generally higher than commissions on United States exchanges, and
while there is an increasing number of overseas stock markets that have
adopted a system of negotiated rates, a number are still subject to an
established schedule of minimum commission rates. There is generally less
government supervision and regulation of foreign 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 include delays beyond periods customary in
the United States and practices, such as delivery of securities prior to
receipt of payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to the Fund.
. Investment Funds The Fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Fund's investment in these funds
is subject to the provisions of the 1940 Act. If the Fund invests in such
investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
. Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also is often more difficult to
keep currently informed of corporate actions which affect the prices of
portfolio securities.
. Taxes The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
. Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of Funds or other assets of the Funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
. Eastern Europe and Russia Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs,
growing consumer spending, and substantial economic growth. However,
investment in 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 the 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. The Fund
will only invest in a company located in, or a government of, Eastern Europe
and Russia, if it believes the potential return justifies the risk.
. Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
<PAGE>
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U. S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. Certain Latin American countries also restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is
no significant foreign exchange market for many currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency transactions
designed to protect the value of the Fund's interests in securities
denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
INVESTMENT PROGRAM
-------------------------------------------------------------------------------
Types of Securities
Set forth below is additional information about certain of the investments
described in the Fund's prospectus.
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a Fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the Fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a
<PAGE>
structured security with an embedded put option, would be to give the Fund
the desired European bond exposure while avoiding currency risk, limiting
downside market risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful, and the Fund could lose money
if, for example, interest rates do not move as anticipated or credit problems
develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party of issuer of the Hybrid Instrument would be an additional risk
factor which the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the Fund. Accordingly, the Fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it
is possible that the Fund's investment in Hybrid Instruments will account for
more than 10% of the Fund's return (positive or negative).
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
<PAGE>
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.
Warrants
The Fund may acquire 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.
Debt Securities
Balanced, Blue Chip Growth, Capital Appreciation, Capital Opportunity,
Dividend Growth, Equity Income, Financial Services, Growth & Income, Health
Sciences, Media & Telecommunications, Mid-Cap Value, New Era, Real Estate,
Small-Cap Stock, Small-Cap Value, and Value Funds
Debt Obligations Although a majority of the Fund's assets are invested in
common stocks, 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 issuer. 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
<PAGE>
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. Because investment in low- and
lower-medium-quality bonds involves greater investment risk, to the extent
the Fund invests in such bonds, achievement of its investment objective will
be more dependent on T. Rowe Price's credit analysis than would be the case
if the Fund were investing in higher-quality bonds. High-yield bonds may be
more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high-yield bond prices
because the advent of such events could lessen the ability of highly
leveraged issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high-yield bonds
may be less liquid than the market for higher-grade bonds, which can
adversely affect the ability of a Fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
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; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
. Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
. Commercial Paper 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.
<PAGE>
. 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 price of such securities, which may be expressed in yield terms, is fixed
at the time the commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs within 90 days of
the purchase for When-Issueds, but may be substantially longer for Forwards.
During the period between purchase and settlement, no payment is made by the
Fund to the issuer and no interest accrues to the Fund. The purchase of these
securities will result in a loss if their value declines prior to the
settlement date. This could occur, for example, if interest rates increase
prior to settlement. The longer the period between purchase and settlement,
the greater the risks are. At the time the Fund makes the commitment to
purchase these securities, it will record the transaction and reflect the
value of the security in determining its net asset value. The Fund will cover
these securities by maintaining cash, liquid, high-grade debt securities, or
other suitable cover as permitted by the SEC with its custodian bank equal in
value to commitments for them during the time between the purchase and the
settlement. Therefore, the longer this period, the longer the period during
which alternative investment options are not available to the Fund (to the
extent of the securities used for cover). Such securities either will mature
or, if necessary, be sold on or before the settlement date.
To the extent the Fund remains fully or almost fully invested (in securities
with a remaining maturity of more than one year) at the same time it
purchases these securities, there will be greater fluctuations in the Fund's
net asset value than if the Fund did not purchase them.
Mortgage-Related Securities
Balanced and Real Estate Funds
Mortgage-related securities in which the Fund may invest include, but are not
limited to, those described below.
. Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the Fund.
This is in contrast to traditional bonds where principal is normally paid
back at maturity in a lump sum. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. (When
a mortgage in the underlying mortgage pool is prepaid, an unscheduled
principal prepayment is passed through to the Fund. This principal is
returned to the Fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies.
. U.S. Government Agency Mortgage-Backed Securities These are obligations
issued or guaranteed by the United States government of one of its agencies
or instrumentalities, such as the Government National Mortgage Association
("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie
Mae" or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie Mac" or
"FHLMC"), and the Federal Agricultural Mortgage Corporation ("Farmer Mac" or
"FAMC"). FNMA, FHLMC, and FAMC obligations are not backed by the full faith
and credit of the U.S. government as GNMA certificates are, but they are
supported by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro-rata share of monthly payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees paid to the guarantor of such securities and
the servicer of the underlying mortgage
<PAGE>
loans. Each of GNMA, FNMA, FHLMC, and FAMC guarantees timely distributions of
interest to certificate holders. GNMA and FNMA guarantee timely distributions
of scheduled principal. FHLMC has in the past guaranteed only the ultimate
collection of principal of the underlying mortgage loan; however, FHLMC now
issues mortgage-backed securities (FHLMC Gold PCS) which also guarantee
timely payment of monthly principal reductions.
. Ginnie Mae Certificates Ginnie Mae is a wholly owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the "Housing
Act"), authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of
mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
guaranteed by the Department of Veterans Affairs under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other
eligible mortgage loans. The Housing Act provides that the full faith and
credit of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In order to meet
its obligations under such guaranty, Ginnie Mae is authorized to borrow from
the United States Treasury with no limitations as to amount.
. Fannie Mae Certificates Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. FNMA Certificates represent a pro-rata
interest in a group of mortgage loans purchased by Fannie Mae. FNMA
guarantees the timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith and credit
of the U.S. government.
. Freddie Mac Certificates Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). Freddie Mac Certificates represent a pro-rata
interest in a group of mortgage loans (a "Freddie Mac Certificate group")
purchased by Freddie Mac. Freddie Mac guarantees timely payment of interest
and principal on certain securities it issues and timely payment of interest
and eventual payment of principal on other securities it issues. The
obligations of Freddie Mac are obligations solely of Freddie Mac and are not
backed by the full faith and credit of the U.S. government.
. Farmer Mac Certificates The Federal Agricultural Mortgage Corporation
("Farmer Mac") is a federally chartered instrumentality of the United States
established by Title VIII of the Farm Credit Act of 1971, as amended
("Charter Act"). Farmer Mac was chartered primarily to attract new capital
for financing of agricultural real estate by making a secondary market in
certain qualified agricultural real estate loans. Farmer Mac provides
guarantees of timely payment of principal and interest on securities
representing interests in, or obligations backed by, pools of mortgages
secured by first liens on agricultural real estate ("Farmer Mac
Certificates"). Similar to Fannie Mae and Freddie Mac, Farmer Mac's
Certificates are not supported by the full faith and credit of the U.S.
government; rather, Farmer Mac may borrow from the U.S. Treasury to meet its
guaranty obligations.
As discussed above, prepayments on the underlying mortgages and their effect
upon the rate of return of a mortgage-backed security, is the principal
investment risk for a purchaser of such securities, like the Fund. Over time,
any pool of mortgages will experience prepayments due to a variety of
factors, including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and (3)
increased amortization by the mortgagee. These factors, in turn, depend upon
general economic factors, such as level of interest rates and economic
growth. Thus, investors normally expect prepayment rates to increase during
periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly,
the life of the mortgage-backed security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment rates, it is not possible to predict
the life of a particular mortgage-backed security, but FHA statistics
indicate that 25- to 30-year single family dwelling mortgages have an average
life of approximately 12 years. The majority of Ginnie Mae Certificates are
backed by mortgages of this type, and, accordingly, the generally accepted
practice treats Ginnie Mae Certificates as 30-year securities which prepay in
full in the 12th year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
<PAGE>
Fixed Rate mortgage-backed securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less certain
fees to GNMA, FNMA and FHLMC for providing the guarantee, and the issuer for
assembling the pool and for passing through monthly payments of interest and
principal.
Payments to holders of mortgage-backed securities consist of the monthly
distributions of interest and principal less the applicable fees. The actual
yield to be earned by a holder of mortgage-backed securities is calculated by
dividing interest payments by the purchase price paid for the mortgage-backed
securities (which may be at a premium or a discount from the face value of
the certificate).
Monthly distributions of interest, as contrasted to semiannual distributions
which are common for other fixed interest investments, have the effect of
compounding and thereby raising the effective annual yield earned on
mortgage-backed securities. Because of the variation in the life of the pools
of mortgages which back various mortgage-backed securities, and because it is
impossible to anticipate the rate of interest at which future principal
payments may be reinvested, the actual yield earned from a portfolio of
mortgage-backed securities will differ significantly from the yield estimated
by using an assumption of a certain life for each mortgage-backed security
included in such a portfolio as described above.
. U.S. Government Agency Multiclass Pass-Through Securities Unlike CMOs, U.S.
Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multiclass pass-through securities.
. Multi-Class Residential Mortgage Securities Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi-Class Residential Mortgage Securities is not
guaranteed by the U.S. government or any of its agencies. Accordingly, yields
on Multi-Class Residential Mortgage Securities have been historically higher
than the yields on U.S. government mortgage securities. However, the risk of
loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government or its agencies. Additionally, pools of
such securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on the
underlying mortgage loans must be borne by persons holding subordinated
securities before those holding senior mortgage securities.
. Privately Issued Mortgage-Backed Certificates These are pass-through
certificates issued by non-governmental issuers. Pools of conventional
residential mortgage loans created by such issuers generally offer a higher
rate of interest than government and government-related pools because there
are no direct or indirect government guarantees of payment. Timely payment of
interest and principal of these pools is, however, generally supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance. The insurance and guarantees are issued by
government entities, private insurance or the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will
be considered in determining whether a mortgage-related security meets the
Fund's quality standards. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan
experience and practices of the poolers, the investment manager determines
that the securities meet the Fund's quality standards.
. 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
<PAGE>
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 Mortgage-Backed Securities These instruments are a type of
potentially high-risk derivative. They represent interests in a pool of
mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Mortgage-Backed Securities may be issued by U.S.
government agencies or by private issuers similar to those described above
with respect to CMOs and privately-issued mortgage-backed certificates. As
interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other mortgage-backed
securities described herein, like other debt instruments, will tend to move
in the opposite direction compared to interest rates. Under the 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. In the case of IOs, prepayments affect the amount, but not
the timing, of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of cash flows
received by investors in POs. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to fully recoup
its initial investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a full faith and
credit obligation. Conversely, if the underlying mortgage assets experience
slower than anticipated prepayments of principal, the price on a PO class
will be affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the 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
trenches; size of the issue and the number of dealers who make a market in
the IO or PO. The Fund will treat nongovernment-issued IOs and
<PAGE>
POs not backed by fixed or adjustable rate mortgages as illiquid unless and
until the Securities and Exchange Commission Staff 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
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.
Real Estate and REIT Risk
Primarily Real Estate Fund (but also any other Fund investing in REITs)
Investors in the Fund may experience many of the same risks involved with
investing in real estate directly. These risks include: declines in real
estate values, risks related to local or general economic conditions,
particularly lack of demand, overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
heavy cash flow dependency, possible lack of availability of mortgage funds,
obsolescence, losses due to natural disasters, condemnation of properties,
regulatory limitations on rents and fluctuations in rental income, variations
in market rental rates, and possible environmental liabilities. Real Estate
Investment Trusts ("REITs") may own real estate properties (Equity REITs) and
be subject to these risks directly, or may make or purchase mortgages
(Mortgage REITs) and be subject to these risks indirectly through underlying
construction, development, and long-term mortgage loans that may default or
have payment problems.
Equity REITs can be affected by rising interest rates that may cause
investors to demand a high annual yield from future distributions which, in
turn, could decrease the market prices for the REITs. In addition, rising
interest rates also increase the costs of obtaining financing for real estate
projects. Since many real estate projects are dependent upon receiving
financing, this could cause the value of the Equity REITs in which the Fund
invests to decline.
Mortgage REITs may hold mortgages that the mortgagors elect to prepay during
periods of declining interest rates which may diminish the yield on such
REITs. In addition, borrowers may not be able to repay mortgages when due
which could have a negative effect on the Fund.
<PAGE>
Some REITs have relatively small market capitalizations which could increase
their volatility. REITs tend to be dependent upon specialized management
skills and have limited diversification so they are subject to risks inherent
in operating and financing a limited number of properties. In addition, when
the Fund invests in REITs, a shareholder will bear his proportionate share of
fund expenses and, indirectly bear similar expenses of the REITs. REITs
depend generally on their ability to generate cash flow to make distributions
to shareholders. In addition, both equity and mortgage REITs are subject to
the risks of failing to qualify for tax-free status of income under the
Internal Revenue Code or failing to maintain exemption from the Investment
Company Act of 1940.
PORTFOLIO MANAGEMENT PRACTICES
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Lending of Portfolio Securities
Securities loans are made to broker-dealers or institutional investors or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the Fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The Fund has a right to call each loan and obtain the securities,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
Fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation of any important vote. The risk 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.
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 Rowe
Price-Fleming International, Inc. ("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
Services, 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
<PAGE>
security during the period while the Fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements
Although the Fund has no current intention, of engaging in reverse repurchase
agreements, the Fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Fund is the seller
of, rather than the investor in, securities, and agrees to repurchase them at
an agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund, subject to
Investment Restriction (1). (See "Investment Restrictions").
Money Market Reserves
It is expected that the Fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price and
Price-Fleming. Currently, two such money market funds are in
operation-Reserve Investment Fund ("RIF") and Government Reserve Investment
Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. Additional
series may be created in the future. These funds were created and operate
under an Exemptive Order issued by the Securities and Exchange Commission
(Investment Company Act Release No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the
Investment Company Act of 1940 governing money market funds. The RIF invests
at least 95% of its total assets in prime money market instruments receiving
the highest credit rating. The GRF invests primarily in a portfolio of U.S.
government-backed securities, primarily U.S. Treasuries, and repurchase
agreements thereon.
The RIF and GRF provide a very efficient means of managing the cash reserves
of the Fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The Fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.
Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.
Options
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The Fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by the Fund. In
writing covered call options, the Fund expects to generate additional premium
income which should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long
term, are deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a security or
currency at a specified price (the exercise price) at expiration of the
option (European style) or at any time until a certain date (the expiration
date) (American style). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at
which the writer effects a closing purchase transaction by
<PAGE>
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, other liquid high-grade debt
obligations, or other suitable cover as determined by the SEC 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.
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.
<PAGE>
Call options written by the Fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may
be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the Fund's net assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options
The Fund may write American or European style covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at
the exercise price during the option period (American style) or at the
expiration of the option (European style). So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to make payment to the
exercise price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related risks and
rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means that
the Fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the Fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.)
The Fund would generally write covered put options in circumstances where T.
Rowe Price wishes to purchase the underlying security or currency for the
Fund's portfolio at a price lower than the current market price of the
security or currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the Fund. In addition, the
Fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
The Fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the Fund's net assets. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
<PAGE>
Purchasing Put Options
The Fund may purchase American or European style put options. As the holder
of a put option, the Fund has the right to sell the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The Fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided next.
The Fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the Fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the Fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The Fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the Fund when purchasing
a put option will be recorded as an asset of the Fund. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of New York Stock Exchange), or, in the absence of such sale,
the latest bid price. This asset will be terminated upon expiration of the
option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.
Purchasing Call Options
The Fund may purchase American or European style call options. As the holder
of a call option, the Fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase call options
for the purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The Fund may also purchase call
options in order to acquire the underlying securities or currencies. Examples
of such uses of call options are provided 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.
<PAGE>
The Fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The Fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options
The Fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as loss
of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the Fund writes
a dealer option, it generally will be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the Fund may be unable to
liquidate a dealer option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses
to the Fund. For example, since the Fund must maintain a secured position
with respect to any call option on a security it writes, the Fund may not
sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair a Fund's ability to
sell portfolio securities or currencies at a time when such sale might be
advantageous.
The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The Fund may treat the cover used for written 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.
Options
(Equity Index 500, Extended Equity Market Index, and Total Equity Market
Index Funds)
The only option activity the Funds currently may engage in is the purchase of
S&P 500 call options for the Equity Index 500 Fund, or the purchases of call
options on any indices that may be consistent with the investment programs
for the Extended Equity Market Index and Total Equity Market Index Funds.
Such activity is subject to the same risks described above under "Purchasing
Call Options." However, the Funds reserve the right to engage in other
options activity.
Futures Contracts
All Funds
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The Fund may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
The New Era Fund may also enter into futures contracts on commodities related
to the types of companies in which it invests, such as oil and gold futures.
The Equity Index 500, Extended Equity Market Index, and
<PAGE>
Total Equity Market Index Funds may only enter into stock index futures which
are appropriate for their investment programs to provide an efficient means
of maintaining liquidity while being invested in the market, to facilitate
trading, or to reduce transaction costs. They 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.
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
premium 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 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 by the Fund to cover the position, or
alternative cover (such as owning an offsetting position) will be employed.
Assets used as cover or held in an identified account cannot be sold while
the position in the corresponding option or future is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion
of a Fund's assets to cover or identified accounts could impede portfolio
management or the fund's ability to meet redemption requests or other current
obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
<PAGE>
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,
liquid, high-grade debt securities, or other suitable cover as determined by
the SEC, known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is traded, and
may be significantly modified from time to time by the exchange during the
term of the contract. Futures contracts are customarily purchased and sold on
margins that may range upward from less than 5% of the value of the contract
being traded.
If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to the market." The Fund
expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is made up of 500 selected
common stocks, most of which are listed on the New York Stock Exchange. The
S&P 500 Index assigns relative weightings to the common stocks included in
the Index, and the Index fluctuates with changes in the market values of
those common stocks. In the case of the S&P 500 Index, contracts are to buy
or sell 250 units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $37,500 (250 units x $150). The stock index futures
contract specifies that no delivery of the actual 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 250 units of the S&P 500 Index at a specified future date at
a contract price of $150 and the S&P 500 Index is at $154 on that future
date, the Fund will gain $1,000 (250 units x gain of $4). If the Fund enters
into a futures contract to sell 250 units of the stock index at a specified
future date at a contract price of $150 and the S&P 500 Index is at $152 on
that future date, the Fund will lose $500 (250 units x loss of $2).
<PAGE>
Special Risks of Transactions in Futures Contracts
. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Margin deposits required on futures trading are low. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit, if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.
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 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 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.
<PAGE>
Successful use of futures contracts by the Fund for hedging purposes is also
subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might decline. If this
were to occur, the Fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, T. Rowe Price believes that over time
the value of the Fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that if
the Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the Fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The Fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the Fund and other T. Rowe Price Funds. Such aggregated orders would be
allocated among the Funds and the other T. Rowe Price Funds in a fair and
nondiscriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. In addition, where the Fund seeks to close out an option position by
<PAGE>
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 applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the Fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the Fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time the Fund's order is placed and the time it is liquidated,
offset or exercised.
Foreign Currency Transactions
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
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.
<PAGE>
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.
Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount
of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date the forward contract is entered into and the date
it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Under normal circumstances, consideration of
the prospect for currency parties will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, T. Rowe Price believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best
interests of the Fund will be served.
The Fund may enter into forward contacts for any other purpose consistent
with the Fund's investment objective and program. However, the Fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the Fund's holdings of liquid, high-grade debt securities, currency
available for cover of the forward contract(s) or other suitable cover as
determined by the SEC. In determining the amount to be delivered under a
contract, the Fund may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent of the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a
<PAGE>
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 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 options, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will
be treated as Section 1256 contracts or straddles.
Transactions that are considered Section 1256 contracts will be considered to
have been closed at the end of the Fund's fiscal year and any gains or losses
will be recognized for tax purposes at that time. Such gains or losses from
the normal closing or settlement of such transactions will be characterized
as 60% long-term capital gain (taxable at a maximum rate of 20%) or loss and
40% short-term capital gain or loss regardless of the holding period of the
instrument. The Fund will be required to distribute net gains on such
transactions to shareholders even though it may not have closed the
transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses if the security covering the option was held for
more than 12 months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.
As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the Fund.
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the Fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
Fund's Board of Directors/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund. Calculation of the
Fund's total assets for
<PAGE>
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the Fund's prospectus or Statement
of Additional Information will not include cash collateral held in connection
with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing Borrow money except that the Fund may (i) borrow for
non-leveraging, temporary or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the Fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The Fund may borrow from banks, other
Price Funds, or other persons to the extent permitted by law;
(2) Commodities Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;
(3) (a)
Industry Concentration (All Funds, except Health Sciences, Financial
Services, and Real Estate Funds) Purchase the securities of any issuer
if, as a result, more than 25% of the value of the Fund's total assets
would be invested in the securities of issuers having their principal
business activities in the same industry;
(b)
Industry Concentration (Health Sciences, Financial Services, and Real
Estate Funds) Purchase the securities of any issuer if, as a result, more
than 25% of the value of the Fund's total assets would be invested in the
securities of issuers having their principal business activities in the
same industry; provided, however, that (i) the Health Sciences Fund will
invest more than 25% of its total assets in the health sciences industry
as defined in the Fund's prospectus; (ii) the Financial Services Fund
will invest more than 25% of its total assets in the financial services
industry as defined in the Fund's prospectus; (iii) the Real Estate Fund
will invest more than 25% of its total assets in the real estate industry
as defined in the Fund's prospectus.
(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 (All Funds, except
Capital Opportunity) Purchase a security if, as a result, with respect to
75% of the value of its total assets, more than 5% of the value of the
Fund's total assets would be invested in the securities of a single
issuer, except securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer (All Funds, except
Capital Opportunity) Purchase a security if, as a result, with respect to
75% of the value of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities);
(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the Fund from investing
in securities or other instruments backed by real estate or 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
<PAGE>
(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 (defined as any other mutual
fund managed by or for which T. Rowe Price or Price-Fleming acts as
adviser) 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 semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.
For purposes of investment restriction (4), the Fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the Fund's net asset value;
(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% of its net assets would be invested in such securities;
(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the Investment Company
Act of 1940; or (ii) securities of the Reserve Investment or Government
Reserve Investment Funds;
(6) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging or hypothecating may not exceed
33/1//\\/3/\\% of the Fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to, oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the Fund would be invested in such
programs;
<PAGE>
(9) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(10) Short Sales Effect short sales of securities; or
(11) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the Fund would be invested in warrants.
For Blue Chip Growth, Capital Opportunity, Diversified Small-Cap Growth,
Financial Services, Health Sciences, Media & Telecommunications, Mid-Cap
Value, Real Estate, and Value Funds:
Notwithstanding anything in the above fundamental and operating restrictions
to the contrary, the Fund may invest all of its assets in a single investment
company or a series thereof in connection with a "master-feeder" arrangement.
Such an investment would be made where the Fund (a "Feeder"), and one or more
other Funds with the same investment objective and program as the Fund,
sought to accomplish its investment objective and program by investing all of
its assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as the
Fund. The Fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
MANAGEMENT OF FUNDS
-------------------------------------------------------------------------------
The officers and directors/trustees of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's
directors/trustees who are considered "interested persons" of T. Rowe Price
as defined under Section 2(a)(19) of the Investment Company Act of 1940 are
noted with an asterisk (*). These directors/trustees are referred to as
inside directors by virtue of their officership, directorship, and/or
employment with T. Rowe Price.
All Funds
Independent Directors/Trustees
DONALD W. DICK, JR., Principal, EuroCapital Advisors, LLC, an acquisition and
management advisory firm; formerly (5/89-6/95) Principal, Overseas Partners,
Inc., a financial investment firm; (6/65-3/89) Director and Vice President;
Consumer Products Division, McCormick & Company, Inc., international food
processors; Director, Waverly, Inc., Baltimore, Maryland; Address: P.O. Box
491, Chilmark, MA 02535-0491
DAVID K. FAGIN, Chairman and Chief Executive Officer, Western Exploration and
Development, Ltd.; Director Golden Star Resources Ltd. and Miranda Mining
Development Corporation; formerly (1986-7/91) President, Chief Operating
Officer and Director, Homestake Mining Company; Address: 1660 Lincoln Street,
Suite 3000, Denver, Colorado 80264-3001
HANNE M. MERRIMAN, Retail business consultant; formerly President and Chief
Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty store,
Director (1984-90) and Chairman (1989-90) Federal Reserve Bank of Richmond,
and President and Chief Executive Officer (1988-89), Honeybee, Inc., a
division of Spiegel, Inc.; Director, Central Illinois Public Service Company,
CIPSCO Incorporated, Finlay Enterprises, Inc., The Rouse Company, State Farm
Mutual Automobile Insurance Company and USAir Group, Inc.; Address: 3201 New
Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016
HUBERT D. VOS, President, Stonington Capital Corporation, a private
investment company; Address: 1231 State Street, Suite 247, Santa Barbara,
California 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
<PAGE>
Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005
Officers
HENRY H. HOPKINS, Vice President-Vice President, Price-Fleming and T. Rowe
Price Retirement Plan Services, Inc.; Director and Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment Services, Inc.,
T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
PATRICIA S. BUTCHER, Secretary-Assistant Vice President, T. Rowe Price and T.
Rowe Price Investment Services, Inc.
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
J. JEFFREY LANG, Assistant Vice President-Assistant Vice President, T. Rowe
Price
INGRID I. VORDEMBERGE, Assistant Vice President-Employee, T. Rowe Price
Balanced Fund
* JAMES A.C. KENNEDY III, Director and Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, Chairman of the Board -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director and Vice President -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
RICHARD T. WHITNEY, President -Managing Director, T. Rowe Price and T. Rowe
Price Trust Company; Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President -Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President -Vice President, T. Rowe Price
EDMUND M. NOTZON, Vice President -Managing Director, T. Rowe Price; Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst
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, Price-Fleming and T. Rowe Price Trust Company
MARK J. VASELKIV, Vice President -Vice President, T. Rowe Price
Blue Chip Growth Fund
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
<PAGE>
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
LARRY J. PUGLIA, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
THOMAS H. BROADUS, JR., Executive Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst and Chartered Investment Counselor
BRIAN W.H. BERGHUIS, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, Vice President -Assistant Vice President, T. Rowe Price
JILL L. HAUSER, Vice President -Vice President, T. Rowe Price
SEEMA R. HINGORANI, Vice President -Employee, T. Rowe Price; formerly
Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
THOMAS J. HUBER, Vice President -Assistant Vice President, T. Rowe Price
ROBERT W. SHARPS, Vice President -Employee, T. Rowe Price; formerly Senior
Consultant, KPMG Peat Marwick
ROBERT W. SMITH, Vice President -Vice President, T. Rowe Price
WILLIAM J. STROMBERG, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
Capital Appreciation Fund
* JAMES A.C. KENNEDY III, Trustee -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Trustee and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Chairman of the Board -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
RICHARD P. HOWARD, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
ARTHUR B. CECIL III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
CHARLES A. MORRIS, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
CHARLES M. OBER, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
BRIAN C. ROGERS, Vice President -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
Capital Opportunity Fund
* JOHN H. LAPORTE, JR., Director and President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
<PAGE>
JOHN F. WAKEMAN, Executive Vice President -Vice President, T. Rowe Price
MARC L. BAYLIN, Vice President -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
BRIAN W.H. BERGHUIS, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, Vice President -Assistant Vice President, T. Rowe Price
LARRY J. PUGLIA, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
ROBERT W. SHARPS, Vice President -Employee, T. Rowe Price; formerly Senior
Consultant, KPMG Peat Marwick
BRIAN D. STANSKY, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
Diversified Small-Cap Growth Fund
* JOHN H. LAPORTE, JR., Director and Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
RICHARD T. WHITNEY, President -Managing Director, T. Rowe Price and T. Rowe
Price Trust Company; Chartered Financial Analyst
MARC L. BAYLIN, Vice President -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
KRISTEN F. CULP, Vice President -Vice President, T. Rowe Price
DONALD J. PETERS, Vice President -Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
PAUL J. WOJCIK, Vice President -Employee, T. Rowe Price; formerly Senior
Programmer/Analyst, Fidelity Investments
Dividend Growth Fund
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
WILLIAM J. STROMBERG, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
BRIAN C. ROGERS, Executive Vice President -Director and Managing Director, T.
Rowe Price; Chartered Financial Analyst
ARTHUR B. CECIL III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
STEPHANIE C. CLANCY, Vice President -Assistant Vice President, T. Rowe Price
<PAGE>
MICHAEL W. HOLTON, Vice President -Assistant Vice President, T. Rowe Price;
formerly Research Analyst at Bowles, Hollowell, Conner and Company; Chartered
Financial Analyst
THOMAS J. HUBER, Vice President -Assistant Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank
DAVID M. LEE, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst; formerly Marketing Representative at IBM
DONALD J. PETERS, Vice President -Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
LARRY J. PUGLIA, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID J. WALLACK, Vice President -Vice President, T. Rowe Price
Equity Income Fund
* JAMES A.C. KENNEDY III, Trustee -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Trustee and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Trustee -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, President -Director and Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President -Vice President, T. Rowe Price
THOMAS H. BROADUS, JR., Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst and Chartered Investment Counselor
ANDREW M. BROOKS, Vice President -Vice President, T. Rowe Price
ARTHUR B. CECIL III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
GIRI DEVULAPALLY, Vice President -Employee, T. Rowe Price; formerly Senior
Consultant, Anderson Consulting
RICHARD P. HOWARD, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
WILLIAM J. STROMBERG, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
MARK J. VASELKIV, Vice President -Vice President, T. Rowe Price
Equity Index 500, Extended Equity Market Index, and Total Market Index Funds
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
RICHARD T. WHITNEY, President -Managing Director, T. Rowe Price and T. Rowe
Price Trust Company; Chartered Financial Analyst
<PAGE>
KRISTEN F. CULP, Executive Vice President -Vice President, T. Rowe Price
STEPHANIE C. CLANCY, Vice President -Assistant Vice President, T. Rowe Price
WENDY R. DIFFENBAUGH, Vice President -Assistant Vice President, T. Rowe Price
RAYMOND A. MILLS, PHD, Vice President -Employee, T. Rowe Price; formerly a
Principal Systems Engineer at TASC, Inc.
CHRISTINE M. MUNOZ, Vice President -Assistant Vice President, T. Rowe Price
DONALD J. PETERS, Vice President -Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
PAUL J. WOJCIK, Vice President -Employee, T. Rowe Price; formerly Senior
Programmer/Analyst, Fidelity Investments
Financial Services Fund
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Chairman of the Board -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
LARRY J. PUGLIA, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
STEPHEN W. BOESEL, Vice President -Vice President, T. Rowe Price
ANNA M. DOPKIN, Vice President -Employee, T. Rowe Price; formerly 1996-1991,
Analyst, Goldman Sachs
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
ROBERT J. MARCOTTE, Vice President -Vice President, T. Rowe Price
ROBERT W. SHARPS, Vice President -Employee, T. Rowe Price; formerly Senior
Consultant, KPMG Peat Marwick
WILLIAM J. STROMBERG, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
SUSAN J. KLEIN, Assistant Vice President -Employee, T. Rowe Price
Growth & Income Fund
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Chairman of the Board -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
STEPHEN W. BOESEL, President -Vice President, T. Rowe Price
ANDREW M. BROOKS, Vice President -Vice President, T. Rowe Price
ARTHUR B. CECIL III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
<PAGE>
KARA M. CHESEBY, Vice President -Vice President, T. Rowe Price; formerly Vice
President, Legg Mason Wood Walker; Chartered Financial Analysis
DAVID M. LEE, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst; formerly Marketing Representative at IBM
GREGORY A. MCCRICKARD, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
LARRY J. PUGLIA, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
BRIAN C. ROGERS, Vice President -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
ROBERT W. SMITH, Vice President -Vice President, T. Rowe Price
MARK J. VASELKIV, Vice President -Vice President, T. Rowe Price
DAVID J. WALLACK, Vice President -Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President -Managing Director, T. Rowe Price and T.
Rowe Price Trust Company; Chartered Financial Analyst
Growth Stock Fund
* JAMES A.C. KENNEDY III, Director and Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Chairman of the Board -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
ROBERT W. SMITH, President -Vice President, T. Rowe Price
BRIAN W.H. BERGHUIS, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
JILL L. HAUSER, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President -Assistant Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank
CHARLES A. MORRIS, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
D. JAMES PREY III, Vice President -Vice President, T. Rowe Price
LARRY J. PUGLIA, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
CAROL G. BARTHA, Assistant Vice President -Employee, T. Rowe Price
Health Sciences Fund
* JOHN H. LAPORTE, JR., Director and President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
<PAGE>
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN D. STANSKY, Executive Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
KRIS H. JENNER, M.D., Vice President -Employee, T. Rowe Price; formerly with
the Laboratory of Biological Cancer, The Brigham & Women's Hospital, Harvard
Medical School
CHARLES A. MORRIS, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
CHARLES G. PEPIN, Vice President -Assistant Vice President, T. Rowe Price
D. JAMES PREY III, Vice President -Vice President, T. Rowe Price
DARRELL M. RILEY, Vice President -Assistant Vice President, T. Rowe Price
BRIAN C. ROGERS, Vice President -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
Media & Telecommunications Fund
* JAMES S. RIEPE, Chairman of the Board -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN D. STANSKY, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
CHARLES A. MORRIS, Executive Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
SEEMA R. HINGORANI, Vice President -Employee, T. Rowe Price; formerly
Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
D. JAMES PREY III, Vice President -Vice President, T. Rowe Price
JOHN F. WAKEMAN, Vice President -Vice President, T. Rowe Price
Mid-Cap Equity Growth Fund
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Chairman of the Board -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director and President -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
BRIAN W.H. BERGHUIS, Executive Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
MARC L. BAYLIN, Vice President -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
ANNA M. DOPKIN, Vice President -Employee, T. Rowe Price; formerly 1996-1991,
Analyst, Goldman Sachs
<PAGE>
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President -Assistant Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank
ROBERT J. MARCOTTE, Vice President -Vice President, T. Rowe Price
CHARLES A. MORRIS, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
JOHN F. WAKEMAN, Vice President -Vice President, T. Rowe Price
Mid-Cap Growth Fund
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JOHN H. LAPORTE, JR., Director -Managing Director, T. Rowe Price; Chartered
Financial Analyst
* JAMES S. RIEPE, Chairman of the Board -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
BRIAN W.H. BERGHUIS, President -Managing Director, T. Rowe Price; Chartered
Financial Analyst
MARC L. BAYLIN, Vice President -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
ANNA M. DOPKIN, Vice President -Employee, T. Rowe Price; formerly 1996-1991,
Analyst, Goldman Sachs
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President -Assistant Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank
ROBERT J. MARCOTTE, Vice President -Vice President, T. Rowe Price
CHARLES A. MORRIS, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
JOHN F. WAKEMAN, Vice President -Vice President, T. Rowe Price
Mid-Cap Value Fund
* JAMES A.C. KENNEDY III, Director and Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
GREGORY A. MCCRICKARD, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
PRESTON G. ATHEY, Vice President -Managing Director, T. Rowe Price; Chartered
Financial Analyst
HUGH M. EVANS III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
MARCY L. FISHER, Vice President -Assistant Vice President, T. Rowe Price
BRIAN C. ROGERS, Vice President -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
<PAGE>
LAUREN A. ROMEO, Vice President -Employee, T. Rowe Price; Chartered Financial
Analyst
DAVID J. WALLACK, Vice President -Vice President, T. Rowe Price
New America Growth Fund
* JOHN H. LAPORTE, JR., Trustee and President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Trustee and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Trustee -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN W.H. BERGHUIS, Executive Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
MARC L. BAYLIN, Vice President -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
KARA M. CHESEBY, Vice President -Vice President, T. Rowe Price; formerly Vice
President, Legg Mason Wood Walker; Chartered Financial Analysis
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
SEEMA R. HINGORANI, Vice President -Employee, T. Rowe Price; formerly
Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
THOMAS J. HUBER, Vice President -Assistant Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank
CHARLES G. PEPIN, Vice President -Assistant Vice President, T. Rowe Price
BRIAN D. STANSKY, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
JOHN F. WAKEMAN, Vice President -Vice President, T. Rowe Price
New Era Fund
* JAMES A.C. KENNEDY III, Director and Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES M. OBER, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID J. WALLACK, Executive Vice President -Vice President, T. Rowe Price
HUGH M. EVANS III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
RICHARD P. HOWARD, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID M. LEE, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst; formerly Marketing Representative at IBM
<PAGE>
ROBERT J. MARCOTTE, Vice President -Vice President, T. Rowe Price
GEORGE A. ROCHE, Vice President -President, Chief Executive Officer, Chairman
of the Board, and Managing Director, T. Rowe Price; Vice President and
Director, Price-Fleming
New Horizons Fund
* JOHN H. LAPORTE, JR., Director and President -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
PRESTON G. ATHEY, Vice President -Managing Director, T. Rowe Price; Chartered
Financial Analyst
MARC L. BAYLIN, Vice President -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
BRIAN W.H. BERGHUIS, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
ANNA M. DOPKIN, Vice President -Employee, T. Rowe Price; formerly 1996-1991,
Analyst, Goldman Sachs
MARCY L. FISHER, Vice President -Assistant Vice President, T. Rowe Price
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
JILL L. HAUSER, Vice President -Vice President, T. Rowe Price
THOMAS J. HUBER, Vice President -Assistant Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank
KRIS H. JENNER, M.D., Vice President -Employee, T. Rowe Price; formerly with
the Laboratory of Biological Cancer, The Brigham & Women's Hospital, Harvard
Medical School
JOSEPH M. MILANO, Vice President -Employee, T. Rowe Price; formerly 1996-1994
Research Assistant, Brookings Institution
CHARLES A. MORRIS, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
CHARLES G. PEPIN, Vice President -Assistant Vice President, T. Rowe Price
DARRELL M. RILEY, Vice President -Assistant Vice President, T. Rowe Price
MARK R. SCHLARBAUM, Vice President -Employee, T. Rowe Price
MICHAEL F. SOLA, Vice President -Assistant Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation
BRIAN D. STANSKY, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
JOHN F. WAKEMAN, Vice President -Vice President, T. Rowe Price
FRANCIES W. HAWKS, Assistant Vice President -Assistant Vice President, T.
Rowe Price
Real Estate Fund
* JAMES A.C. KENNEDY III, Director and Vice President -Managing Director, T.
Rowe Price; Chartered Financial Analyst
<PAGE>
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
WILLIAM J. STROMBERG, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID M. LEE, Executive Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst; formerly Marketing Representative at IBM
STEPHEN W. BOESEL, Vice President -Vice President, T. Rowe Price
ANNA M. DOPKIN, Vice President -Employee, T. Rowe Price; formerly 1996-1991,
Analyst, Goldman Sachs
CHARLES M. OBER, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
BRIAN C. ROGERS, Vice President -Director and Managing Director, 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, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES A. MORRIS, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
MARC L. BAYLIN, Vice President -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
MARCY L. FISHER, Vice President -Assistant Vice President, T. Rowe Price
ROBERT N. GENSLER, Vice President -Vice President, T. Rowe Price
STEPHEN C. JANSEN, Vice President -Employee, T. Rowe Price; formerly an
Investment Analyst at Schroder & Co.
JILL L. HAUSER, Vice President -Vice President, T. Rowe Price
D. JAMES PREY III, Vice President -Vice President, T. Rowe Price
MICHAEL F. SOLA, Vice President -Assistant Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation
BRIAN D. STANSKY, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
Small-Cap Stock Fund
* JOHN H. LAPORTE, JR., Chairman of the Board -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe
<PAGE>
Price Retirement Plan Services, Inc., and T. Rowe Price Trust Company;
Director, Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
GREGORY A. MCCRICKARD, President -Vice President, T. Rowe Price; Chartered
Financial Analyst
PRESTON G. ATHEY, Vice President -Managing Director, T. Rowe Price; Chartered
Financial Analyst
HUGH M. EVANS III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
MARCY L. FISHER, Vice President -Assistant Vice President, T. Rowe Price
JAMES A.C. KENNEDY III, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst
JOSEPH M. MILANO, Vice President -Employee, T. Rowe Price; formerly 1996-1994
Research Assistant, Brookings Institution
CHARLES G. PEPIN, Vice President -Assistant Vice President, T. Rowe Price
LAUREN A. ROMEO, Vice President -Employee, T. Rowe Price; Chartered Financial
Analyst
BRIAN D. STANSKY, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
RICHARD T. WHITNEY, Vice President -Managing Director, T. Rowe Price and T.
Rowe Price Trust Company; Chartered Financial Analyst
Small-Cap Value Fund
* JOHN H. LAPORTE, JR., Chairman of the Board -Managing Director, T. Rowe
Price; Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
PRESTON G. ATHEY, President -Managing Director, T. Rowe Price; Chartered
Financial Analyst
HUGH M. EVANS III, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
ROBERT J. MARCOTTE, Vice President -Vice President, T. Rowe Price
GREGORY A. MCCRICKARD, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst
JOSEPH M. MILANO, Vice President -Employee, T. Rowe Price; formerly 1996-1994
Research Assistant, Brookings Institution
LAUREN A. ROMEO, Vice President -Employee, T. Rowe Price; Chartered Financial
Analyst
FRANCIES W. HAWKS, Assistant Vice President -Assistant Vice President, T.
Rowe Price
Value Fund
* JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* JAMES S. RIEPE, Director and Vice President -Vice Chairman of the Board and
Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
Price-Fleming and General Re Corporation
<PAGE>
* M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, President -Director and Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHEN W. BOESEL, Vice President -Vice President, T. Rowe Price
KARA M. CHESEBY, Vice President -Vice President, T. Rowe Price; formerly Vice
President, Legg Mason Wood Walker; Chartered Financial Analysis
STEPHANIE C. CLANCY, Vice President -Assistant Vice President, T. Rowe Price
RICHARD P. HOWARD, Vice President -Vice President, T. Rowe Price; Chartered
Financial Analyst
ROBERT W. SMITH, Vice President -Vice President, T. Rowe Price
DAVID J. WALLACK, Vice President -Vice President, T. Rowe Price
COMPENSATION TABLE
-------------------------------------------------------------------------------
The Funds do not pay pension or retirement benefits to its officers or
directors/trustees. Also, any director/ trustee of a Fund who is an officer
or employee of T. Rowe Price or Price-Fleming does not receive any
remuneration from the Fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and Fund Complex
Position ------- Paid to Directors/ Trustees(b)
- -------------------------------- -----------
- ------------------------------------------------------------------
---------------------------------------------------------------------------
-----------------------------------------------
<C> <S> <S>
Balanced Fund
Donald W. Dick, Jr., Director $1,572 $81,000
David K. Fagin, Director 2,078 65,000
Hanne M. Merriman, Director 2,078 65,000
Hubert D. Vos, Director 2,078 66,000
Paul M. Wythes, Director 1,572 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund
Donald W. Dick, Jr., Director $1,639 $81,000
David K. Fagin, Director 2,184 65,000
Hanne M. Merriman, Director 2,184 65,000
Hubert D. Vos, Director 2,184 66,000
Paul M. Wythes, Director 1,639 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund
Donald W. Dick, Jr., Director $1,532 $81,000
David K. Fagin, Director 2,005 65,000
Hanne M. Merriman, Director 2,005 65,000
Hubert D. Vos, Director 2,005 66,000
Paul M. Wythes, Director 1,532 80,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and Fund Complex
Position ------- Paid to Directors/ Trustees(b)
- -------------------------------- -----------
- ------------------------------------------------------------------
---------------------------------------------------------------------------
-----------------------------------------------
<S> <S> <S>
Capital Opportunity Fund
Donald W. Dick, Jr., Director $1,053 $81,000
David K. Fagin, Director 1,108 65,000
Hanne M. Merriman, Director 1,108 65,000
Hubert D. Vos, Director 1,108 66,000
Paul M. Wythes, Director 1,053 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund
Donald W. Dick, Jr., Director $227 $81,000
David K. Fagin, Director 691 65,000
Hanne M. Merriman, Director 691 65,000
Hubert D. Vos, Director 691 66,000
Paul M. Wythes, Director 227 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Dividend Growth Fund
Donald W. Dick, Jr., Director $1,238 $81,000
David K. Fagin, Director 1,447 65,000
Hanne M. Merriman, Director 1,447 65,000
Hubert D. Vos, Director 1,447 66,000
Paul M. Wythes, Director 1,238 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Equity Income Fund
Donald W. Dick, Jr., Trustee $6,328 $81,000
David K. Fagin, Trustee 8,997 65,000
Hanne M. Merriman, Trustee 8,997 65,000
Hubert D. Vos, Trustee 8,997 66,000
Paul M. Wythes, Trustee 6,328 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Equity Index 500 Fund
Donald W. Dick, Jr., Director $1,678 $81,000
David K. Fagin, Director 2,264 65,000
Hanne M. Merriman, Director 2,264 65,000
Hubert D. Vos, Director 2,264 66,000
Paul M. Wythes, Director 1,678 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Extended Equity Market Index Fund(c)
Donald W. Dick, Jr., Director $ 834 $81,000
David K. Fagin, Director 1,111 65,000
Hanne M. Merriman, Director 1,111 65,000
Hubert D. Vos, Director 1,111 66,000
Paul M. Wythes, Director 834 80,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and Fund Complex
Position ------- Paid to Directors/ Trustees(b)
- -------------------------------- -----------
- ------------------------------------------------------------------
---------------------------------------------------------------------------
-----------------------------------------------
<S> <S> <S>
Financial Services Fund
Donald W. Dick, Jr., Director $1,014 $81,000
David K. Fagin, Director 1,028 65,000
Hanne M. Merriman, Director 1,028 65,000
Hubert D. Vos, Director 1,028 66,000
Paul M. Wythes, Director 1,014 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund
Donald W. Dick, Jr., Director $2,555 $81,000
David K. Fagin, Director 3,923 65,000
Hanne M. Merriman, Director 3,923 65,000
Hubert D. Vos, Director 3,923 66,000
Paul M. Wythes, Director 2,555 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund
Donald W. Dick, Jr., Director $3,003 $81,000
David K. Fagin, Director 4,772 65,000
Hanne M. Merriman, Director 4,772 65,000
Hubert D. Vos, Director 4,772 66,000
Paul M. Wythes, Director 3,003 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Health Sciences Fund
Donald W. Dick, Jr., Director $1,008 $81,000
David K. Fagin, Director 1,020 65,000
Hanne M. Merriman, Director 1,020 65,000
Hubert D. Vos, Director 1,020 66,000
Paul M. Wythes, Director 1,008 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Media & Telecommunications Fund
Donald W. Dick, Jr., Director $444 $81,000
David K. Fagin, Director 466 65,000
Hanne M. Merriman, Director 466 65,000
Hubert D. Vos, Director 466 66,000
Paul M. Wythes, Director 444 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Mid-Cap Equity Growth Fund
Donald W. Dick, Jr., Director $1,040 $81,000
David K. Fagin, Director 1,078 65,000
Hanne M. Merriman, Director 1,078 65,000
Hubert D. Vos, Director 1,078 66,000
Paul M. Wythes, Director 1,040 80,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and Fund Complex
Position ------- Paid to Directors/ Trustees(b)
- -------------------------------- -----------
- ------------------------------------------------------------------
---------------------------------------------------------------------------
-----------------------------------------------
<S> <S> <S>
Mid-Cap Growth Fund
Donald W. Dick, Jr., Director $1,700 $81,000
David K. Fagin, Director 2,317 65,000
Hanne M. Merriman, Director 2,317 65,000
Hubert D. Vos, Director 2,317 66,000
Paul M. Wythes, Director 1,700 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Mid-Cap Value Fund
Donald W. Dick, Jr., Director $1,010 $81,000
David K. Fagin, Director 1,021 65,000
Hanne M. Merriman, Director 1,021 65,000
Hubert D. Vos, Director 1,021 66,000
Paul M. Wythes, Director 1,010 80,000
- ---------------------------------------------------------------------------------------------------------------------------
New America Growth Fund
Donald W. Dick, Jr., Trustee $1,809 $81,000
David K. Fagin, Trustee 2,523 65,000
Hanne M. Merriman, Trustee 2,523 65,000
Hubert D. Vos, Trustee 2,523 66,000
Paul M. Wythes, Trustee 1,809 80,000
- ---------------------------------------------------------------------------------------------------------------------------
New Era Fund
Donald W. Dick, Jr., Director $1,833 $81,000
David K. Fagin, Director 2,576 65,000
Hanne M. Merriman, Director 2,576 65,000
Hubert D. Vos, Director 2,576 66,000
Paul M. Wythes, Director 1,833 80,000
- ---------------------------------------------------------------------------------------------------------------------------
New Horizons Fund
Donald W. Dick, Jr., Director $3,408 $81,000
David K. Fagin, Director 5,533 65,000
Hanne M. Merriman, Director 5,533 65,000
Hubert D. Vos, Director 5,533 66,000
Paul M. Wythes, Director 3,408 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Real Estate Fund
Donald W. Dick, Jr., Director $166 $81,000
David K. Fagin, Director 166 65,000
Hanne M. Merriman, Director 166 65,000
Hubert D. Vos, Director 166 66,000
Paul M. Wythes, Director 166 80,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and Fund Complex
Position ------- Paid to Directors/ Trustees(b)
- -------------------------------- -----------
- ------------------------------------------------------------------
---------------------------------------------------------------------------
-----------------------------------------------
<S> <S> <S>
Science & Technology Fund
Donald W. Dick, Jr., Director $2,872 $81,000
David K. Fagin, Director 4,522 65,000
Hanne M. Merriman, Director 4,522 65,000
Hubert D. Vos, Director 4,522 66,000
Paul M. Wythes, Director 2,872 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Small-Cap Stock Fund
Donald W. Dick, Jr., Director $1,276 $81,000
David K. Fagin, Director 1,518 65,000
Hanne M. Merriman, Director 1,518 65,000
Hubert D. Vos, Director 1,518 66,000
Paul M. Wythes, Director 1,276 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Small-Cap Value Fund
Donald W. Dick, Jr., Director $1,870 $81,000
David K. Fagin, Director 2,634 65,000
Hanne M. Merriman, Director 2,634 65,000
Hubert D. Vos, Director 2,634 66,000
Paul M. Wythes, Director 1,870 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Total Market Equity Index Fund(c)
Donald W. Dick, Jr., Director $834 $81,000
David K. Fagin, Director 1,111 65,000
Hanne M. Merriman, Director 1,111 65,000
Hubert D. Vos, Director 1,111 66,000
Paul M. Wythes, Director 834 80,000
- ---------------------------------------------------------------------------------------------------------------------------
Value Fund
Donald W. Dick, Jr., Director $1,023 $81,000
David K. Fagin, Director 1,040 65,000
Hanne M. Merriman, Director 1,040 65,000
Hubert D. Vos, Director 1,040 66,000
Paul M. Wythes, Director 1,023 80,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Amounts in this column are based on accrued compensation for calendar
year 1997.
(b) Amounts in this column are based on compensation received from January 1,
1997, to December 31, 1997. The T. Rowe Price complex included 84 funds as of
December 31, 1997.
(c) Estimated future annual compensation from the Fund based on a full calendar
year.
All Funds
The Fund's Executive Committee, consisting of the Fund's interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the Funds in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors/trustees of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
As of April 1, 1998, the following shareholders beneficially owned more than
5% of the outstanding shares of:
Blue Chip Growth, Growth & Income, Growth Stock, Mid-Cap Value, New Era, and
New Horizons Funds: Pirateline & Co., FBO Spectrum Growth Fund Acct., Attn.:
Mark White, State Street Bank & Trust Co., 1776 Heritage Drive-4W, North
Quincy, Massachusetts 02171-2197;
Blue Chip Growth Fund: Fidelity Investments Institutional Operations as agent
for Merck & Company, Inc., #83169, 100 Magellan Way, Covington, Kentucky
41015-1999;
Capital Appreciation, Dividend Growth, Media & Telecommunications, Mid-Cap
Growth, New Era, Small-Cap Stock, Small-Cap Value and Science & Technology
Funds: Charles Schwab & Co. Inc., Reinvest. Account, Attn.: Mutual Fund
Dept., 101 Montgomery Street, San Francisco, California 94104-4122;
Growth & Income Fund: Manulife Financial USA, 200 Bloor St East NT3, Toronto,
Ontario Canada M4WIE5, Attn.: Rosie Chuck, Pension Accounting;
Small-Cap Stock Fund: Sigler & Co. of Smithsonian Inst., Wellington Trust
Co., RD7 9866-77, Attn.: Jasmine Felix, 4 New York Plaza, 4th Floor, New
York, New York 10004-2413;
Mid-Cap Equity Growth Fund: Roland & Company, c/o Mercantile Bank of St.
Louis, Attn.: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, Missouri
63166-0387; Atlantic Trust Company NA, Attn.: Nominee Account, 100 Federal
Street, 37th Floor, Boston, Massachusetts 02110-1802; Conref & Company, c/o
Mercantile Bank of St. Louis, Attn.: Trust Securities Unit 17-1, P.O. Box
387, St. Louis, Missouri 63166-0387; Wentworth-Douglass Hospital, Attn.:
Rayna Feldman, 789 Central Avenue, Dover, New Hampshire 03820-2589; Mac &
Company A/C JHFF0800212 Mutual Funds Operations, P.O. Box 3198, Pittsburgh,
Pennsylvania 15230-3198; Trustmark National Bank, Trustee, FBO various Trust
Company, NA, Nominee Account, Attn.: Mutual Funds, 100 Federal Street, 37th
Floor, Boston, MA 02110-1802; Wheaton College, 26 Main Street, Norton, MA
02766-2322.
INVESTMENT MANAGEMENT SERVICES
-------------------------------------------------------------------------------
Services
Under the Management Agreement, T. Rowe Price provides the Fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the Fund in accordance with
the Fund's investment objectives, program, and restrictions as provided in
its prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
Fund, including the negotiation of commissions and the allocation of
principal business and portfolio brokerage. In addition to these services, T.
Rowe Price provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal laws; monitoring the
financial, accounting, and administrative functions of the Fund; maintaining
liaison with the agents employed by the Fund such as the Fund's custodian and
transfer agent; assisting the Fund in the coordination of such agents'
activities; and permitting T. Rowe Price's employees to serve as officers,
directors/trustees, and committee members of the Fund without cost to the
Fund.
The Management Agreement also provides that T. Rowe Price, its
directors/trustees, officers, employees, and certain other persons performing
specific functions for the Fund will only be liable to the Fund for losses
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
<PAGE>
All Funds except Equity Index 500, Extended Equity Market Index, Total Equity
Market Index, and Mid-Cap Equity Growth Funds
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of two components: a
Group Management Fee ("Group Fee") and an Individual Fund Fee ("Fund Fee").
The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is calculated as described 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 Price Fund's net assets for that day to the sum
of the aggregate net assets of the Price Funds for that day. The Daily Price
Funds' Group Fee Accrual for any particular day is calculated by multiplying
the fraction of one (1) over the number of calendar days in the year by the
annualized Daily Price Funds' Group Fee Accrual for that day as determined in
accordance with the following schedule:
<TABLE>
Price Funds' Annual Group Base Fee Rate for Each Level of
Assets
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16
billion
---------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30
billion
---------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
---------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
---------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
For the purpose of calculating the Group Fee, the Price Funds include all the
mutual funds distributed by T. Rowe Price Investment Services, Inc.,
(excluding the T. Rowe Price Spectrum Funds, and any institutional, index, or
private label mutual funds). For the purpose of calculating the Daily Price
Funds' Group Fee Accrual for any particular day, the net assets of each Price
Fund are determined in accordance with the Funds' prospectus as of the close
of business on the previous business day on which the Fund was open for
business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum of the daily Fund Fee
accruals ("Daily Fund Fee Accruals") for each month. The Daily Fund Fee
Accrual for any particular day is computed by multiplying the fraction of one
(1) over the number of calendar days in the year by the individual Fund Fee
Rate and multiplying this product by the net assets of the Fund for that day,
as determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for
business. The individual fund fees of each Fund are listed in the chart
below:
<TABLE>
<CAPTION>
<S> <C>
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%*
Capital Opportunity Fund 0.45%
Diversified Small-Cap Growth Fund 0.35%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
Equity Index 500 Fund 0.20%
Financial Services Fund 0.35%
Growth & Income Fund 0.25%
Growth Stock Fund 0.25%
Health Sciences Fund 0.35%
Media & Telecommunications Fund 0.35%
Mid-Cap Growth Fund 0.35%
Mid-Cap Value Fund 0.35%
New America Growth Fund 0.35%
New Era Fund 0.25%
New Horizons Fund 0.35%
Real Estate Fund 0.30%
Small-Cap Stock Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
Value Fund 0.35%
</TABLE>
<PAGE>
*Subject to Performance Adjustment (please see pages 51 and 52.)
The following chart sets forth the total management fees, if any, paid to T.
Rowe Price by each Fund, during the last three years:
<TABLE>
<CAPTION>
Fund 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C>
Balanced $ 5,317,000 $ 3,765,000 $ 2,778,000
Blue Chip Growth 8,706,000 1,924,000 534,000
Capital Appreciation 3,861,000 4,218,000 4,940,000
Capital Opportunity 899,000 890,000 134,000
Diversified Small-Cap Growth 81,000 (a) (a)
Dividend Growth 2,659,000 754,000 357,000
Equity Income 60,406,000 37,762,000 24,358,000
Equity Index 500 2,516,000 925,000 498,000
Financial Services 635,934 (b) (a)
Growth & Income 17,390,000 12,048,000 8,195,000
Growth Stock 22,078,000 17,848,000 14,222,000
Health Sciences 1,810,576 750,000 (a)
Media & Telecommunications (c) 1,781,000 3,056,000 2,665,000
Mid-Cap Equity Growth 117,000 (b) (a)
Mid-Cap Growth 9,548,000 4,390,000 1,234,000
Mid-Cap Value 728,000 22,000 (a)
New America Growth 10,541,000 8,648,000 5,554,000
New Era 9,144,000 7,559,000 6,218,000
New Horizons 31,439,000 25,875,000 15,035,000
Real Estate (b) (a) (a)
Science & Technology 24,246,000 19,792,000 11,393,000
Small-Cap Stock 4,405,000 2,619,000 1,897,000
Small-Cap Value 11,594,000 8,187,000 4,262,000
Value 2,597,000 748,000 19,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
(b) Due to each Fund's expense limitation in effect at that time, no
management fees were paid by the Funds to T. Rowe Price.
(c) Fees listed were paid under this Fund's previous management
agreement, prior to becoming an open-end mutual fund.
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.
<PAGE>
For Capital Opportunity, Diversified Small-Cap Growth, Dividend Growth,
Equity Index 500, Financial Services, Health Sciences, Mid-Cap Equity Growth,
Mid-Cap Value, Real Estate, and 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.
<TABLE>
<CAPTION>
Expense Reimbursement
Fund Limitation Period ------- -------------
---- ----------------- Ratio Date
----- ----
Limitation
----------
<S> <S> <C> <S>
November 30, 1994 -
Capital Opportunity December 31, 1996 1.35% December 31, 1998
June 30, 1997 -
Diversified Small-Cap Growth December 31, 1998 1.25% December 31, 2000
January 1, 1995 -
Dividend Growth(a) December 31, 1996 1.10% December 31, 1998
January 1, 1998 -
Equity Index 500(b) December 31, 1999 0.40% December 31, 2001
September 30, 1996 -
Financial Services December 31, 1998 1.25% December 31, 2000
December 31, 1995 -
Health Sciences December 31, 1997 1.35% December 31, 1999
July 31, 1996 -
Mid-Cap Equity Growth December 31, 1997 0.85% December 31, 1999
June 28, 1996 -
Mid-Cap Value December 31, 1997 1.25% December 31, 1999
October 31, 1997 -
Real Estate December 31, 1999 1.00% December 31, 2001
Value September 30, 1994 - 1.10% December 31, 1998
December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Dividend Growth Fund previously operated under a 1.00% limitation
that expired December 31, 1994. The reimbursement period for this
limitation extends through December 31, 1996.
(b) The Equity Index 500 Fund previously operated under a 0.40% limitation
that expired December 31, 1997. The reimbursement period for this
limitation extends through December 31, 1999.
Each of the above-referenced Fund's Management Agreement also provides that
one or more additional expense limitations periods (of the same or different
time periods) may be implemented after the expiration of the current expense
limitation, and that with respect to any such additional limitation period,
the Fund may reimburse T. Rowe Price, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional expense
limitation.
Pursuant to Capital Opportunity Fund's expense limitation that expired on
December 31, 1996, $63,000 of previously unaccrued managements fees and
expenses were repaid for the year ended December 31, 1997. Additionally,
$94,000 remains subject to reimbursement through December 31, 1998.
Pursuant to the Diversified Small-Cap Growth Fund's current expense
limitation, $94,000 of management fees were not accrued for the year ended
December 31, 1997.
Pursuant to the Dividend Growth Fund's previous expense limitation, $5,000 of
unaccrued management fees were repaid during the year ended December 31,
1997.
Pursuant to the Equity Index 500 Fund's previous expenses limitation,
$283,000 of management fees were not accrued by the Fund for the year ended
December 31, 1997. Additionally, $370,000 of unaccrued 1996 management fees
are subject to reimbursement through December 31, 1999.
Pursuant to the Financial Services Fund's current expense limitation, $24,000
of management fees were not accrued by the Fund for the year ended December
31, 1997 and $26,000 of unaccrued fees and expenses are subject to
reimbursement through December 31, 2000.
Pursuant to the Health Sciences Fund's current expense limitation, $101,000
of previously unaccrued management fees were repaid by the Fund for the year
ended December 31, 1997.
<PAGE>
Pursuant to the Mid-Cap Equity Growth Fund's current expense limitation,
$68,000 of management fees were not accrued by the Fund for the year ended
December 31, 1997 and are subject to reimbursement through December 31, 1999,
and $48,000 remains unaccrued from prior periods.
Pursuant to the Mid-Cap Value Fund's current expense limitation, $71,000 of
previously unaccrued management fees were repaid by the Fund for the year
ended December 31, 1997 and $7,000 remains subject to reimbursement through
December 31, 1999.
Pursuant to the Real Estate Fund's current expense limitation, $5,000 of
management fees were not accrued by the Fund for the year ended December 31,
1997, and $18,000 of other expenses were borne by the Manager.
Pursuant to the Value Fund's previous expense limitation, $237,000 of
previously unaccrued fees and expenses were repaid during the year ended
December 31, 1997.
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, 1996,
decreased management fees by $1,530,000.
The Monthly Group Fee and Monthly Fund Fee are combined (the "Combined Fee")
and are subject to a Performance fee Adjustment until October 31, 1998,
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. Effective
November 1, 1998, there will no longer be any Performance Fee Adjustment. The
Performance Fee Adjustment is computed as of the end of each month and if any
adjustment results, is 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) 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)%.
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 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:
<PAGE>
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 ex-dividend 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 ex-dividend date occurring
within the period made by companies whose securities comprise the Index.
Management Fee
Equity Index 500 Fund
The Fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.20% of the average daily net asset value of the Fund.
Extended Equity Market Index and Total Equity Market Index Funds
Each Fund pays T. Rowe Price an annual all-inclusive fee in monthly
installments of 0.40% of the average daily net assets of the Fund.
Mid-Cap Equity Growth Fund
The Fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.60% of the average daily net asset value of the Fund.
Blue Chip Growth, Equity Income, Growth & Income, Growth Stock, Mid-Cap
Value, New Era, and New Horizons Funds
T. Rowe Price Spectrum Fund, Inc.
The Funds listed above are a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum
Fund"), T. Rowe Price, and various other T. Rowe Price funds which, along
with the Fund, are funds in which Spectrum Fund invests (collectively all
such funds "Underlying Price Funds").
The Agreement provides that, if the Board of Directors/Trustees of any
Underlying Price Fund determines that such Underlying Fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further that no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of
numerous separate shareholder accounts which are or would have been invested
directly in the Underlying Price Funds and the resulting reduction in
shareholder servicing costs. Although such cost savings are not certain, the
estimated savings to the Underlying Price Funds generated by the operation of
Spectrum Fund are expected to be sufficient to offset most, if not all, of
the expenses incurred by Spectrum Fund.
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
<PAGE>
with: necessary state filings; preparing, setting in type, printing, and
mailing its prospectuses and reports to shareholders; and issuing its shares,
including expenses of confirming purchase orders.
The Underwriting Agreement provides that Investment Services will pay all
fees and expenses in connection with: printing and distributing prospectuses
and reports for use in offering and selling Fund shares; preparing, setting
in type, printing, and mailing all sales literature and advertising;
Investment Services' federal and state registrations as a broker-dealer; and
offering and selling Fund shares, except for those fees and expenses
specifically assumed by the Fund. Investment Services' expenses are paid by
T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with the sale
of its shares in the various states in which Investment Services is qualified
as a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for Fund shares at net asset value. No sales charges are paid
by investors or the Fund.
All Funds
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the Fund's U.S.
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.
The Fund (other than Equity Index 500, Extended Equity Market Index, and
Total Equity Market Index Funds) has entered into a Custodian Agreement with
The Chase Manhattan Bank, N.A., London, pursuant to which portfolio
securities which are purchased outside the United States are maintained in
the custody of various foreign branches of The Chase Manhattan Bank and such
other custodians, including foreign banks and foreign securities depositories
as are approved in accordance with regulations under the Investment Company
Act of 1940. The address for The Chase Manhattan Bank, N.A., London is
Woolgate House, Coleman Street, London, EC2P 2HD, England.
SHAREHOLDER SERVICES
-------------------------------------------------------------------------------
The Fund from time to time may enter into agreements with outside parties
through which shareholders hold Fund shares. The shares would be held by such
parties in omnibus accounts. The agreements would provide for payments by the
Fund to the outside party for shareholder services provided to shareholders
in the omnibus accounts.
CODE OF ETHICS
-------------------------------------------------------------------------------
The Fund's investment adviser (T. Rowe Price) has a written Code of Ethics
which requires all employees to obtain prior clearance before engaging in
personal securities transactions. In addition, all employees must report
their personal securities transactions within 10 days of their execution.
Employees will not be permitted to effect transactions in a security: if
there are pending client orders in the security; the security has been
purchased or sold by a client within seven calendar days; the security is
being considered for purchase for a client; a change has occurred in T. Rowe
Price's rating of the security within seven calendar days prior to the date
of the proposed transaction; or the security is subject to internal trading
restrictions. In addition, employees are prohibited from profiting from
short-term trading (e.g., purchases and sales involving the same security
within 60 days). Any material violation of the Code of Ethics is reported to
the Board of the Fund. The Board also reviews the administration of the Code
of Ethics on an annual basis.
<PAGE>
PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
How Brokers and Dealers Are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is T. Rowe
Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided
by them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a
higher commission rate would offer greater reliability or provide better
price or execution.
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a primary
market-maker acting as principal for the securities on a net basis, with no
brokerage commission being paid by the client 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 a 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
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
Descriptions of Research Services Received From Brokers and Dealers
T. Rowe Price receives a wide range of research services from brokers and
dealers. These services include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis and analysis of corporate responsibility issues. These
services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons,
<PAGE>
economists, academicians and government representatives. In some cases,
research services are generated by third parties but are provided to T. Rowe
Price by or through broker-dealers.
Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently
provided by brokers and dealers. T. Rowe Price pays cash for certain research
services received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash. While receipt
of research services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could be materially
increased if it attempted to generate such additional information through its
own staff. To the extent that research services of value are provided by
brokers or dealers, T. Rowe Price may be relieved of expenses which it might
otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in return for
products or services other than brokerage or research services. In accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934,
T. Rowe Price may from time to time receive services and products which serve
both research and non-research functions. In such event, T. Rowe Price makes
a good faith determination of the anticipated research and non-research use
of the product or service and allocates brokerage only with respect to the
research component.
Commissions to Brokers Who Furnish Research Services
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would
have charged for effecting the same transaction, if the adviser determines in
good faith that the commission paid is reasonable in relation to the value of
the brokerage and research services provided. The determination may be viewed
in terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the
total brokerage and research services provided by each particular broker. T.
Rowe Price may receive research, as defined in Section 28(e), in connection
with selling concessions and designations in fixed price offerings in which
the Funds participate.
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
<PAGE>
described above. In no case is a broker or dealer excluded from receiving
business from T. Rowe Price because it has not been identified as providing
research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-Fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the Fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the Fund.
From time to time, orders for clients may be placed through a computerized
transaction network.
The Fund does not allocate business to any broker-dealer on the basis of its
sales of the Fund's shares. However, this does not mean that broker-dealers
who purchase Fund shares for their clients will not receive business from the
Fund.
Some of T. Rowe Price's other clients have investment objectives and programs
similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution
which generally results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of transactions at
various prices on a given day, each participating client's proportionate
share of such order reflects the average price paid or received with respect
to the total order. T. Rowe Price has established a general investment policy
that it will ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if, as a result
of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.
At the present time, T. Rowe Price does not recapture commissions or
underwriting discounts or selling group concessions in connection with
taxable securities acquired in underwritten offerings. T. Rowe Price does,
however, attempt to negotiate elimination of all or a portion of the
selling-group concession or underwriting discount when purchasing tax-exempt
municipal securities on behalf of its clients in underwritten offerings.
Trade Allocation Policies
T. Rowe Price has developed written trade allocation guidelines for its
Equity, Municipal, and Taxable Fixed Income Trading Desks. Generally, when
the amount of securities available in a public offering or the secondary
market is insufficient to satisfy the volume or price requirements for the
participating client portfolios, the guidelines require a pro-rata allocation
based upon the amounts initially requested by each portfolio manager. In
allocating trades made on combined basis, the Trading Desks seek to achieve
the same net unit price of the securities for each participating client.
Because a pro-rata allocation may not always adequately accommodate all facts
and circumstances, the guidelines provide for exceptions to allocate trades
on an adjusted, pro-rata basis. Examples of where adjustments may be made
include: (i) reallocations to recognize the efforts of a portfolio manager in
negotiating a transaction or a private placement; (ii) reallocations to
eliminate deminimis positions; (iii) priority for accounts with specialized
investment policies and objectives; and (iv) reallocations in light of a
participating portfolio's characteristics (e.g., industry or issuer
concentration, duration, and credit exposure).
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
<PAGE>
allocation of portfolio brokerage and principal business. It is expected that
T. Rowe Price will often place orders for the Fund's portfolio transactions
with broker-dealers through the trading desks of certain affiliates of Robert
Fleming Holdings Limited ("Robert Fleming"), an affiliate of Price-Fleming.
Robert Fleming, through Copthall Overseas Limited, a wholly owned subsidiary,
owns 25% of the common stock of Price-Fleming. Fifty percent of the common
stock of Price-Fleming is owned by TRP Finance, Inc., a wholly owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by Jardine
Fleming Holdings Limited, a subsidiary of Jardine Fleming Group Limited
("JFG"). JFG is 50% owned by Robert Fleming and 50% owned by Jardine Matheson
Holdings Limited. The affiliates through whose trading desks such orders may
be placed include Fleming Investment Management Limited ("FIM"), Fleming
International Fixed Interest Management Limited ("FIFIM"), and Robert Fleming
& Co. Limited ("RF&Co."). FIM, FIFIM, and RF&Co. are wholly owned
subsidiaries of Robert Fleming. These trading desks will operate under strict
instructions from the Fund's portfolio manager with respect to the terms of
such transactions. Neither Robert Fleming, JFG, nor their affiliates will
receive any commission, fee, or other remuneration for the use of their
trading desks, although orders for a Fund's portfolio transactions may be
placed with affiliates of Robert Fleming and JFG who may receive a
commission.
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.
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 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.
The above-referenced authorization was made in accordance with Section 17(e)
of the Investment Company Act of 1940 (the "1940 Act") and Rule 17e-1
thereunder which require the Funds' independent Directors/ Trustees to
approve the procedures under which brokerage allocation to affiliates is to
be made and to monitor such allocations on a continuing basis. It is not
expected that any portion of the commissions, fees, brokerage, or similar
payments received by the affiliates of Robert Fleming in such transactions
will be recaptured by the Funds. The Directors/Trustees have reviewed and
from time to time may continue to review whether other recapture
opportunities are legally permissible and available and, if they appear to
be, determine whether it would be advisable for a Fund to seek to take
advantage of them.
Other
For the years 1997, 1996, and 1995, 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.
<TABLE>
<CAPTION>
1997 1996 1995
Fund Commissions % Commissions % Commissions %
---- ----------- - ----------- - ----------- -
<S> <C> <C> <C> <C> <C> <C>
Balanced $ 1,276,793 9.7% $ 292,325 13.0% $ 392,293 14.8%
Blue Chip Growth 2,567,926 54.2 748,661 34.6 420,931 10.3
Capital Appreciation 1,734,274 35.4 886,009 46.6 1,922,697 32.4
Capital Opportunity 506,307 43.4 764,518 38.7 528,727 24.6
Diversified Small-Cap Growth 107,676 1.0 (a) (a) (a) (a)
Dividend Growth 1,620,702 42.3 478,131 28.6 373,298 9.6
Equity Income 8,137,149 59.3 6,912,071 59.2 4,193,326 43.2
Equity Index 500 150,827 0.0 37,146 0.0 98,198 0.1
Financial Services 839,766 3.2 60,862 10.5 (a) (a)
Growth & Income 2,971,378 29.1 1,874,214 42.7 1,431,194 44.7
Growth Stock 5,523,460 53.9 5,630,241 48.7 4,769,565 42.6
Health Sciences 1,040,908 31.2 1,488,623 20.4 (a) (a)
Media & Telecommunications 357,871 26.8 1,659,735 15.0 1,069,973 22.6
Mid-Cap Equity Growth 140,756 21.9 24,079 12.0 (a) (a)
Mid-Cap Growth 4,686,813 32.3 3,149,050 27.9 924,702 16.5
Mid-Cap Value 364,072 36.4 92,359 17.0 (a) (a)
New America Growth 3,220,413 26.6 1,344,080 31.6 3,605,675 16.1
New Era 3,029,701 43.0 2,500,868 45.2 1,259,196 42.7
New Horizons 10,028,310 10.3 15,900,960 6.5 8,729,848 9.1
Real Estate 35,421 0.8 (a) (a) (a) (a)
Science & Technology 4,421,394 33.3 5,713,825 39.1 4,766,171 18.5
Small-Cap Stock 1,742,106 8.3 1,044,665 5.5 873,954 7.5
Small-Cap Value 2,503,146 19.1 1,289,012 31.8 1,321,168 14.4
Value 1,200,103 66.0 780,033 57.4 270,119 32.3
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Prior to commencement of operations.
On December 31, 1997, the Balanced Fund held common stock of J.P. Morgan with
a value of $2,257,000. The Fund also held a bond of Lehman Brothers Holding,
with a value of $1,625,000. The Fund also held a GMAC MTN valued at $81,000.
In 1997, J.P. Morgan, Lehman Brothers Holding, and GMAC 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, 1997, the Blue Chip Growth Fund held common stock of Chase
Manhattan with a value of $21,900,000, and a Morgan Stanley MTN valued at
$5,005,000. In 1997, Chase Manhattan and Morgan Stanley 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, 1997, the Equity Income Fund held common stock of the
following regular brokers or dealers of the Fund: Bankers Trust -
$106,816,000; Chase Manhattan - $109,500,000; J.P. Morgan - $101,588,000; and
Morgan Stanley (MTN) - $36,035,000. In 1997, Bankers Trust, Chase Manhattan,
J.P. Morgan, and Morgan Stanley 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, 1997, the Equity Index 500 Fund held common stock of the
following regular brokers or dealers of the Fund: Bankers Trust - $2,742,000;
Citicorp - $14,318,000; Chase Manhattan - $11,498,000; J.P. Morgan -
$4,961,000; and Merrill Lynch - $6,041,000. In 1997, Bankers Trust, Citicorp,
Chase Manhattan, J.P. Morgan, and Merrill Lynch 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, 1997, the Financial Services Fund held common stock of the
following regular brokers or dealers of the Fund: Chase Manhattan -
$3,832,000; First Chicago NBD - $1,670,000; Morgan Stanley - $1,035,000; and
Nations Bank Montgomery - $2,372,000. In 1997, Chase Manhattan, First Chicago
NBD, Morgan Stanley, and NationsBank Montgomery 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, 1997, the Growth and Income Fund held common stock or the
following regular brokers or dealers of the Fund: Chase Manhattan -
$49,275,000; and Citicorp - $31,176,000. In 1997, Chase Manhattan and
Citicorp were among the Fund's regular brokers or dealers as defined in Rule
10b-1 under the Investment Company Act of 1940.
<PAGE>
On December 31, 1997, the Growth Stock Fund held common stock of Mellon Bank
valued at $19, 703,000. In 1997, Mellon Bank 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, 1997, the Growth & Income and Small-Cap Value Funds held
Morgan Stanley Group MTN, both valued at $10,010,000, respectively. In 1997,
The Morgan Stanley Group was among the Funds' 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 1997, 1996, and
1995, was as follows:
<TABLE>
<CAPTION>
Fund 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C>
Balanced 15.5% 22.3% 12.6%
Blue Chip Growth 23.7 26.3 38.1
Capital Appreciation 48.3 44.2 47.0
Capital Opportunity 85.0 107.3 136.9
Diversified Small-Cap Growth 13.4 (b) (b)
Dividend Growth 39.1 43.1 56.1
Equity Income 23.9 25.0 21.4
Equity Index 500 0.7 1.3 1.3
Financial Services 46.0 5.6(a) (b)
Growth & Income 15.7 13.5 26.2
Growth Stock 40.9 49.0 42.5
Health Sciences 104.4 133.1 (b)
Media & Telecommunications 38.6 102.9 118.9
Mid-Cap Equity Growth 41.0 31.3(a) (b)
Mid-Cap Growth 42.6 38.1 57.5
Mid-Cap Value 16.0 3.9(a) (b)
New America Growth 43.2 36.7 56.2
New Era 27.5 28.6 22.7
New Horizons 45.2 41.4 55.9
Real Estate 8.4 (b) (b)
Science & Technology 133.9 125.6 130.3
Small-Cap Stock 22.9 31.1 57.8
Small-Cap Value 14.6 15.2 18.1
Value 67.2 68.0 89.7
- --------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Prior to commencement of operations.
All Funds
PRICING OF SECURITIES
-------------------------------------------------------------------------------
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price at the time the valuations are made. A
security that is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such
security. Listed securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the mean of the
latest bid and asked prices. Other equity securities are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors/Trustees, or by persons delegated by the Board, best to reflect
fair value.
<PAGE>
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 amortized cost in local
currency which, when combined with accrued interest, approximates fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation. In the absence of a last
sale price, purchased and written options are valued at the mean of the
latest bid and asked prices, respectively.
For the purposes of determining the Fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
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 its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the Fund is normally
calculated as of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Determination of net asset value (and the offering, sale redemption and
repurchase of shares) for the Fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by order permit such
a suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the 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 capital gain distributions, final
quarterly dividend (Balanced, Dividend Growth, Equity Income, Equity Index
500, Growth & Income, Mid-Cap Value, Real Estate, Total Equity Market Index,
and Value Funds) and annual dividend (other funds), if any, will be
reinvested on the reinvestment date using the NAV per share of that date. The
reinvestment date normally precedes the payment date by about 10 days,
although the exact timing is subject to change.
<PAGE>
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 by
December 31 of each year equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to avoid a federal
excise tax and distribute within 12 months 100% of ordinary income and
capital gains as of December 31 to avoid a federal income tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed capital gains or net unrealized appreciation of securities held
by the Fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable. For federal
income tax purposes, the Fund is permitted to carry forward its net realized
capital losses, if any, for eight years and realize net capital gains up to
the amount of such losses without being required to pay taxes on, or
distribute, such gains.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
Fund's distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax
would be imposed at the rate of 30% upon the gross amount of the dividends in
the absence of a Tax Treaty providing for a reduced rate or exemption from
U.S. taxation. Distributions of net long-term capital gains realized by the
Fund are not subject to tax unless the foreign shareholder is a nonresident
alien individual who was physically present in the U.S. during the tax year
for more than 182 days.
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
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. Such trusts have been the
only or primary way to invest in certain countries. 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 fund's 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.
To avoid such tax and interest, 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; deductions for losses are allowable only to the
extent of any gains resulting from these deemed sales for prior taxable
years. Such gains and losses will be treated as ordinary. The Fund will be
required to distribute any resulting income even though it has not sold the
security and received cash to pay such distributions.
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
<PAGE>
transactions is a gain, the ordinary income dividend paid by the Fund will be
increased. If the result is a loss, the income dividend paid by the Fund will
be decreased, or to the extent such dividend has already been paid, it may be
classified as a return of capital. Adjustments to reflect these gains and
losses will be made at the end of the Fund's taxable year.
All Funds
INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------
Total Return Performance
The Fund's calculation of total return performance includes the reinvestment
of all capital gain distributions and income dividends for the period or
periods indicated, without regard to tax consequences to a shareholder in the
Fund. Total return is calculated as the percentage change between the
beginning value of a static account in the Fund and the ending value of that
account measured by the then current net asset value, including all shares
acquired through reinvestment of income and capital gain dividends. The
results shown are historical and should not be considered indicative of the
future performance of the Fund. Each average annual compound rate of return
is derived from the cumulative performance of the Fund over the time period
specified. The annual compound rate of return for the Fund over any other
period of time will vary from the average.
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. Ended 5 Yrs. Ended 10 Yrs. Ended % Since Inception
----------- ------------ ------------- ------- ---------
12/31/97 12/31/97 12/31/97 Inception Date
-------- -------- -------- --------- ----
12/31/97
--------
<S> <C> <C> <C> <C> <C>
S & P 500 33.36% 151.63% 425.68% -- --
Dow Jones Industrial
Average 24.94 170.73 451.88 -- --
CPI 2.02 14.02 40.21 -- --
Balanced Fund 18.97 88.98 249.95 34,026.64% 12/31/39
Blue Chip Growth Fund 27.56 -- -- 158.97 06/30/93
Capital Appreciation
Fund 16.20 99.74 286.01 342.85 06/30/86
Capital Opportunity
Fund 15.87 -- -- 106.73 11/30/94
Diversified Small-Cap
Growth Fund -- -- -- 7.10 06/30/97
Dividend Growth Fund 30.77 163.46 -- 163.46 12/30/92
Equity Income Fund 28.82 148.29 380.25 593.49 10/31/85
Equity Index 500Fund 32.87 147.07 -- 243.27 03/30/90
Financial Services
Fund 41.44 -- -- 60.39 09/30/96
Growth & Income Fund 23.53 129.19 361.04 696.12 12/21/82
Growth Stock Fund 26.57 135.19 324.68 21,416.77 04/11/50
Health Sciences Fund 19.41 -- -- 51.36 12/29/95
Media &
Telecommunications
Fund(a) 28.05 -- -- 80.27 10/13/93
Mid-Cap Equity Growth
Fund 18.39 -- -- 37.45 07/31/96
Mid-Cap Growth Fund 18.33 163.61 -- 228.30 06/30/92
Mid-Cap Value Fund 27.11 -- -- 47.83 06/28/96
New America Growth
Fund 21.10 128.00 483.90 616.98 09/30/85
New Era Fund 10.96 101.95 195.92 1,897.09 01/20/69
New Horizons Fund 9.77 144.39 435.12 7,285.94 06/03/60
Real Estate Fund -- -- -- 7.82 10/31/97
Science & Technology
Fund 1.71 159.96 677.35 526.60 09/30/87
Small-Cap Stock Fund 28.81 147.32 370.38 30,079.00 06/01/56
Small-Cap Value Fund 27.92 150.59 -- 309.53 06/30/88
Value Fund 29.25 -- -- 139.48 09/30/94
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) Figures based on performance as a closed-end investment company traded on
the New York Stock Exchange.
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. Ended 5 Yrs. Ended 10 Yrs. Ended % Since Inception Date
----------- ------------ ------------- ------- --------------
12/31/97 12/31/97 12/31/97 Inception
-------- -------- -------- ---------
12/31/97
--------
<S> <C> <C> <C> <C> <C>
S & P 500 33.36% 20.27% 18.05% -- --
Dow Jones Industrial
Average 24.94 22.04 18.63 -- --
CPI 2.02 2.66 3.44 -- --
Balanced Fund 18.97 13.57 13.34 10.58% 12/31/39
Blue Chip Growth Fund 27.56 -- -- 23.53 06/30/93
Capital Appreciation
Fund 16.20 14.84 14.46 13.81 06/30/86
Capital Opportunity
Fund 15.87 -- -- 26.54 11/30/94
Diversified Small-Cap
Growth Fund -- -- -- -- 06/30/97
Dividend Growth Fund 30.77 21.38 -- 21.38 12/30/92
Equity Income Fund 28.82 19.95 16.99 17.25 10/31/85
Equity Index 500 Fund 32.87 19.83 -- 17.23 03/30/90
Financial Services
Fund 41.44 -- -- 45.87 09/30/96
Growth & Income Fund 23.53 18.04 16.51 14.80 12/21/82
Growth Stock Fund 26.57 18.65 15.56 11.91 04/11/50
Health Sciences Fund 19.41 -- -- 22.96 12/29/95
Media &
Telecommunications
Fund(a) 28.05 -- -- 15.00 10/13/93
Mid-Cap Equity Growth
Fund 18.39 -- -- 25.15 07/31/96
Mid-Cap Growth Fund 18.33 21.39 -- 24.11 06/30/92
Mid-Cap Value Fund 27.11 -- -- 29.53
New America Growth
Fund 21.10 17.92 19.30 17.44 09/30/85
New Era Fund 10.96 15.09 11.46 10.90 01/20/69
New Horizons Fund 9.77 19.57 18.26 12.13 06/03/60
Real Estate Fund -- -- -- -- 10/31/97
Science & Technology
Fund 1.71 21.05 22.76 19.60 09/30/87
Small-Cap Stock Fund 28.81 19.85 16.75 14.72 06/01/56
Small-Cap Value Fund 27.92 20.17 -- 15.99 06/30/88
Value Fund 29.25 -- -- 30.81 09/30/94
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Figures based on performance as a closed-end investment company traded on
the New York Stock Exchange.
<PAGE>
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the Fund's
total return performance, ranking, or any other measure of the Fund's
performance may be compared to any one or combination of the following: (i) a
broadbased index; (ii) other groups of mutual funds, including T. Rowe Price
Funds, tracked by independent research firms ranking entities, or financial
publications; (iii) indices of stocks comparable to those in which the Fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the Fund or the general economic, business, investment, or
financial environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and other
persons may be used to illustrate aspects of the Fund's performance; (4) the
effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the Fund invests may be compared to
relevant indices or surveys in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by T. Rowe
Price Investment Services, Inc., T. Rowe Price mutual fund portfolio managers
may discuss economic, financial and political developments in the U.S. and
abroad and how these conditions have affected or may affect securities prices
or the Fund; individual securities within the Fund's portfolio; and their
philosophy regarding the selection of individual stocks, including why
specific stocks have been added, removed or excluded from the Fund's
portfolio.
Other Features and Benefits
The Fund is a member of the T. Rowe Price family of Funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the Fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price Associates, Inc. and/or T. Rowe Price Investment Services, Inc. may be
made available.
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.
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.
<PAGE>
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.
Media & Telecommunications Fund
On July 28, 1997, the Fund converted its status from a closed-end fund to an
open-end mutual fund. Prior to the conversion the Fund was known as New Age
Media Fund, Inc.
Small-Cap Stock Fund
Effective May 1, 1997, the Fund's name was changed from the T. Rowe Price OTC
Fund to the T. Rowe Price Small-Cap Stock Fund.
Equity Index 500 Fund
Effective January 30, 1998, the Fund's name was changed from T. Rowe Price
Equity Index Fund to the T. Rowe Price Equity Index 500 Fund.
All Funds except Capital Appreciation, Equity Income and New America Growth
Funds
CAPITAL STOCK
-------------------------------------------------------------------------------
The Fund's Charter authorizes the Board of Directors/Trustees to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions,
as shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. The Board of Directors/Trustees
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/Trustees 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/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 directors/trustees
unless and until such time as less than a majority of the directors/ trustees
holding office have been elected by shareholders, at which time the
directors/trustees then in office will call a shareholders' meeting for the
election of directors/trustees. Except as set forth above, the directors/
<PAGE>
trustees shall continue to hold office and may appoint successor
directors/trustees. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors/trustees can,
if they choose to do so, elect all the directors/trustees of the Fund, in
which event the holders of the remaining shares will be unable to elect any
person as a director/trustee. 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 FUNDS
-------------------------------------------------------------------------------
For tax and business reasons, the Funds were organized as Massachusetts
Business Trusts, and are registered with the 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 nonassesable, 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
<PAGE>
general assets of the Fund. The Trustees intend to conduct the operations of
the Fund is such a way so as to avoid, as far as possible, ultimate liability
of the shareholders for liabilities of such Fund.
All Funds
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The Fund's shares are registered for sale under the Securities Act of 1933.
Registration of the Fund's shares is not required under any state law, but
the Fund is required to make certain filings with and pay fees to the states
in order to sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Shereff, Friedman, Hoffman, & Goodman LLP, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
Blue Chip Growth, Diversified Small-Cap Growth, Dividend Growth, Equity
Income, Growth & Income, Media & Telecommunications, Mid-Cap Equity Growth,
Mid-Cap Growth, Mid-Cap Value, New America Growth, New Era, and Real Estate
Funds
Price Waterhouse LLP, 1306 Concourse Drive, Suite 100, Linthicum, Maryland
21090-1020, are independent accountants to the Fund.
Balanced, Capital Appreciation, Capital Opportunity, Equity Index 500,
Extended Equity Market Index, Financial Services, Growth Stock, Health
Sciences, New Horizons, Science & Technology, Small-Cap Stock, Small-Cap
Value, Total Equity Market Index, and Value Funds
Coopers & Lybrand L.L.P., 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are independent accountants to the Fund.
The financial statements of the Funds (except for Extended Market Index and
Total Equity Market Index Funds) for the year ended December 31, 1997, and
the report of independent accountants are included in the Fund's Annual
Report for the year ended December 31, 1997. The audited financial statements
of the T. Rowe Price Diversified Small-Cap Growth Fund, Inc., for the period
June 30, 1997 (commencement of operations) to December 31, 1997, and for the
T. Rowe Price Real Estate Fund, Inc., for the period October 31, 1997
(commencement of operations) to December 31, 1997, are included in their
Annual Reports for the period ended December 31, 1997. 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, 1997, are incorporated into
this Statement of Additional Information by reference:
<PAGE>
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CAPITAL EQUITY NEW AMERICA NEW ERA
APPRECIATION INDEX 500 GROWTH -------
------------ --------- ------
<S> <C> <C> <C> <C>
Report of Independent
Accountants 26 32 20 23
Statement of Net Assets,
December 31, 1997 12-19 11-25 11-14 11-16
Statement of Operations, year
ended
December 31, 1997 20 26 15 17
Statement of Changes in Net
Assets, years ended
December 31, 1997 and
December 31, 1996 21 27 16 18
Notes to Financial
Statements, December 31, 1997 22-25 28-31 17-19 19-22
Financial Highlights 11 10 10 10
</TABLE>
<TABLE>
<CAPTION>
SMALL-CAP MEDIA & DIVIDEND
STOCK TELECOMMUNICATIONSGROWTH BALANCED
----- --------------- --------
<S> <C> <C> <C> <C>
Report of Independent Accountants 26 18 24 47
Statement of Net Assets, December
31, 1997 11-20 10-12 10-17 11-40
Statement of Operations, year
ended
December 31, 1997 21 13 18 41
Statement of Changes in Net
Assets, years ended
December 31, 1997 and December
31, 1996 22 14 19 42
Notes to Financial Statements,
December 31, 1997 23-25 15-17 20-23 43-46
Financial Highlights 10 9 9 10
</TABLE>
<TABLE>
<CAPTION>
VALUE CAPITAL
----- OPPORTUNITY
-----------
<S> <C> <C> <C> <C>
Report of Independent Accountants 21 20
Statement of Net Assets, December 31,
1997 8-14 10-14
Statement of Operations, year ended
December 31, 1997 15 15
Statement of Changes in Net Assets,
years ended
December 31, 1997 and December 31,
1996 16 16
Notes to Financial Statements,
December 31, 1997 17-20 17-19
Financial Highlights 7 9
</TABLE>
<TABLE>
<CAPTION>
EQUITY GROWTH & GROWTH MID-CAP
INCOME INCOME STOCK GROWTH
------ ------ ----- ------
<S> <C> <C> <C> <C>
Report of Independent Accountants 25 23 24 22
Portfolio of Investments, December 31,
1997 9-17 8-15 10-17 10-15
Statement of Assets and Liabilities,
December 31, 1997 18 16 18 16
Statement of Operations, year ended
December 31, 1997 19 17 19 17
Statement of Changes in Net Assets,
years ended
December 31, 1997 and December 31, 1996 20 18 20 18
Notes to Financial Statements, December
31, 1997 21-24 19-22 21-23 19-21
Financial Highlights 8 7 9 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NEW SMALL-CAP BLUE CHIP SCIENCE &
HORIZONS VALUE GROWTH TECHNOLOGY
-------- ----- ------ ----------
<S> <C> <C> <C> <C>
Report of Independent
Accountants 33 27 26 19
Portfolio of Investments,
December 31, 1997 12-25 9-19 11-18 10-12
Statement of Assets and
Liabilities,
December 31, 1997 26 20 19 13
Statement of Operations, year
ended
December 31, 1997 27 21 20 14
Statement of Changes in Net
Assets, years ended
December 31, 1997 and December
31, 1996 28 22 21 15
Notes to Financial Statements,
December 31, 1997 29-32 23-26 22-25 16-18
Financial Highlights 11 8 10 9
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
SERVICES
--------
<S> <C> <C> <C>
Report of Independent Accountants 21
Statement of Net Assets, December 31, 1997 11-14
Statement of Operations, December 31, 1997 15
Statement of Changes in Net Assets, December
31, 1997 and September 30, 1996 (commencement
of operations) to December 31, 1996 16
Notes to Financial Statements, December 31,
1997 17-20
Financial Highlights 10
</TABLE>
<TABLE>
<CAPTION>
HEALTH
SCIENCES
--------
<S> <C> <C> <C>
Report of Independent Accountants 27
Portfolio of Investments, December 31, 1997 14-19
Statement of Net Assets, December 31, 1997 20
Statement of Operations, December 31, 1997 21
Statement of Changes in Net Assets, December
31, 1997 and December 31, 1995 (commencement of
operations) to December 31, 1996 22
Notes to Financial Statements, December 31,
1997 23-26
Financial Highlights 13
</TABLE>
<TABLE>
<CAPTION>
MID-CAP
VALUE
-----
<S> <C> <C> <C>
Report of Independent Accountants 24
Statement of Net Assets, December 31, 1997 10-17
Statement of Operations, December 31, 1997 18
Statement of Changes in Net Assets, December 31,
1997 and June 28, 1996 (commencement of
operations) to December 31, 1996 19
Notes to Financial Statements, December 31, 1997 20-23
Financial Highlights 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MID-CAP
EQUITY
GROWTH
------
<S> <C> <C> <C>
Report of Independent Accountants 14
Statement of Net Assets, December 31, 1997 7-9
Statement of Operations, December 31, 1997 10
Statement of Changes in Net Assets, December
31, 1997 and July 31, 1996 (commencement of
operations) to December 31, 1996 11
Notes to Financial Statements, December 31,
1997 12-13
Financial Highlights 6
</TABLE>
<TABLE>
<CAPTION>
DIVERSIFIED
SMALL-CAP
GROWTH
------
<S> <C> <C> <C>
Report of Independent Accountants 27
Statement of Net Assets, December 31, 1997 9-21
Statement of Operations, period from June
30, 1997 (commencement of operations) to
December 31, 1997 22
Statement of Changes in Net Assets, period
from June 30, 1997 (commencement of
operations) to December 31, 1997 23
Notes to Financial Statements, December 31,
1997 24-26
Financial Highlights, period from June 30,
1997 (commencement of operations) to
December 31, 1997 8
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
-----------
<S> <C> <C> <C>
Report of Independent Accountants 16
Portfolio of Investments, December 31, 1997 7-9
Statement of Assets and Liabilities,
December 31, 1997 10
Statement of Operations, period from October
31, 1997 (commencement of operations) to
December 31, 1997 11
Statement of Changes in Net Assets, period
from October 31, 1997 (commencement of
operations) to December 31, 1997 12
Notes to Financial Statements, December 31,
1997 13-15
Financial Highlights, period from October
31, 1997 (commencement of operations) to
December 31, 1997 6
</TABLE>
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."
<PAGE>
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally know as high-grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations.
Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of attaining investment standing.
Standard & Poor's Corporation (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, B, CCC, CC, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
Fitch 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 wide margin of protection through collateral, security or direct lien on
specific
<PAGE>
property. Sinking funds or voluntary reduction of debt by call or purchase or
often factors, while guarantee or assumption by parties other than the
original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions ad
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.
<PAGE>
PROSPECTUS
May 1, 1998
Blue Chip Growth Fund
A stock fund seeking long-term capital growth through investments primarily in
high-quality U.S. growth companies.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Blue Chip Growth Fund
Investment Goal
To provide long-term capital growth. Income is a secondary consideration.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest primarily in common stocks of large and medium-sized blue chip
companies that have the potential for above-average growth in earnings and are
well established in their respective industries.
Risk/Reward
The potential to provide long-term growth of capital through investments in
high-quality growth companies. However, the fund's share price may decline,
causing a loss.
Investor Profile
Individuals seeking capital appreciation who can accept the price declines
inherent in common stock investing. Appropriate for both regular and
tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 3
---------------------------------------------
Fund, Market, and Risk Characteristics 4
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 7
Sale Proceeds
---------------------------------------------
Distributions and Taxes 8
---------------------------------------------
Transaction Procedures and 11
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 14
---------------------------------------------
Understanding Performance Information 17
---------------------------------------------
Investment Policies and Practices 18
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 25
and Transaction Information
---------------------------------------------
Opening a New Account 25
---------------------------------------------
Purchasing Additional Shares 27
---------------------------------------------
Exchanging and Redeeming 28
---------------------------------------------
Rights Reserved by the Fund 29
---------------------------------------------
Shareholder Services 30
---------------------------------------------
Discount Brokerage 32
---------------------------------------------
Investment Information 33
---------------------------------------------
</TABLE>
T. Rowe Price Blue Chip Growth Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <S> <C> <C> <C>
Percentage of
Shareholder Fiscal 1997 Average
Transaction Expenses Annual Fund Expenses Net Assets
Sales charge "load" on None Management fee 0.62%
purchases
----------------------------------------------------------------------------
Sales charge "load" on
reinvested None Marketing fees (12b-1) None
distributions
----------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.33%
custodial, auditing, etc.)
----------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.95%
--------------------------------------------------------------------------
</TABLE>
Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.30%
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
<PAGE>
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$10 $30 $53 $117
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Price Waterhouse LLP, the fund's independent
accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993/a/ $10.00 $0.05/b/ $ 1.38 $1.43 $(0.05) $(0.14) $(0.19) $11.24
---------------------------------------------------------------------------------------------------------
1994 11.24 0.12/b/ (0.03) 0.09 (0.10) (0.12) (0.22) 11.11
---------------------------------------------------------------------------------------------------------
1995 11.11 0.16/b/ 4.05 4.21 (0.15) (0.08) (0.23) 15.09
---------------------------------------------------------------------------------------------------------
1996 15.09 0.14 4.05 4.19 (0.14) (0.08) (0.22) 19.06
---------------------------------------------------------------------------------------------------------
1997 19.06 0.13 5.12 5.25 (0.12) (0.02) (0.14) 24.17
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<PAGE>
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C> <C>
1993/a/ 14.32%/b/ $ 24,651 1.25%/bc/ 0.80%/bc/ 89.0%/c/ -
---------------------------------------------------------------------------------
1994 0.80/b/ 38,978 1.25/b/ 1.05/b/ 75.0 -
---------------------------------------------------------------------------------
1995 37.90/b/ 146,454 1.25/b/ 1.27/b/ 38.1 -
---------------------------------------------------------------------------------
1996 27.75 539,674 1.12 0.87 26.3 $0.0544
---------------------------------------------------------------------------------
1997 27.56 2,344,555 0.95 0.86 23.7 0.0537
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/a/ From June 30, 1993 (commencement of operations) to December 31, 1993.
/b/ Excludes expenses in excess of a 1.25% voluntary expense limitation in
effect through December 31, 1996.
/c/ Annualized.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund's primary objective is long-term growth of capital. Current income
is a secondary objective, and many of the stocks in the fund's portfolio are
expected to pay dividends.
What is the fund's investment program?
The fund will invest at least 65% of total assets in the common stocks of
large and medium-sized blue chip companies, as defined by T. Rowe Price.
These companies will be well established in their industries and have the
potential for above-average growth in earnings.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options. Investments in convertible securities, preferred
stocks, and debt securities are limited to 25% of total assets.
<PAGE>
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
What is meant by a "blue chip" investment approach?
T. Rowe Price analysts evaluate the growth prospects of companies and their
industries. This approach seeks to identify companies with strong market
franchises in industries that appear to be strategically poised for long-term
growth. Our investment approach reflects T. Rowe Price's belief that the
combination of solid company fundamentals (with emphasis on the potential for
above-average growth in earnings) along with a positive outlook for the
overall industry will ultimately reward investors with a higher stock price.
While the primary emphasis is on a company's prospects for future growth, the
fund will not purchase securities that, in T. Rowe Price's opinion, are
overvalued considering the underlying business fundamentals. In the search
for substantial capital appreciation, the fund looks for stocks attractively
priced relative to their anticipated long-term value.
How does the fund select stocks for the portfolio?
The fund will generally take the following into consideration:
. Leading market positions Blue chip companies often have leading market
positions that are expected to be maintained or enhanced over time. Strong
positions, particularly in growing industries, can give a company pricing
flexibility as well as the potential for good unit sales. These factors, in
turn, can lead to higher earnings growth and greater share price
appreciation.
. Seasoned management teams Seasoned management teams with a track record of
providing superior financial results are important for a company's long-term
growth prospects. Our analysts will evaluate the depth and breadth of a
company's management experience.
. Strong financial fundamentals Companies should demonstrate faster earnings
growth than their competitors and the market in general; high profit margins
relative to competitors; strong cash flow; a healthy balance sheet with
relatively low debt; and a high return on equity with a comparatively low
dividend payout ratio.
What are some of the fund's potential risks?
Growth stocks can be volatile for several reasons. Since they usually
reinvest a high portion of earnings in their own businesses, they may lack
the comfortable dividend associated with value stocks that can cushion total
return in a declining market. Also, since investors buy these stocks because
of their expected superior earnings growth, earnings disappointments often
result in sharp price declines.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The market frequently rewards growth stocks with price increases when
expectations are met or exceeded. A successful implementation of our strategy
could lead to long-term growth of capital. By investing in companies with
proven track records, the fund should be less risky than one focusing on
newer or smaller companies while still offering significant potential
appreciation.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the price fluctuations inherent in
growth stock investing in an effort to achieve long-term capital
appreciation, the fund could be an appropriate part of your overall
investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored accounts.
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transactions or any other special conditions.
Fund shares may be purchased through various third-party intermediaries,
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
be priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
<PAGE>
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
<PAGE>
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
<PAGE>
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
<PAGE>
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
<PAGE>
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
. Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
<PAGE>
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1993 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Larry J. Puglia, Chairman, Brian W. H. Berghuis, Seema R. Hingorani, Thomas
J. Huber, Robert Sharps, Robert W. Smith, and William J. Stromberg. The
committee chairman has day-to-day responsibility for managing the portfolio
and works with the committee in developing and executing the fund's
investment program. Mr. Puglia was appointed chairman of the fund in April
1996 and was co-manager of the fund prior to that. He joined T. Rowe Price in
1990 and has been managing investments since 1993.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
<PAGE>
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $1,679,000
to T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $982,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $60,000 to T. Rowe Price for accounting services.
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C>
0.334% First $50 billion/a/
----------------------------------------------------------------------
0.305% Next $30 billion
----------------------------------------------------------------------
0.300% Thereafter
- ------------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
<PAGE>
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the
fund's investment program, investors should not view them as an accurate
gauge of the potential risk of such investments. For example, in a given
period, a 5% investment in hybrid instruments could have significantly more
of an impact on the fund's share price than its weighting in the portfolio.
The net effect of a particular investment depends on its volatility and the
size of its overall return in relation to the performance of all the fund's
other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
<PAGE>
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
<PAGE>
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 20% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 5% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
<PAGE>
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy The fund will not invest more than 15% of its net assets in
illiquid securities.
<PAGE>
Types of Management Practices
Reserve Position
The fund will hold a certain portion of its assets in money market
reserves. The fund's reserve position can consist of shares of one or more T.
Rowe Price internal money market funds as well as short-term, high-quality
U.S. and foreign dollar-denominated money market securities, including
repurchase agreements. For temporary, defensive purposes, the fund may invest
without limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. The fund may purchase, sell, or write call
and put options on securities, financial indices, and foreign currencies.
<PAGE>
Futures contracts and options may not always be successful hedges and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 23.7%, 26.3%, and 38.1%, respectively.
<PAGE>
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts, except for IRA Rollover checks that are properly endorsed.
<PAGE>
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
(For mailgrams, express, registered, or certified mail, see previous section.)
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
(For mailgrams, express, registered, or certified mail, see Opening a New
Account.)
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500
Investor Services 1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.
Automated Services
Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660
For existing discount brokerage investors 1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
Discount Brokerage is a division of T. Rowe Price Investment Services, Inc.,
Member NASD/SIPC.
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F93-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Capital Appreciation Fund
A stock fund for relatively conservative equity investors seeking long-term
growth of capital.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Capital Appreciation Fund
Investment Goal
To provide long-term capital growth by investing primarily in common stocks.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest in common stocks and other securities believed by T. Rowe Price to be
undervalued in relation to various measures, such as assets or earnings, and
also to invest in fixed income securities.
Risk/Reward
The potential to provide capital growth over time with less volatility than the
overall stock market in rising and falling markets. Nevertheless, the fund's
share price may decline, causing a loss.
Investor Profile
Individuals seeking capital appreciation who can accept the price declines
inherent in common stock investing but prefer a strategy that focuses on
reducing risk as much as maximizing gains. Appropriate for both regular and
tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 4
---------------------------------------------
Fund, Market, and Risk Characteristics 5
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 9
Sale Proceeds
---------------------------------------------
Distributions and Taxes 10
---------------------------------------------
Transaction Procedures and 13
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 16
---------------------------------------------
Understanding Performance Information 19
---------------------------------------------
Investment Policies and Practices 20
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 26
and Transaction Information
---------------------------------------------
Opening a New Account 26
---------------------------------------------
Purchasing Additional Shares 28
---------------------------------------------
Exchanging and Redeeming 29
---------------------------------------------
Rights Reserved by the Fund 30
---------------------------------------------
Shareholder Services 31
---------------------------------------------
Discount Brokerage 34
---------------------------------------------
Investment Information 35
- --------- ---------------------------------------------
</TABLE>
T. Rowe Price Capital Appreciation Fund
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <S> <C> <C> <C> <C>
Percentage of Fiscal
Shareholder Annual Fund Expenses 1997 Average Net
Transaction Expenses (after performance adjustment) Assets
Sales charge "load" on None Management fee 0.38%/ab/
purchases
--------------------------------------------------------------------------------
Sales charge "load" on
reinvested None Marketing fees (12b-1) None
distributions
---------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servic 0.26%
ing, custodial, auditing, etc.)
---------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.64%/ab/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/a/The management fee was formerly subject to an upward or downward adjustment
depending upon whether, and to what extent, the investment performance of the
fund for a specified performance period exceeded, or was exceeded by, the
investment performance of the Standard & Poor's Index of 500 common stocks
(S&P 500) over the same period. The performance adjustment feature first
became operative on July 1, 1987. This performance adjustment began to be
phased out on May 1, 1997, and will cease on October 31, 1998. In the
phase-out period performance can only be adjusted downward. Performance of the
fund and the S&P 500 is calculated to include reinvestment of dividends and
other distributions. The annual performance adjustment will equal 0.02% for
each percentage point the fund's performance is below that of the S&P 500
during the measurement period up to a maximum annual adjustment of minus
0.30%. This performance calculation is made each month and is applied, on an
annualized basis, to the average daily net assets of the fund during the same
period.
b The fund's management fee and total expense ratio would have been 0.62% and
0.88%, respectively, without the impact of a ($2,474,000) performance
adjustment.
Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.30%, subject to adjustment.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$7 $20 $36 $80
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
<PAGE>
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 $9.15 $0.28/a/ $1.64 $1.92 $(0.28) $(0.37) $(0.65) $10.42
---------------------------------------------------------------------------------------------------------
1989 10.42 0.46/a/ 1.75 2.21 (0.45) (1.36) (1.81) 10.82
---------------------------------------------------------------------------------------------------------
1990 10.82 0.37/b/ (0.51) (0.14) (0.39) (0.31) (0.70) 9.98
---------------------------------------------------------------------------------------------------------
1991 9.98 0.44///b/ 1.67 2.11 (0.43) (0.64) (1.07) 11.02
---------------------------------------------------------------------------------------------------------
1992 11.02 0.51 0.52 1.03 (0.50) (0.16) (0.66) 11.39
---------------------------------------------------------------------------------------------------------
1993 11.39 0.26 1.52 1.78 (0.18) (0.33) (0.51) 12.66
---------------------------------------------------------------------------------------------------------
1994 12.66 0.35 0.13 0.48 (0.35) (0.69) (1.04) 12.10
---------------------------------------------------------------------------------------------------------
1995 12.10 0.43 2.30 2.73 (0.44) (0.72) (1.16) 13.67
---------------------------------------------------------------------------------------------------------
1996 13.67 0.60 1.70 2.30 (0.60) (0.90) (1.50) 14.47
---------------------------------------------------------------------------------------------------------
1997 14.47 0.50 1.82 2.32 (0.50) (1.58) (2.08) 14.71
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1988 21.20%/a/ $101,306 1.50%/a/ 2.76%/a/ 166.4% -
---------------------------------------------------------------------------------
1989 21.40/a/ 133,175 1.50/a/ 3.85/a/ 98.9 -
---------------------------------------------------------------------------------
1990 (1.30)/b/ 141,923 1.25/b/ 3.44/b/ 49.9 -
---------------------------------------------------------------------------------
1991 21.60/b/ 215,693 1.20/b/ 3.90/b/ 50.7 -
---------------------------------------------------------------------------------
1992 9.36 359,272 1.08 4.28 30.3 -
---------------------------------------------------------------------------------
1993 15.66 536,244 1.09 2.37 39.4 -
---------------------------------------------------------------------------------
1994 3.80 654,999 1.10 2.91 43.6 -
---------------------------------------------------------------------------------
1995 22.57 864,273 0.97 3.28 47.0 -
---------------------------------------------------------------------------------
1996 16.82 959,942 0.76 4.07 44.2 $0.0584
---------------------------------------------------------------------------------
1997 16.20 1,059,882 0.64 3.17 48.3 0.0377
- -----------------------------------------------------------------------------------------------
</TABLE>
a Excludes expenses in excess of a 1.50% voluntary expense limitation in effect
through December 31, 1989.
b Excludes expenses in excess of a 1.25% voluntary expense limitation in effect
through December 31, 1993.
<PAGE>
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks to maximize capital appreciation by investing primarily in
common stocks. In addition, the fund may hold fixed income and other
securities to help preserve principal value in uncertain or declining
markets.
What is the fund's investment program?
The fund's principal focus is on common stocks of established companies
believed by T. Rowe Price to offer above-average prospects of appreciation.
While common stocks typically compose at least half of total assets, the fund
can also invest in preferred stocks and convertible and fixed income
securities when considered consistent with the fund's objective and overall
program. The portfolio manager may also engage in a variety of investment
management practices, such as buying and selling futures and options.
Common stock investments generally fall into one of two categories. The
larger category comprises long-term "core" holdings of stocks whose prices at
the time of purchase are regarded as low in relation to various measures,
such as the company's assets or earnings. The smaller category consists of
"opportunistic" investments whose prices are expected to rise in the short
run but which may not be attractive long-term holdings. The fund's total
return will derive mainly from capital appreciation (or depreciation) and, to
a lesser extent, from income.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
How does the fund select investments for the portfolio?
The fund uses a value approach, which means looking for companies whose
stocks and other securities appear to be undervalued or out of favor with
investors.
Possible indicators of an undervalued stock include:
. Above-average current dividend yield relative to the average yield of the
S&P 500.
. Low price/earnings ratios relative to the S&P 500.
<PAGE>
. Low stock price relative to a company's underlying value measured by assets,
earnings, cash flow, or business franchises. Ratios that measure this include
price/book value and price/cash flow.
The fund's value emphasis may lead to a "contrarian" approach, resulting in
purchases of stocks or other securities shunned by investors due to earnings
setbacks, unfavorable industry or economic conditions, or negative publicity.
Such investments may be attractive to the fund if their prices appear to be
excessively discounted and prospects for appreciation are considered
favorable.
What are some examples of undervalued situations?
There are numerous situations in which a company's value may not be reflected
in its stock price. For example, a company may own a substantial amount of
real estate that is valued on its financial statements well below market
levels. If those properties were to be sold, or if their hidden value became
recognized in some other manner, the company's stock price could rise. In
another example, a company's management could spin off an unprofitable
division into a separate company, potentially increasing the value of the
parent. Or, in the reverse, a parent company could spin off a profitable
division that has not drawn the attention it deserves, potentially resulting
in higher valuations for both entities.
Sometimes new management can revitalize companies that have grown fat or lost
their focus, eventually leading to improved profitability. Management could
increase shareholder value by using excess cash flow to pay down debt, buying
back outstanding shares of common stock, or raising the dividend.
What distinguishes this fund from other stock funds?
The fund's focus and approach differ from many other funds in several ways:
. The manager works as hard to reduce risk as to maximize gains. For instance,
to cushion the impact of a market downturn, the fund may seek to realize
gains, whether short- or long-term, so as not to give them back during market
declines.
. The manager looks for the best risk/reward values across the whole spectrum
of securities - common and preferred stocks, bonds, convertibles, warrants,
and so on.
. The portion of the fund invested in a particular type of security, such as
common stocks, results largely from case-by-case investment decisions. The
size of the reserve position may reflect the manager's success in finding
investments that meet his criteria rather than his outlook on the market.
<PAGE>
What are some of the fund's potential risks?
A by-product of the fund's contrarian, value-oriented approach is that some
holdings may not recover from their problems, thus providing no appreciation.
The fund's opportunistic trading approach and willingness to realize gains
could result in higher taxable capital gain distributions than other equity
funds. A risk of maintaining sizable cash positions is not participating
fully in a bull market, particularly one that starts suddenly and rises
rapidly. Despite attempts to limit downside risk, a shareholder in this fund
is exposed to the stock market's declines.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The fund's attempt to cushion the effects of market declines on the share
price could reduce the fund's overall risk (volatility) relative to that of
the broad stock market. In addition, the fund's willingness to seek
appreciation opportunities outside the stock market may also aid performance
when stocks are declining. The fund's primary emphasis on common stocks could
allow it to participate in favorable stock market trends.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you are a relatively conservative equity investor
but nevertheless can accept the price fluctuations inherent in stock
investing in an
effort to achieve long-term capital appreciation, the fund could be an
appropriate part of your overall investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was organized as a Massachusetts business trust in 1986 and is a
"diversified, open-end investment company," or mutual fund. Mutual funds pool
money received from shareholders and invest it to try to achieve specified
objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund trustees, changes in fundamental policies, or approval of changes in the
fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Trustees that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Richard P. Howard, Chairman, Arthur B. Cecil III, Charles A. Morris, Charles
M. Ober, and Brian C. Rogers. The committee chairman has day-to-day
responsibility for managing the portfolio and works with the committee in
developing and executing the fund's investment program. Mr. Howard has been
chairman of the fund's committee since 1989. He joined T. Rowe Price in 1982
and has been managing investments since 1989.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
. The fund's management fee is subject to a performance adjustment described
under Transaction and Fund Expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $712,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $1,202,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $85,000 to T. Rowe Price for accounting services.
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C>
0.334% First $50 billion/a/
----------------------------------------------------------------------
0.305% Next $30 billion
----------------------------------------------------------------------
0.300% Thereafter
- -----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge
of the potential risk of such investments. For example, in a given period, a
5% investment in hybrid instruments could have significantly more of an
impact on the fund's share price than its weighting in the portfolio. The net
effect of a particular investment depends on its volatility and the size of
its overall return in relation to the performance of all the fund's other
investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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
anytime during the life of the warrants (generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 25% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 15% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 48.3%, 44.2%, and 47.0%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts
T. Rowe Price Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
(For mailgrams, express, registered, or certified mail, see previous section.)
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
(For mailgrams, express, registered, or certified mail, see Opening a New
Account.)
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500
Investor Services 1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660
For existing discount brokerage investors 1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
Discount Brokerage is a division of T. Rowe Price Investment Services,
Inc., Member NASD/SIPC.
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram logo
F72-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Capital Opportunity Fund
An aggressively managed stock fund for investors seeking superior capital
appreciation through a flexible investment strategy.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Capital Opportunity Fund
Investment Goal
To provide superior capital appreciation by investing primarily in the common
stocks of small, medium, and large companies.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To establish a portfolio of a relatively limited number of stocks, primarily of
U.S. companies believed by T. Rowe Price to be well positioned for capital
appreciation. The fund will use a flexible approach to stock selection, not
limited by investment style, industry, or company size.
Risk/Reward
Higher risk of loss is assumed in pursuit of superior capital appreciation.
Concentrating assets in a limited number of companies involves greater risk
than investing in a more broadly diversified portfolio, but holds the potential
for greater rewards. The fund's share price may decline, causing a loss.
Investor Profile
Individuals seeking significant capital appreciation who can accept the higher
risk of loss of an aggressively managed portfolio of stocks. Appropriate for
both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 4
---------------------------------------------
Fund, Market, and Risk Characteristics 5
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving
Sale Proceeds 9
---------------------------------------------
Distributions and Taxes 10
---------------------------------------------
Transaction Procedures and
Special Requirements 13
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 16
---------------------------------------------
Understanding Performance Information 18
---------------------------------------------
Investment Policies and Practices 19
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements
and Transaction Information 25
---------------------------------------------
Opening a New Account 25
---------------------------------------------
Purchasing Additional Shares 27
---------------------------------------------
Exchanging and Redeeming 28
---------------------------------------------
Rights Reserved by the Fund 29
---------------------------------------------
Shareholder Services 30
---------------------------------------------
Discount Brokerage 33
---------------------------------------------
Investment Information 34
---------------------------------------------
</TABLE>
T. Rowe Price Capital Opportunity Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate the fund for a year, based on 1997 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from the fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <S> <C> <C> <C> <C>
Percentage of Fiscal
Shareholder Annual Fund Expenses 1997
Transaction Expenses (after reduction) Average Net Assets
Sales charge "load" on None Management fee 0.83%ab
purchases
--------------------------------------------------------------------------------------------
Sales charge "load" on
reinvested None Marketing fees (12b-1) None
distributions
--------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.52%ab
custodial, auditing, etc.)
--------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 1.35%ab
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/a/The fund's management fee and other expenses presented include 0.06% of
management fees repaid from prior years pursuant to
the expense limitation described below. Without this repayment, the fund's
management fee, other expenses, and total expense ratios would have been
0.77%, 0.51%, and 1.28%, respectively.
/b/To limit the fund's expenses during its initial period of operations, T. Rowe
Price agreed to waive its fees and bear any expenses through December 31,
1996, which would have caused the fund's ratio of expenses to average net
assets to exceed 1.35%. Fees waived or expenses paid or assumed under this
agreement are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 1.35%; however, no reimbursement will be
made after December 31, 1998, or if it would result in the expense ratio
exceeding 1.35%. Any amounts reimbursed will have the effect of increasing
fees otherwise paid by the fund. Organizational expenses will be charged to
the fund over a period not to exceed 60 months.
Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.45%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$14 $43 $74 $162
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are
incorporated by reference into the Statement of Additional Information
(available upon request). The financial statements in the annual report were
audited by Coopers & Lybrand L.L.P., the fund's independent accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994/a/ $10.00 $0.02/b/ $0.41 $0.43 - - - $10.43
---------------------------------------------------------------------------------------------------------
1995 10.43 0.01/b/ 4.83 4.84 $(0.01) $(1.13) $(1.14) 14.13
---------------------------------------------------------------------------------------------------------
1996 14.13 -/b/ 2.36 2.36 - (0.74) (0.74) 15.75
---------------------------------------------------------------------------------------------------------
1997 15.75 0.01 2.45 2.46 - (1.59) (1.59) 16.62
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994/a/ 4.30%/b/ $ 2,437 1.35%/bc/ 2.71%/bc/ 134.5%/c/ -
---------------------------------------------------------------------------------
1995 46.51/b/ 61,923 1.35/b/ 0.08/b/ 136.9 -
---------------------------------------------------------------------------------
1996 16.76/b/ 125,077 1.35/b/ 0.02/b/ 107.3 $0.0338
---------------------------------------------------------------------------------
1997 15.87 109,055 1.35% 0.04 85.0 0.0471
- -----------------------------------------------------------------------------------------------
</TABLE>
/a/ From November 30, 1994 (commencement of operations) to December 31, 1994.
/b/Excludes expenses in excess of a 1.35% voluntary expense limitation in effect
through December 31, 1996.
/c/ Annualized.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
<PAGE>
What is the fund's objective?
The fund's investment objective is superior capital appreciation over time by
investing primarily in U.S. common stocks of small, medium, and large
companies. Income is not an objective and, therefore, is not a consideration
in the selection of securities.
What is the fund's investment program?
The fund's primary focus will be on the common stocks of U.S. companies
appearing to offer the best opportunities for capital appreciation at any
given time, based on the proprietary research of T. Rowe Price. The fund
manager will pursue a flexible investment strategy in the selection of
stocks, not limited by any particular investment style, industry, or company
size. Therefore, this fund has much broader latitude in its selection of
securities than a typical equity mutual fund. When attractive investments are
identified, the fund manager expects to establish relatively large positions,
sometimes representing 5% or more of total fund assets. From time to time, it
would not be unusual for the fund to emphasize the stocks of small and
medium-sized companies.
In addition to U.S. common stocks, the fund may also purchase other types of
securities, for example, foreign securities, junk bonds, private placements,
and warrants, when considered consistent with the fund's investment
objective. The fund is limited with respect to the percentage of assets it
can place in such securities; please refer to Investment Policies and
Practices for a further discussion of these securities and the limitations
imposed on the fund. The fund may also engage in a variety of investment
management practices, such as buying and selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
How are securities for the portfolio identified?
Drawing on its research, T. Rowe Price will generally seek to invest in
companies:
. expected to achieve accelerating earnings growth, perhaps due to strong
demand for their products or services;
. whose securities appear undervalued, based on various measures such as
price/ earnings and price/book value ratios, etc.;
. undergoing financial restructuring;
. involved in takeover or arbitrage situations;
. expected to benefit from evolving market cycles or changing economic
conditions; or
<PAGE>
. representing special situations, such as changes in management or favorable
regulatory developments, which are expected to lead to higher earnings and
share prices.
o The fund's portfolio will tend to be less diversified than that of the
average stock fund.
What distinguishes the fund from many other stock funds?
Many stock funds follow a particular investment approach or look for
opportunities in particular market sectors. For example, some take a "growth"
approach based on the premise that, when a company's earnings grow faster
than inflation and the economy in general, eventually the market should
reward it with a higher stock price. Others pursue a "value" approach,
seeking to buy a stock when its price is low in relation to what they believe
to be its intrinsic worth. Some limit their search to large- or small-cap
stocks, or to stocks in a particular sector such as natural resources, health
care, or technology.
The fund will not be limited to any single approach. Rather, its flexible
strategy will allow it to pursue growth, value, or any other opportunities
across the universe of common stocks. This opportunistic trading approach
could result in higher taxable gain distributions than other equity funds
because the fund may buy and sell securities more frequently than other funds
do.
Will the fund attempt to time swings in the market?
The fund will not make explicit calls on the future direction of the general
market. The fund generally intends to be fully invested. However, if the fund
manager is unable to find attractive situations offering the potential for
significant capital appreciation, the fund may hold above-average levels of
cash reserves.
What are some of the fund's potential risks?
The fund's risks fall into several categories, including:
. Less diversification The fund will concentrate on fewer issues than is
typical of most mutual funds, and may establish relatively large positions in
them. Because of this approach, the fund is registered as a nondiversified
fund. Potential losses could be greater than for funds investing in a broader
variety of issues. See the fundamental policy under Types of Portfolio
Securities for further information.
. Flexible strategy By having the flexibility to invest heavily in particular
securities or industries, the fund may underperform the market when these
sectors are declining faster than the general stock market. Also, there is no
guarantee the fund's flexible approach will succeed.
. Small stocks At times, a substantial portion of the portfolio may be in
securities of small companies. The very nature of investing in small
companies involves
greater risk than is customarily associated with larger established
companies. 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 be subject to
more abrupt or erratic market declines than securities of larger companies or
the market averages in general.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The fund offers the possibility of returns exceeding those of the S&P 500
through concentration in a relatively limited number of stocks. An
opportunistic approach to stock selection, without limitations on the types
of issues that can be bought, may provide superior returns over time.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance level for risk. If you can accept the greater risk of
investing in an aggressively managed, nondiversified fund in an effort to
achieve superior capital appreciation, the fund may be an appropriate part of
your overall investment strategy.
<PAGE>
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
<PAGE>
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1994 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
John F. Wakeman, Chairman, Marc L. Baylin, Brian W. H. Berghuis, John H.
Laporte, Larry J. Puglia, Robert Sharps, and Brian D. Stansky. The committee
chairman has day-to-day responsibility for managing the portfolio and works
with the committee in developing and executing the fund's investment program.
Mr. Wakeman has been chairman of the fund's committee since 1994. He joined
T. Rowe Price in 1989 and has been managing investments since 1992.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $254,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $17,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $60,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C>
0.334% First $50 billion/a/
----------------------------------------------------------------------
0.305% Next $30 billion
----------------------------------------------------------------------
0.300% Thereafter
- --------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
<PAGE>
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a
particular investment depends on its volatility and the size of its overall
return in relation to the performance of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
Fundamental policy The fund is registered as a nondiversified mutual fund.
This means that the fund may invest a greater portion of its assets in, and
own a greater amount of the voting securities of, a single company than a
diversified fund which may subject the fund to greater risk with respect to
its portfolio securities. However, because the fund intends to qualify as a
"regulated investment company" under the Internal Revenue Code, it must
invest so that, at the end of each quarter, with respect to 50% of its total
assets, not more than 5% of its assets are invested in the securities of a
single issuer, and with respect to the remaining 50%, no more than 25% of
fund assets is invested in a single issuer.
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 nonconvertible 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 anytime during the life of the warrants (generally, two or
more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 20% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
<PAGE>
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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.
<PAGE>
Operating policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions involve the risk that
anticipated currency movements will not occur, and the fund's total return
could be reduced.
<PAGE>
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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 85.0%, 107.3%, and 136.9%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts
T. Rowe Price Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax--
<PAGE>
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment Services, /
/Inc., Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F08-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Growth Stock Fund
A stock fund seeking long-term capital appreciation through investments
primarily in well-established growth companies.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Growth Stock Fund
Investment Goal
To provide long-term capital growth and, secondarily, increasing dividend
income by investing primarily in common stocks of well-established growth
companies.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest in the common stocks of companies expected by T. Rowe Price to have
superior earnings growth. Total return will consist primarily of capital
appreciation or depreciation and secondarily, of dividend income.
Risk/Reward
The potential to provide superior capital appreciation and increasing dividend
income over time. However, the fund's share price may decline, causing a loss.
Investor Profile
Individuals seeking to build capital over the long term who can accept the
price fluctuations inherent in common stock investing. Appropriate for both
regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 3
---------------------------------------------
Fund, Market, and Risk Characteristics 4
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 7
Sale Proceeds
---------------------------------------------
Distributions and Taxes 8
---------------------------------------------
Transaction Procedures and 10
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 13
---------------------------------------------
Understanding Performance Information 15
---------------------------------------------
Investment Policies and Practices 16
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 21
and Transaction Information
---------------------------------------------
Opening a New Account 21
---------------------------------------------
Purchasing Additional Shares 23
---------------------------------------------
Exchanging and Redeeming 23
---------------------------------------------
Rights Reserved by the Fund 25
---------------------------------------------
Shareholder Services 25
---------------------------------------------
Discount Brokerage 28
---------------------------------------------
Investment Information 29
---------------------------------------------
</TABLE>
T. Rowe Price Growth Stock Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<C> <C> <C> <C> <C>
Shareholder Transaction Percentage of Fiscal 1997
Expenses Annual Fund Expenses Average Net Assets
Sales charge "load" on purchases None Management fee 0.57%
- ------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- ------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.18%
custodial, auditing, etc.)
- ------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.75%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.25%.
<PAGE>
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$8 $24 $42 $93
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value, End
Beginning Income Gain (Loss) on Activities Income Gain of Period
of Period Investments
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 $14.27 $0.32 $ 0.54 $ 0.86 $(0.32) $(0.26) $(0.58) $14.55
---------------------------------------------------------------------------------------------------------
1989 14.55 0.36 3.28 3.64 (0.34) (1.58) (1.92) 16.27
---------------------------------------------------------------------------------------------------------
1990 16.27 0.38 (1.08) (0.70) (0.43) (0.43) (0.86) 14.71
---------------------------------------------------------------------------------------------------------
1991 14.71 0.24 4.67 4.91 (0.25) (0.62) (0.87) 18.75
---------------------------------------------------------------------------------------------------------
1992 18.75 0.18 0.94 1.12 (0.18) (1.03) (1.21) 18.66
---------------------------------------------------------------------------------------------------------
1993 18.66 0.17 2.72 2.89 (0.14) (0.99) (1.13) 20.42
---------------------------------------------------------------------------------------------------------
1994 20.42 0.18 (0.01) 0.17 (0.18) (1.66) (1.84) 18.75
---------------------------------------------------------------------------------------------------------
1995 18.75 0.23 5.57 5.80 (0.23) (0.97) (1.20) 23.35
---------------------------------------------------------------------------------------------------------
1996 23.35 0.19 4.89 5.08 (0.19) (2.06) (2.25) 26.18
---------------------------------------------------------------------------------------------------------
1997 26.18 0.23 6.65 6.88 (0.20) (3.87) (4.07) 28.99
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C> <C>
1988 6.10% $1,294,270 0.77% 2.08% 40.7% -
---------------------------------------------------------------------------------
1989 25.40 1,516,040 0.69 2.13 38.8 -
---------------------------------------------------------------------------------
1990 (4.30) 1,396,461 0.76 2.31 30.2 -
---------------------------------------------------------------------------------
1991 33.80 1,846,016 0.85 1.40 31.8 -
---------------------------------------------------------------------------------
1992 5.99 1,946,250 0.83 0.94 27.4 -
---------------------------------------------------------------------------------
1993 15.56 1,975,554 0.82 0.86 35.3 -
---------------------------------------------------------------------------------
1994 0.89 2,067,520 0.81 0.91 54.0 -
---------------------------------------------------------------------------------
1995 30.97 2,761,828 0.80 1.09 42.5 -
---------------------------------------------------------------------------------
1996 21.70 3,430,809 0.77 0.74 49.0 $0.0426
---------------------------------------------------------------------------------
1997 26.57 3,988,398 0.75 0.75 40.9 0.0164
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund's objective is long-term growth of capital and, secondarily,
increasing dividend income by investing primarily in common stocks of
well-established growth companies.
What is the fund's investment program?
The fund will invest at least 65% of total assets in the common stocks of a
diversified group of growth companies. The companies in which the fund
invests normally (but not always) pay dividends that are generally expected
to rise in future years as earnings increase.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
What is meant by a "growth" investment approach?
Thomas Rowe Price, Jr., pioneered the growth stock theory of investing over
60 years ago. It is based on the premise that inflation represents a more
serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that, during periods
of adverse economic and market conditions, stock prices may fall despite
favorable earnings trends.
o Growth investors look for companies with above-average earnings gains.
<PAGE>
What does the fund look for when selecting growth stocks?
The fund generally looks for companies with one or more of the following:
. An above-average growth rate Superior growth in earnings and cash flow.
. Operations in "fertile fields" The ability to sustain earnings momentum even
during economic slowdowns by operating in industries or service sectors where
earnings and dividends can outpace inflation and the overall economy.
. A profitable niche A lucrative niche in the economy that enables the company
to expand even during times of slow growth. Ideally, profit margins should be
widening due to economic factors rather than one-time events such as lower
taxes.
What are some of the fund's potential risks?
Growth stocks can be volatile for several reasons. Since they usually
reinvest a high portion of earnings in their own businesses, they may lack
the comfortable dividend associated with value stocks that can cushion total
return in a declining market. Also, since investors buy these stocks because
of their expected superior earnings growth, earnings disappointments often
result in sharp price declines. Since the fund may contain a substantial
percentage of foreign securities, investors are also subject to the special
risks of international investing, including the risk of currency fluctuation.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The market frequently rewards growth stocks with price increases when
expectations are met or exceeded. Common stocks in general offer a way to
invest for long-term growth of capital. The fund's broad diversification,
which often includes significant holdings of foreign stocks, could help
cushion its overall price volatility, since U.S. and foreign stocks may not
move together.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S.
stock market has experienced 10 negative years as well as steep drops of
shorter duration. Its worst calendar quarter return in recent years was
-22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the price fluctuations inherent in
growth stock investing in an effort to achieve long-term capital
appreciation, the fund could be an appropriate part of your overall
investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can
redeem shares you own in this or another identically registered T. Rowe Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1950 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Robert W. Smith, Chairman, Brian W. H. Berghuis, Robert N. Gensler, Thomas J.
Huber, Charles A. Morris, Thomas O. Murtha, and Larry J. Puglia. The
committee chairman has day-to-day responsibility for managing the portfolio
and works with the committee in developing and executing the fund's
investment program. Mr. Smith was appointed as the fund's chairman in 1997.
He joined T. Rowe Price in 1992 and has been managing investments since 1987.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $1,579,000
to T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $2,300,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $104,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfo-
lio'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). These risks are heightened for investments in developing countries,
and there is no limit on the amount of the fund's foreign investments that
may be made in such countries.
Operating policy The fund may invest up to 30% of its total assets (excluding
reserves) in foreign securities.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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.
<PAGE>
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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 40.9%, 49.0%, and 42.5%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
<PAGE>
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax--
<PAGE>
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment Services, / /Inc.,
Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F40-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Mid-Cap Equity Growth Fund
A stock fund seeking long-term capital appreciation through investments
in medium-sized growth companies.
T. Rowe Price
<PAGE>
FACTS AT A GLANCE
Mid-Cap Equity Growth Fund
Investment Goal
To provide long-term capital appreciation by investing primarily in common
stocks of medium-sized (mid-cap) growth companies.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
The fund will focus on companies with superior earnings growth potential that
are no longer considered new or emerging but may still be in the dynamic phase
of their life cycles.
Risk/Reward
The potential to provide above-average growth of capital over time. Mid-cap
growth company stocks are generally more volatile than stocks of large
companies, but they offer the possibility of more rapid growth. Additionally,
mid-cap stocks tend to be less volatile than small-company stocks. The fund's
share price may decline, causing a loss.
Investor Profile
Institutional investors seeking greater potential for capital appreciation than
is provided by large companies, who are willing to incur the higher risk of
loss associated with somewhat aggressive investments in mid-cap stocks.
Fees and Charges
100% no load. No sales charges; free telephone exchange; no 12b-1 marketing
fees.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
Institutional Equity Funds,Inc.
Prospectus
May 1, 1998
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
-------------------------------------------------
Financial Highlights 4
-------------------------------------------------
Fund, Market, and Risk Characteristics 5
-------------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds 8
-------------------------------------------------
Distributions and Taxes 9
-------------------------------------------------
Transaction Procedures and Special 11
Requirements
-------------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 15
-------------------------------------------------
Understanding Performance Information 17
-------------------------------------------------
Investment Policies and Practices 18
-------------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements andTransaction 23
Information
-------------------------------------------------
Opening a New Account 23
-------------------------------------------------
Purchasing Additional Shares 24
-------------------------------------------------
Exchanging and Redeeming 24
-------------------------------------------------
Rights Reserved by the Fund 25
-------------------------------------------------
Financial Institution Services 26
-------------------------------------------------
</TABLE>
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate the fund for a year, based on 1997 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from the fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C>
Percentage of
Fiscal 1997
Shareholder Transaction Annual Fund Expenses Average Net
Expenses (after reduction) Assets
Sales charge "load" on purchases None Management fee 0.38/a/
- -----------------------------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.47%/a/
custodial, auditing, etc.)
- ------------------------------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.85%/a/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/a/To limit the fund's expenses during its initial period of operations, T. Rowe
Price agreed to waive its fees and bear any expenses through December 31,
1997, which would cause the fund's ratio of expenses to average net assets to
exceed 0.85%. Effective January 1, 1998, T. Rowe Price agreed to extend the
existing expense limitation for a period of two years through December 31,
1999. Fees waived or expenses paid or assumed under these agreements are
subject to reimbursement to T. Rowe Price by the fund whenever the fund's
expense ratio is below 0.85%; however, no reimbursement will be made after
December 31, 1999 (for the first agreement), or December 31, 2001 (for the
second agreement), or if it would result in the expense ratio exceeding 0.85%.
Any amounts reimbursed will have the effect of increasing fees otherwise paid
by the fund. Without this expense limitation, it is estimated that the fund's
management fee, other expenses, and total expense ratio would have been 0.60%,
0.47%, and 1.07%, respectively. Organizational expenses will be charged to the
fund over a period not to exceed 60 months.
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fee for this fund is 0.60%.
<PAGE>
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years
$9 $27 $47 $105
- --------------------------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Price Waterhouse LLP, the fund's independent
accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset Value,
Ended Value, Investment & Unrealized Investment Investment Realized Distributions End of Period
Beginning Income (Loss) Gain (Loss) on Activities Income Gain
of Period Investments
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996/a/ $10.00 $ 0.02/b/ $1.59 $1.61 $(0.02) - $(0.02) $11.59
-----------------------------------------------------------------------------------------------------------
1997 11.59 (0.01)/b/ 2.14 2.13 - $(0.03) (0.03) 13.69
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net
Ended (Includes Net Assets Expenses to Investment Portfolio Average
Reinvested ($ Thousands) Average Net Income to Turnover Commission
Distributions) Assets Average Net Rate Rate Paid
Assets
<S> <C> <C> <C> <C> <C> <C>
1996/a/ 16.10%/b/ $14,367 0.85%/bc/ 0.43%/bc/ 31.3%/c/ $0.0402
---------------------------------------------------------------------------------
1997 18.39/b/ 57,974 0.85/b/ (0.12)/b/ 41.0 0.0487
- ------------------------------------------------------------------------------------------
</TABLE>
/a/ From July 31, 1996 (commencement of operations) to December 31, 1996.
/b/Excludes expenses in excess of a 0.85% voluntary expense limitation in effect
through December 31, 1997.
/c/Annualized.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund's investment objective is to provide long-term capital appreciation
by investing in mid-cap stocks offering the potential for above-average
earnings growth.
What is the fund's investment program?
The fund will invest at least 65% of its assets in a diversified portfolio of
mid-cap companies whose earnings are expected by T. Rowe Price to grow at a
faster rate than the average company.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
<PAGE>
What are "mid-cap growth" stocks?
A mid-cap company is defined as one whose market capitalization (number of
shares outstanding multiplied by share price) falls between $300 million and
$5 billion. Mid-cap growth companies are no longer considered new or
emerging, but they are not large. By focusing their activities, mid-cap
companies may be more responsive and better able to adapt to the changing
needs of their markets than large companies. Mid-cap companies tend to offer
higher growth prospects than larger companies. They tend to have greater
resources and, therefore, represent less risk, than smaller companies. They
are usually mature enough to have established organizational structures and
the depth of management needed to expand their operations. In addition, these
companies generally have sufficient financial resources and access to capital
to finance their growth.
Does the fund only invest in mid-cap stocks?
Most of the stocks purchased by the fund will be in the mid-cap size range
just described. However, the fund will not automatically sell a stock just
because the company's market cap has grown beyond the $5 billion upper limit,
and such positions may be increased on occasion through additional purchases.
What is meant by a "growth" investment approach?
Thomas Rowe Price, Jr., pioneered the growth stock theory of investing over
60 years ago. It is based on the premise that inflation represents a more
serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that, during periods
of adverse economic and market conditions, stock prices may fall despite
favorable earnings trends.
o Growth investors look for companies with above-average earnings gains.
How does the fund select mid-cap stocks for the portfolio?
T. Rowe Price analysts seek to identify mid-cap companies with attractive
growth prospects. The fund attempts to invest primarily in companies that
offer proven products or services; have a record of above-average earnings
growth; demonstrate the potential to sustain earnings growth; operate in
industries experiencing increasing demand; or have stock prices that appear
to undervalue their growth prospects.
<PAGE>
What are some of the fund's potential risks?
The stocks of mid-cap companies entail greater risk and are usually more
volatile than the shares of large, established companies. Also, growth stocks
can be volatile for several reasons. Since they usually reinvest a high
portion of earnings in their own businesses, they may lack the comfortable
dividend associated with value stocks that can cushion total return in a
declining market. Also, since investors buy these stocks because of their
expected superior earnings growth, earnings disappointments often result in
sharp price declines.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
Mid-cap companies may offer greater potential for capital appreciation than
large companies because of their higher growth rates. Since mid-cap stocks
are usually less actively followed by securities analysts, they could be
undervalued by the market, providing opportunities for investors.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance level for risk. If you can accept the greater risk of
investing in mid-cap companies in an effort to achieve superior capital
appreciation, the fund can be an appropriate part of your overall investment
strategy.
<PAGE>
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional
accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
<PAGE>
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
<PAGE>
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any,
that may be exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
<PAGE>
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
<PAGE>
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the costs to the fund of maintaining accounts with less than the
required minimum balance, we ask you to maintain an account balance of at
least $1,000,000. If your balance is below $1,000,000 for three months or
longer, we have the right to close your account after giving you 60 days in
which to increase your balance.
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
<PAGE>
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The Institutional Equity Funds, Inc. (the "Corporation") was incorporated in
Maryland in 1996 and is a "diversified, open-end investment company," or
mutual fund. Mutual funds pool money received from shareholders and invest it
to try to achieve specified objectives.
The Corporation currently consists of one series, the Mid-Cap Equity Growth
Fund, representing a separate class of shares.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Does the fund have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a
special meeting, if they wish, for the purpose of voting on the removal of
any fund director or trustee. If a meeting is held and you cannot attend, you
can vote by proxy. Before the meeting, the fund will send you proxy materials
that explain the issues to be decided and include a voting card for you to
mail back.
Who runs the fund?
General Oversight
The Corporation is governed by a Board of Directors that meets regularly to
review the fund's investments, performance, expenses, and other business
affairs. The Board elects the Corporation's officers. The policy of the
Corporation is that a majority of Board members are independent of T. Rowe
Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Brian W. H. Berghuis, Chairman, Marc L. Baylin, James A. C. Kennedy, and John
F. Wakeman. The committee chairman has day-to-day responsibility for managing
the portfolio and works with the committee in developing and executing the
fund's investment program. Mr. Berghuis has been chairman of the fund's
committee since its inception in 1996. He has been managing investments since
joining T. Rowe Price in 1985.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
<PAGE>
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $6,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services and $60,000 to T. Rowe Price for
accounting services.
The Management Fee
The fund pays the fund manager an annual investment management fee of 0.60%
of the average daily net asset value of the fund. The fund calculates and
accrues the fee daily. (See Transaction and Fund Expenses.)
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumu-
lative return. This gives you an idea of an investment's annual contribution
to your portfolio, provided you held it for the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any
typeof security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with
the fund's investment program. The following pages describe the principal
types of portfolio securities and investment management practices of the
fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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). These risks
are heightened for invest-
ments in developing countries, and there is no limit on the amount of the
fund's foreign investments that may be made in such countries.
Operating policy The fund may invest up to 25% of its total assets (excluding
reserves) in foreign securities.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of unusual
market volatility.
<PAGE>
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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to
protect the fund's foreign securities from adverse currency movements
relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
Although the fund will not generally trade for short-term profits,
circumstances may warrant a sale without regard to the length of time a
security was held. A high turnover rate may increase transaction costs and
result in additional taxable gains. The fund's portfolio turnover rates for
the periods ended December 31, 1997 and 1996, were 41.0% and 31.3%
(annualized), respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Financial Institution Services promptly.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$1,000,000 minimum initial investment
All initial and subsequent investments must be made by bank wire. (See
Redemptions in Kind in the fund's Statement of Additional Information for
further information on the issuance of fund shares for securities or assets
other than cash.)
By Wire
Call Financial Institution Services at 1-800-638-8797 for an account number and
assignment to a dedicated service representative, and give the following wire
address to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 Mid-Cap Equity Growth Fund Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed on the next page.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.
<PAGE>
Regular Mail
T. Rowe Price Financial Institution Services P.O. Box 17302 Baltimore, MD
21298-9355
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Financial Institution Services 10090 Red Run Boulevard Owings
Mills, MD 21117
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100,000 minimum purchase
By Wire
Call Financial Institution Services or use the wire address in Opening a New
Account.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
By Phone
Call Financial Institution Services at 1-800-638-8797
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Financial Institution
Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
<PAGE>
Regular Mail
T. Rowe Price Financial Institution Services P.O. Box 17302 Baltimore, MD
21298-9355
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Financial Institution Services 10090 Red Run Boulevard Owings
Mills, MD 21117
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
FINANCIAL INSTITUTION SERVICES
----------------------------------------------------------
Financial Institution Services 1-800-638-8797
Many services are available to you as a fund shareholder; some you receive
automatically, and others you must authorize on the New Account Form. By signing
up for services on the New Account Form rather than later on, you avoid having
to complete a separate form and obtain a signature guarantee. This section
reviews some of the principal services currently offered. Our Services Guide,
which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
<PAGE>
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Financial Institution Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Financial Institution Services. For information on all other
retirement plans, including our no-load variable annuity, please call our Trust
Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Financial Institution Services for an
information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Subaccounting Services
An institution may arrange for subaccounting services. Such services provide a
master account record which links together individual accounts and provides the
following information: account number, trade date, trans-
<PAGE>
action, previous share balance, dollar amount of the current transaction, share
price, number of shares purchased, new share balance, and the current market
value of your group. The subaccounting agent reserves the right to charge a fee
for such services or other shareholder services.
Telephone Services
Buy, sell, or exchange shares by calling one of our service representatives.
Electronic Transfers
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
For information
Financial Institutions Division
1-800-638-8797 toll free,
1-410-581-7290 in Baltimore
F34-041 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Media & Telecommunications Fund
An aggressive stock fund seeking long-term capital appreciation through
investments in media, technology, and telecommunications companies.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Media & Telecommunications Fund
Investment Goal
To provide long-term capital appreciation.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest primarily in common stocks of companies operating in the media,
telecommunications, and technology industries, such as entertainment,
broadcasting, and advanced communications networks. Income is not a
consideration in choosing stocks.
Risk/Reward
Likely to have more severe price fluctuations than the overall stock market but
offering the potential for superior returns over time. The fund's share price
may decline, causing a loss.
Investor Profile
Individuals seeking an aggressive approach to capital growth who can accept the
risk of loss inherent in a fund that focuses on a volatile area of the market.
Appropriate for both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 4
---------------------------------------------
Fund, Market, and Risk Characteristics 5
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 9
Sale Proceeds
---------------------------------------------
Distributions and Taxes 10
---------------------------------------------
Transaction Procedures and 13
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 16
---------------------------------------------
Understanding Performance Information 19
---------------------------------------------
Investment Policies and Practices 20
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 26
and Transaction Information
---------------------------------------------
Opening a New Account 26
---------------------------------------------
Purchasing Additional Shares 28
---------------------------------------------
Exchanging and Redeeming 29
---------------------------------------------
Rights Reserved by the Fund 30
---------------------------------------------
Shareholder Services 31
---------------------------------------------
Discount Brokerage 34
---------------------------------------------
Investment Information 35
---------------------------------------------
</TABLE>
T. Rowe Price Media & Telecommunications Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate the fund for a year, based on 1997 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from the fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Annual Fund Expenses Percentage of Fiscal 1997
Expenses (after reduction) Average Net Assets
Sales charge "load" on purchases None Management fee 0.67%ab
- ------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- ------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.24%ab
custodial, auditing, etc.)
- ------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.91%ab
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
/a/The information in Table 1 has been restated to reflect current fees. The
1997 effective annual management fee was 0.97%. Prior to conversion to
open-end status in July 1997, the management fee was computed at an annual
rate of 1.10% of weekly net assets. Since conversion, the management fee
consists of an individual fund fee of 0.35% of average daily net assets and a
group fee, equal to 0.32% at December 31, 1997.
/b/To limit the fund's expenses, T. Rowe Price has agreed to waive its fees and
bear any expenses through December 31, 1998, which would cause the fund's
ratio of expenses to average net assets to exceed 1.25%. Fees waived or
expenses paid or assumed under this agreement are subject to reimbursement to
T. Rowe Price by the fund whenever the fund's expense ratio is below 1.25%;
however, no reimbursement will be made after December 31, 2000, or if it would
result in the expense ratio exceeding 1.25%. Any amounts reimbursed will have
the effect of increasing fees otherwise paid by the fund.
Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
<PAGE>
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.35%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years
$12 $38 $67 $147
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Price Waterhouse LLP, the fund's independent
accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION> Net Asset Value
Income From Investment Activities Less Distributions
Period Net Asset Net Net Realized Total From Net Net Total Total From Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Share Value,
Beginning Income (Loss) Gain (Loss) on Activities Income Gain Repurchases End of Period
of Period Investments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993/ab/ $13.93 $ 0.01 $(0.37) $(0.36) - - - - $13.57
-----------------------------------------------------------------------------------------------------------------------
1994/a/ 13.57 (0.01) (0.11) (0.12) $(0.01) - $(0.01) - 13.44
-----------------------------------------------------------------------------------------------------------------------
1995/a/ 13.44 (0.04) 5.79 5.75 (0.07) $(1.13) (1.20) - 17.99
-----------------------------------------------------------------------------------------------------------------------
1996/a/ 17.99 (0.11) 0.36 0.25 - (3.09) (3.09) $0.07 15.22
-----------------------------------------------------------------------------------------------------------------------
1997 15.22 (0.01) 4.22 4.21 - (2.05) (2.05) 0.02 17.40
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993/ab/ (2.58)% $202,911 1.30%/c/ 0.24%/c/ 58.7%/c/ -
---------------------------------------------------------------------------------
1994/a/ (0.88) 200,996 1.35 (0.15) 133.9 -
---------------------------------------------------------------------------------
1995/a/ 43.30 268,782 1.25 (0.25) 118.9 -
---------------------------------------------------------------------------------
1996/a/ 1.78 222,556 1.22 (0.55) 102.9 $0.0487
---------------------------------------------------------------------------------
1997 28.05 133,913 1.21 (0.06) 38.6 0.0417
- -------------------------------------------------------------------------------------------
</TABLE>
/a/The figures in these columns reflect the performance of the fund as a
closed-end investment company trading on the New York Stock Exchange.
/b/From 10/13/93 to 12/31/93.
/c/Annualized.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks long-term growth of capital.
What is the fund's investment program?
The fund will invest at least 80% of total assets in the common stocks of
companies engaged in any facet of media and telecommunications.
The fund will invest a minimum of 65% of its assets in the securities of U.S.
companies and may invest up to 35% of assets in foreign securities. Up to 20%
may be invested in the debt securities of media and telecommunications
companies that have potential for capital appreciation.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
Why invest in media and telecommunications companies?
T. Rowe Price believes that potential significant wealth-building
opportunities are being created by three major forces: the convergence of
media, telecommunications, and technology companies; favorable regulatory
changes; and beneficial financial markets that have provided much of the
needed capital. These forces extend to international markets and could affect
a broad variety of industries.
Technological changes should continue to have a profound influence on
communication, education, commerce, and the demand for entertainment products
and services. While government regulations have not always kept pace with
this technological revolution, various governments have recently begun to
eliminate barriers that previously restrained innovation and competition. T.
Rowe Price's extensive research capability may enable the fund to benefit
from active participation in the financial markets, including initial public
offerings, which have provided capital for many companies in these
industries.
What types of companies could benefit most from these developments?
The fund may benefit from companies operating in the following areas:
. Media and Content These companies create and own various forms of printed,
visual, and audio content, as well as information databases that they sell or
lease to others. Examples include newspaper, magazine, and book publishers;
software developers; movie and television studios; advertising agencies;
gaming and lodging companies; and credit card processors.
. Distribution These companies own and operate both wired and wireless
distribution networks that transport various forms of content. Examples
include domestic and international telephone companies, cellular and paging
services, radio and television broadcasters, and cable television and direct
satellite broadcast system operators.
. Technology These companies manufacture equipment and provide services used
by content creators, distribution companies, and various consumers of media
and telecommunications products and services. Examples include semiconductor
manufacturers, software developers, networking companies, and
telecommunications equipment vendors.
How does the fund select investments for the portfolio?
Stock selection is based on fundamental, "bottom-up" analysis that seeks to
identify companies with good appreciation prospects. The fund managers will
seek to invest primarily in mid- to large-cap stocks with market
capitalizations in excess of $500 million. The managers will typically follow
a growth-oriented approach to stock selection, although some portion of fund
assets may be invested in value stocks. In the growth area, the manager will
try to identify companies with capable management, attractive business
niches, sound financial and accounting practices, and a demonstrated ability
to increase revenues, earnings, and cash flow consistently. In the value
area, the managers will seek companies whose current stock prices appear
undervalued in terms of earnings potential, projected cash flow, or asset
value per share.
o Growth investors look for companies with above-average earnings gains.
Value investors look for undervalued assets.
What are some of the fund's potential risks?
The fund will be less diversified than stock funds investing in a broader
range of industries and, therefore, could experience significant volatility
when trends are perceived as unfavorable for media and telecommunications
companies. For example, these companies are subject to risks of developing
technologies, including rapid obsolescence, lack of consumer or business
acceptance, and lack of standardization or compatibility with existing
technologies.
Governmental regulatory authorities can adversely affect the types of
companies in which the fund invests by delaying or refusing to issue
necessary licences, regulating rates, limiting returns, imposing market share
restrictions, and being unpredictable.
Many of the companies in these fields are subject to intense competition,
which can adversely affect their ability to maintain profitable margins.
Other companies are dependent on a combination of patent, copyright,
trademark, and trade secret protection, and there is no assurance a company
will be able to protect its rights in these areas. Finally, certain of the
new technologies in which the fund may invest could be perceived as posing
health risks to consumers.
To the extent that the fund invests in foreign companies, its share price
would be subject to the additional risk of fluctuations in the foreign
exchange value of the dollar. The fund's partial exposure to mid- and
smaller-cap companies makes it subject to greater price fluctuation than is
associated with large-cap companies.
The fund may also buy below investment-grade ("junk") bonds, which would
expose a portion of the portfolio to the risk that an issuer may have trouble
making interest and principal payments.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
T. Rowe Price believes that trends in the media and telecommunications
industries offer opportunities for significant long-term capital
appreciation. For investors who currently have a broad exposure to equities,
the fund provides a way to diversify into an area of the economy undergoing
substantial change as well as the potential for rapid growth in a number of
fields, such as content, distribution, and technology.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S.
stock market has experienced 10 negative years as well as steep drops of
shorter duration. Its worst calendar quarter return in recent years was
-22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you seek capital growth through a more narrowly
focused fund and are willing to accept the price swings that can affect
media, telecommunications, and technology stocks, the fund could be an
appropriate part of your long-term investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1993 as a diversified, closed-end
investment company. In 1997, it was converted to a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Brian D. Stansky, Chairman, Robert N. Gensler, Seema R. Hingorani, Charles A.
Morris, and John F. Wakeman. The committee chairman has day-to-day
responsibility for managing the portfolio and works with the committee in
developing and executing the fund's investment program. Mr. Stansky became
chairman of the fund's committee in 1997. As a member of the Investment
Advisory Committees of the T. Rowe Price Capital Opportunity Fund, Inc., and
T. Rowe Price New Horizons Fund, Inc., Mr. Stansky has been managing
investments since 1996. He joined T. Rowe Price in 1989 as an investment
analyst.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $82,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services and $68,000 to T. Rowe Price for
accounting services.
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfo-
lio'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). These risks are heightened for investments in developing countries,
and there is no limit on the amount of the fund's foreign investments that
may be made in such countries.
Operating policy The fund may invest up to 35% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds
(those rated below BBB or in default) are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments.
Operating policy The fund may invest up to 20% of its total assets in
corporate debt securities, including convertible bonds.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 5% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obli-
gation (where the investor writes (sells) the option), to buy or sell an
asset at a predetermined price in the future. The fund may buy and sell
futures and options contracts for any number of reasons, including: to manage
its exposure to changes in securities prices and foreign currencies; as an
efficient means of adjusting its overall exposure to certain markets; in an
effort to enhance income; and to protect the value of portfolio securities.
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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fis-
cal years ending December 31, 1997, 1996, and 1995, were 38.6%, 102.9%, and
118.9%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment Services, /
/Inc., Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F21-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
New America Growth Fund
A stock fund seeking long-term capital appreciation through investments
primarily in growth companies operating in service industries.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
New America Growth Fund
Investment Goal
To provide long-term capital growth by investing primarily in common stocks of
U.S. growth companies operating in service industries.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest in the stocks of large and small service companies expected by T.
Rowe Price to show superior earnings growth. The fund may also invest up to 25%
of total assets in nonservice-related growth companies. Total return will
consist primarily of capital appreciation or depreciation.
Risk/Reward
The potential to provide significant growth of capital over time with
above-average volatility. The fund's share price may decline, causing a loss.
Investor Profile
Individuals seeking long-term capital appreciation who can accept the risk of
declines in share prices inherent in common stock investing. Appropriate for
both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
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Financial Highlights 4
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Fund, Market, and Risk Characteristics 5
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 9
Sale Proceeds
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Distributions and Taxes 10
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Transaction Procedures and 13
Special Requirements
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3 MORE ABOUT THE FUND
Organization and Management 16
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Understanding Performance Information 19
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Investment Policies and Practices 20
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4 INVESTING WITH T. ROWE PRICE
Account Requirements 26
and Transaction Information
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Opening a New Account 26
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Purchasing Additional Shares 28
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Exchanging and Redeeming 29
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Rights Reserved by the Fund 30
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Shareholder Services 31
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Discount Brokerage 34
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Investment Information 35
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</TABLE>
T. Rowe Price New America Growth Fund
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C>
Shareholder Transaction Percentage of Fiscal 1997
Expenses Annual Fund Expenses Average Net Assets
Sales charge "load" on purchases None Management fee 0.67%
- -------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- -------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.29%
custodial, auditing, etc.)
- -------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.96%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
<PAGE>
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.35%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$10 $31 $53 $118
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Price Waterhouse LLP, the fund's independent
accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income (Loss) Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 $10.45 $(0.05)/a/ $ 1.98 $ 1.93 - - - $12.38
------------------------------------------------------------------------------------------------------------
1989 12.38 - 4.75 4.75 - $(0.23) $(0.23) 16.90
------------------------------------------------------------------------------------------------------------
1990 16.90 0.13/b/ (2.20) (2.07) $(0.17) - (0.17) 14.66
------------------------------------------------------------------------------------------------------------
1991 14.66 (0.02) 9.02 9.00 - (0.87) (0.87) 22.79
------------------------------------------------------------------------------------------------------------
1992 22.79 (0.04) 2.29 2.25 - (0.18) (0.18) 24.86
------------------------------------------------------------------------------------------------------------
1993 24.86 (0.08) 4.39 4.31 - (1.13) (1.13) 28.04
------------------------------------------------------------------------------------------------------------
1994 28.04 (0.07) (2.02) (2.09) - (0.53) (0.53) 25.42
------------------------------------------------------------------------------------------------------------
1995 25.42 (0.12) 11.36 11.24 - (1.75) (1.75) 34.91
------------------------------------------------------------------------------------------------------------
1996 34.91 (0.13) 7.08 6.95 - (3.49) (3.49) 38.37
------------------------------------------------------------------------------------------------------------
1997 38.37 (0.13) 8.15 8.02 - (2.20) (2.20) 44.19
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988 18.50%/a/ $ 66,384 1.50%/a/ (0.36%)/a/ 45.2% -
---------------------------------------------------------------------------------
1989 38.40 134,065 1.50 (0.02) 39.6 -
---------------------------------------------------------------------------------
1990 (12.20)/b/ 95,697 1.25/b/ 0.81 41.7 -
---------------------------------------------------------------------------------
1991 61.90 231,729 1.25 (0.12) 42.3 -
---------------------------------------------------------------------------------
1992 9.89 480,229 1.25 (0.44) 26.4 -
---------------------------------------------------------------------------------
1993 17.44 619,118 1.23 (0.39) 43.7 -
---------------------------------------------------------------------------------
1994 (7.43) 646,146 1.14 (0.27) 31.0 -
---------------------------------------------------------------------------------
1995 44.31 1,028,210 1.07 (0.46) 56.2 -
---------------------------------------------------------------------------------
1996 20.01 1,440,189 1.01 (0.39) 36.7 $0.0545
---------------------------------------------------------------------------------
1997 21.10 1,757,885 0.96 (0.34) 43.2 0.0457
- ------------------------------------------------------------------------------------------
</TABLE>
/a/Excludes expenses in excess of a 1.50% voluntary expense limitation in effect
through December 31, 1989.
/b/Excludes expenses in excess of a 1.25% voluntary expense limitation in effect
through December 31, 1993.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund's objective is to provide long-term growth of capital by investing
primarily in the common stocks of U.S. growth companies operating in service
industries.
What is the fund's investment program?
The fund will invest most of its assets in service companies, regardless of
size, that are believed by T. Rowe Price to be above-average performers in
their fields. Companies in the portfolio will range from larger blue chip
firms to small, rapidly growing companies. The fund may also invest up to 25%
of its assets in growth companies outside the service sector. Total return
will consist primarily of capital appreciation or depreciation.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
<PAGE>
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
What types of service companies will the fund invest in?
The fund will emphasize companies that derive a majority of their revenues or
operating earnings from such activities as consumer services (for example,
retailing, entertainment and leisure, media and communications, restaurants
and food distribution), business services (for example, health care and
computer services), and financial services (for example, insurance and
investment services).
T. Rowe Price analysts will attempt to identify service companies that are
expected to show superior earnings growth. In addition to their growth
prospects, companies will be judged according to their fundamental strength
and the relative valuations of their stock prices.
o The fund also includes companies whose prospects are closely tied to
service industries.
Why does the fund emphasize the service sector?
If service companies, which represent over 50% of the U.S. economy, outpace
overall economic growth, their stocks could generate above-average returns.
Share prices generally rise with earnings over time, so companies with
superior earnings growth can provide investors with the opportunity for
attractive capital appreciation. In addition, service-oriented companies in
general may have certain advantages over manufacturing companies because they
have lower fixed costs, are less capital intensive, and maintain smaller
physical inventories.
While service-related companies will dominate, the fund will take advantage
of its ability to invest in promising nonservice growth companies as
opportunities occur.
What is meant by a "growth" investment approach?
Thomas Rowe Price, Jr., pioneered the growth stock theory of investing over
60 years ago. It is based on the premise that inflation represents a more
serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that, during periods
of adverse economic and market conditions, stock prices may fall despite
favorable earnings trends.
o Growth investors look for companies with above-average earnings gains.
<PAGE>
What are some of the fund's potential risks?
The fund may entail above-average risk since rapidly growing companies paying
few dividends are generally more volatile than companies with slower growth
rates and higher dividends. In addition, the portfolio may contain the stocks
of small companies that often have limited product lines, markets, or
financial resources. These stocks may have limited marketability and may be
subject to more volatile price movements than securities of larger companies.
Finally, trends favoring service companies may reverse, leading to falling
share prices.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The fund offers the potential for significant, long-term capital appreciation
by participating in the growth of dynamic service-related companies. In
addition, the fund has the flexibility to seek appreciation opportunities
through growth stock investments outside the service sector.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the risk of price declines in an
effort to achieve superior capital appreciation, the fund may be an
appropriate part of your overall investment strategy.
<PAGE>
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can
<PAGE>
redeem shares you own in this or another identically registered T. Rowe Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
<PAGE>
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was organized as a Massachusetts business trust in 1985 and is a
"diversified, open-end investment company," or mutual fund. Mutual funds pool
money received from shareholders and invest it to try to achieve specified
objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund trustees, changes in fundamental policies, or approval of changes in the
fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Trustees that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
John H. Laporte, Chairman, Marc L. Baylin, Brian W. H. Berghuis, and John F.
Wakeman. The committee chairman has day-to-day responsibility for managing
the portfolio and works with the committee in developing and executing the
fund's investment program. Mr. Laporte has been chairman of the fund's
committee since 1988. He joined T. Rowe Price in 1976 and has been managing
investments since 1984.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $1,139,000
to T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $2,225,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $70,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfo-
<PAGE>
lio'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). These risks are heightened for investments in developing countries,
and there is no limit on the amount of the fund's foreign investments that
may be made in such countries.
Operating policy The fund may invest up to 15% of its total assets (excluding
reserves) in foreign securities.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
<PAGE>
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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.
<PAGE>
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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 43.2%, 36.7%, and 56.2%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
<PAGE>
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax--
<PAGE>
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment Services, / /Inc.,
Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F60-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
New Era Fund
A stock fund seeking long-term appreciation by investing primarily in companies
that own or develop natural resources and other basic commodities.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
New Era Fund
Investment Goal
To provide long-term capital appreciation by investing primarily in the common
stocks of companies that own or develop natural resources and other basic
commodities.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
The fund will focus on U.S. and foreign companies whose earnings or tangible
assets are expected by T. Rowe Price to grow faster than the rate of inflation,
and on selected nonresource growth companies. Current income is not a factor in
the selection of stocks. Total return will consist primarily of capital
appreciation or depreciation.
Risk/Reward
The potential to provide significant long-term growth of capital with an
above-average level of risk due to the irregular earnings patterns of natural
resource companies and to exposure to foreign markets, which may be
significant. The fund's share price may decline, causing a loss.
Investor Profile
Individuals seeking superior capital appreciation who are concerned about the
threat of accelerating inflation and who seek to invest in natural resource
companies. Appropriate for both regular and tax-deferred accounts, such as
IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 3
---------------------------------------------
Fund, Market, and Risk Characteristics 4
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 8
Sale Proceeds
---------------------------------------------
Distributions and Taxes 9
---------------------------------------------
Transaction Procedures and 12
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 15
---------------------------------------------
Understanding Performance Information 17
---------------------------------------------
Investment Policies and Practices 18
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 26
and Transaction Information
---------------------------------------------
Opening a New Account 26
---------------------------------------------
Purchasing Additional Shares 28
---------------------------------------------
Exchanging and Redeeming 29
---------------------------------------------
Rights Reserved by the Fund 30
---------------------------------------------
Shareholder Services 31
---------------------------------------------
Discount Brokerage 34
---------------------------------------------
Investment Information 35
---------------------------------------------
</TABLE>
T. Rowe Price New Era Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND
1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C>
Shareholder Transaction Percentage of Fiscal 1997
Expenses Annual Fund Expenses Average Net Assets
Sales charge "load" on purchases None Management fee 0.57%
- -------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- -------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.17%
custodial, auditing, etc.)
- -------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.74%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
<PAGE>
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.25%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$8 $24 $41 $92
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Price Waterhouse LLP, the fund's independent
accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Total Value,
Beginning Income Gain (Loss) on Activities Income Gain Distributions End of Period
of Period Investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 $18.08 $0.51 $ 1.34 $ 1.85 $(0.53) $(0.61) $(1.14) $18.79
---------------------------------------------------------------------------------------------------------
1989 18.79 0.56 3.99 4.55 (0.56) (1.05) (1.61) 21.73
---------------------------------------------------------------------------------------------------------
1990 21.73 0.60 (2.52) (1.92) (0.62) (0.71) (1.33) 18.48
---------------------------------------------------------------------------------------------------------
1991 18.48 0.54 2.12 2.66 (0.55) (0.73) (1.28) 19.86
---------------------------------------------------------------------------------------------------------
1992 19.86 0.45 (0.04) 0.41 (0.45) (0.94) (1.39) 18.88
---------------------------------------------------------------------------------------------------------
1993 18.88 0.40 2.48 2.88 (0.38) (1.03) (1.41) 20.35
---------------------------------------------------------------------------------------------------------
1994 20.35 0.36 0.69 1.05 (0.38) (0.87) (1.25) 20.15
---------------------------------------------------------------------------------------------------------
1995 20.15 0.47 3.71 4.18 (0.48) (1.20) (1.68) 22.65
---------------------------------------------------------------------------------------------------------
1996 22.65 0.38 5.12 5.50 (0.38) (1.71) (2.09) 26.06
---------------------------------------------------------------------------------------------------------
1997 26.06 0.40 2.40 2.80 (0.37) (2.54) (2.91) 25.95
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988 10.30% $ 726,476 0.89% 2.41% 15.5% -
---------------------------------------------------------------------------------
1989 24.30 826,582 0.83 2.52 18.6 -
---------------------------------------------------------------------------------
1990 (8.80) 707,548 0.83 2.81 9.0 -
---------------------------------------------------------------------------------
1991 14.70 756,817 0.85 2.56 9.0 -
---------------------------------------------------------------------------------
1992 2.08 699,599 0.81 2.22 16.9 -
---------------------------------------------------------------------------------
1993 15.33 752,532 0.80 1.92 24.7 -
---------------------------------------------------------------------------------
1994 5.17 979,495 0.80 1.87 24.7 -
---------------------------------------------------------------------------------
1995 20.76 1,090,393 0.79 2.00 22.7 -
---------------------------------------------------------------------------------
1996 24.25 1,467,738 0.76 1.53 28.6 $0.0300
---------------------------------------------------------------------------------
1997 10.96 1,492,662 0.74 1.33 27.5 0.0446
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund's objective is long-term capital appreciation primarily through the
common stocks of companies that own or develop natural resources and other
basic commodities, and also through the stocks of selected nonresource growth
companies.
What is the fund's investment program?
The fund's primary focus will be on the common stocks of natural resource
companies whose earnings and tangible assets could benefit from accelerating
inflation. The fund will also invest in selected nonresource growth companies
with strong potential for earnings growth. T. Rowe Price believes that
natural resource companies with the flexibility to adjust prices or control
operating costs offer attractive opportunities for capital growth when
inflation is rising. Income is not a consideration in the selection of
securities.
At least half of fund assets will be invested in U.S. securities, principally
common stocks, and the fund may also invest up to 50% of its assets in
foreign securities. In addition to common stocks, the fund may purchase other
types of securities, for example, convertible stocks and bonds, and warrants,
when
<PAGE>
considered consistent with the fund's investment objective. The fund may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
Why invest substantial assets in companies based outside the U.S.?
Foreign stock markets offer increasing opportunities for natural
resource-related investments for several reasons. First, the worldwide trend
toward privatization of government-owned enterprises, many of which involve
commodities, opens up numerous new areas for private investors. Second, the
exploration and development of natural resources is expanding faster outside
the U.S. than within, and some countries that previously refused to accept
outside capital now welcome it. Finally, the demand for natural resources in
many emerging markets is growing, which could brighten the prospects of
companies based in those countries.
What percentage of assets will the fund invest in natural resource companies?
Approximately two-thirds of assets will normally be committed to natural
resource companies. The relative percentages invested in these companies and
in nonresource growth companies, however, may vary considerably, depending on
economic and monetary conditions and on the outlook for inflation.
What distinguishes the fund from many other stock funds?
T. Rowe Price believes that inflation is one of the major economic problems
facing investors over time. From the early 1970s through the late 1980s, the
inflation rate was considerably above its historical average. Although
inflation has slowed in recent years, the strenuous efforts required by
government, business, labor, and consumers to control it can be difficult to
maintain for long periods. Political pressure to counteract economic
slowdowns may lead to stimulative government policies that trigger new
inflationary forces. T. Rowe Price developed the fund's investment program
with these considerations in mind.
How does the fund select securities to meet its objective?
The fund manager looks for companies that have the ability to expand
production, to maintain superior exploration programs and production
facilities, and the potential to accumulate new resources. The fund invests
primarily in natural resource companies that own or develop energy sources,
precious metals, forest products, real estate, nonferrous metals, diversified
resources, and other basic commodities that can be produced and marketed
profitably when both labor costs and prices are rising.
<PAGE>
What are some of the fund's potential risks?
The rate of earnings growth and stock prices of natural resource companies
may follow irregular patterns since they are influenced strongly by the
forces of nature, economic cycles, and international politics. For example,
stock prices of mining and energy companies can be unpredictable and can fall
steeply and rapidly. Companies owning or developing real estate could also be
subject to earnings fluctuations related to the availability of money, the
level of interest rates, and other factors.
Although the fund's foreign investments carry exposure to currency risk (the
chance that a strong dollar will decrease returns for U.S. investors), many
commodity markets are dollar-based, which cushions this risk. The fund's
investments in companies located in emerging markets are exposed to the risk
of political and economic instability, prevalent in such countries.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The fund is designed to protect investors against inflation and to provide a
way to participate in the global demand for natural resources. By investing
in companies that may prosper in periods of high inflation by raising prices
while controlling costs, the fund hopes to provide significant long-term
capital appreciation.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As an economy expands, corporate profits generally should grow and
share prices rise. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
<PAGE>
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the risk of investing in U.S. and
foreign companies whose earnings are especially influenced by worldwide
economic and monetary conditions, the fund can be an appropriate part of your
overall strategy of seeking capital growth.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can
<PAGE>
redeem shares you own in this or another identically registered T. Rowe Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
<PAGE>
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1968 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Charles M. Ober, Chairman, Hugh M. Evans III, Richard P. Howard, James A. C.
Kennedy, David M. Lee, George A. Roche, and David J. Wallack. The committee
chairman has day-to-day responsibility for managing the portfolio and works
with the committee in developing and executing the fund's investment program.
Mr. Ober was appointed as the committee chairman in 1997. He joined T. Rowe
Price in 1980 and has been managing investments since 1987.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $929,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $269,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $72,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's
<PAGE>
diversification and may enhance return, but they also involve some special
risks described below. These risks are heightened for investments in
developing countries, and there is no limit on the amount of the fund's
foreign investments that may be made in such countries.
Operating policy The fund may invest up to 50% of its total assets (excluding
reserves) in foreign securities.
Risks of Foreign Securities
Stock prices of foreign and U.S. companies are subject to many of the same
influences, such as general economic conditions, company and industry
earnings prospects, and investor psychology. However, investing in foreign
securities also involves additional risks that can increase the potential for
losses in the fund. Normally, these risks are significantly greater for
investments in emerging markets.
. Currency fluctuations Transactions in foreign securities are conducted in
local currencies, so dollars must often be exchanged for another currency
when a stock is bought or sold or a dividend is paid. Likewise, share price
quotations and total return information reflect conversion into dollars.
Fluctuations in foreign exchange rates can significantly increase or decrease
the dollar value of a foreign investment, boosting or offsetting its local
market return. For example, if a French stock rose 10% in price during a
year, but the U.S. dollar gained 5% against the French franc during that
time, the U.S. investor's return would be reduced to 5%. This is because the
franc would "buy" fewer dollars at the end of the year than at the beginning,
or, conversely, a dollar would buy more francs. The fund's total return will
be affected by currency fluctuations. The exact amount of the impact depends
on the currencies represented in the portfolio and how each one appreciates
or depreciates in relation to the U.S. dollar.
o Exchange rate movements can be large, unpredictable, and last for extended
periods.
. Political and economic factors The economies, markets, and political
structures of a number of the countries in which the fund can invest do not
compare favorably with the U.S. and other mature economies in terms of wealth
and stability. Therefore, investments in these countries will be riskier and
more subject to erratic and abrupt price movements. This is especially true
for emerging markets. However, even investments in countries with highly
developed economies are subject to risk. For example, Japanese securities
markets historically have experienced wide swings in value.
Some economies are less well developed, overly reliant on particular
industries, and more vulnerable to the ebb and flow of international trade,
trade barriers, and other protectionist or retaliatory measures. This makes
investment in such markets significantly riskier than in other countries.
Many countries have legacies
<PAGE>
and the risk of hyperinflation and currency devaluations versus the dollar
(which adversely affects returns to U.S. investors) and may be overly
dependent on foreign capital (a risk that is exacerbated by big currency
movements). Investments in countries that have recently begun moving away
from central planning and state-owned industries toward free markets should
be regarded as speculative.
o While certain countries have made progress in economic growth,
liberalization, fiscal discipline, and political and social stability,
there is no assurance these trends will continue.
Certain countries have histories of instability and political upheaval that
could cause their governments to act in a detrimental or hostile manner
toward private enterprise or foreign investment. Actions such as capital
controls, nationalizing a company or industry, expropriating assets, or
imposing punitive taxes could have a severe effect on security prices and
impair a fund's ability to repatriate capital or income. Significant external
risks, including war, currently affect some countries. Governments in many
emerging market countries participate to a significant degree in their
economies and securities markets.
. Legal, regulatory, and operational Certain countries lack uniform
accounting, auditing, and financial reporting standards, have less
governmental supervision of financial markets than in the U.S., do not honor
legal rights enjoyed in the U.S., and have settlement practices, such as
delays, which could subject a fund to risks of loss not customary in the U.S.
In addition, securities markets in these countries have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
<PAGE>
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve as a short-term defense during periods of unusual
market volatility.
<PAGE>
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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to
<PAGE>
protect the fund's foreign securities from adverse currency movements
relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 27.5%, 28.6%, and 22.7%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax--
<PAGE>
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment Services, / /Inc.,
Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F41-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
New Horizons Fund
An aggressive stock fund seeking long-term capital growth primarily through
investments in small, rapidly growing companies.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
New Horizons Fund
Investment Goal
To provide long-term capital growth by investing primarily in common stocks of
small, rapidly growing companies.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest mostly in a diversified group of emerging growth companies still in
the early stages of their life cycles. Total return will consist primarily of
capital appreciation or depreciation.
Risk/Reward
The potential to provide superior returns but with above-average risk. While
investing in small companies generally involves greater risk of loss than
investments in more established companies, it may offer greater capital
appreciation potential. The fund's share price may decline, causing a loss.
Investor Profile
Individuals seeking substantial long-term rewards who can accept more abrupt or
erratic market movements than are associated with larger-company stocks or the
market averages in general. Appropriate for both regular and tax-deferred
accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 3
---------------------------------------------
Fund, Market, and Risk Characteristics 4
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 8
Sale Proceeds
---------------------------------------------
Distributions and Taxes 9
---------------------------------------------
Transaction Procedures and 12
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 15
---------------------------------------------
Understanding Performance Information 18
---------------------------------------------
Investment Policies and Practices 19
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 25
and Transaction Information
---------------------------------------------
Opening a New Account 25
---------------------------------------------
Purchasing Additional Shares 27
---------------------------------------------
Exchanging and Redeeming 28
---------------------------------------------
Rights Reserved by the Fund 29
---------------------------------------------
Shareholder Services 30
---------------------------------------------
Discount Brokerage 32
---------------------------------------------
Investment Information 33
---------------------------------------------
</TABLE>
T. Rowe Price New Horizons Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Percentage of Fiscal 1997
Expenses Annual Fund Expenses Average Net Assets
Sales charge "load" on purchases None Management fee 0.67%
- -------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- -------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.21%
custodial, auditing, etc.)
- -------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.88%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
<PAGE>
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.35%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$9 $28 $49 $108
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income (Loss) Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 $ 9.51 $ 0.07 $ 1.26 $ 1.33 $(0.07) $(0.03) $(0.10) $10.74
------------------------------------------------------------------------------------------------------------
1989 10.74 0.08 2.69 2.77 (0.07) (1.01) (1.08) 12.43
------------------------------------------------------------------------------------------------------------
1990 12.43 0.09 (1.29) (1.20) (0.09) (0.53) (0.62) 10.61
------------------------------------------------------------------------------------------------------------
1991 10.61 0.05 5.46 5.51 (0.05) (0.39) (0.44) 15.68
------------------------------------------------------------------------------------------------------------
1992 15.68 (0.04) 1.65 1.61 - (1.76) (1.76) 15.53
------------------------------------------------------------------------------------------------------------
1993 15.53 (0.07) 3.40 3.33 - (2.70) (2.70) 16.16
------------------------------------------------------------------------------------------------------------
1994 16.16 (0.07) 0.10 0.03 - (1.43) (1.43) 14.76
------------------------------------------------------------------------------------------------------------
1995 14.76 (0.04) 8.19 8.15 - (2.41) (2.41) 20.50
------------------------------------------------------------------------------------------------------------
1996 20.50 (0.08) 3.54 3.46 - (2.19) (2.19) 21.77
------------------------------------------------------------------------------------------------------------
1997 21.77 (0.12) 2.23 2.11 - (0.58) (0.58) 23.30
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988 14.00% $ 914,570 0.84% 0.67% 43.2% -
---------------------------------------------------------------------------------
1989 26.20 1,043,121 0.79 0.58 45.1 -
---------------------------------------------------------------------------------
1990 (9.60) 855,490 0.82 0.72 38.0 -
---------------------------------------------------------------------------------
1991 52.30 1,470,440 0.92 0.35 32.5 -
---------------------------------------------------------------------------------
1992 10.58 1,547,258 0.93 (0.32) 49.6 -
---------------------------------------------------------------------------------
1993 22.01 1,627,722 0.93 (0.50) 49.4 -
---------------------------------------------------------------------------------
1994 0.30 1,648,377 0.93 (0.50) 44.3 -
---------------------------------------------------------------------------------
1995 55.44 2,854,545 0.90 (0.23) 55.9 -
---------------------------------------------------------------------------------
1996 17.03 4,363,418 0.90 (0.41) 41.4 $0.0416
---------------------------------------------------------------------------------
1997 9.77 5,103,739 0.88 (0.57) 45.2 0.0368
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund's investment objective is long-term growth of capital by investing
primarily in common stocks of small, rapidly growing companies.
What is the fund's investment program?
The fund will invest primarily in a diversified group of small, emerging
growth companies. It will seek to invest early in the corporate life cycle,
before a company becomes widely recognized by the investment community. The
fund may also invest in companies that offer the possibility of accelerating
earnings growth because of rejuvenated management, new products, or
structural changes in the economy. Total return will consist primarily of
capital appreciation or depreciation.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
<PAGE>
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
What is meant by a "small growth" company?
A small growth company is one that is still in the developing stage of its
life cycle but has demonstrated (or is expected to achieve) long-term
earnings growth that reaches new highs over time. Capable management and
fertile operating areas are two of the most important characteristics of a
successful small growth company.
These are the principal criteria for identifying candidates for purchase.
However, the fund may not necessarily sell its position in a company that has
grown beyond the developing stage if the company still fits the fund's other
investment criteria.
How does the fund select investments for the portfolio?
T. Rowe Price analysts look for small growth companies that demonstrate
effective research, product development, and marketing; provide efficient
service; possess pricing flexibility; and employ sound financial and
accounting policies.
What is meant by a "growth" investment approach?
Thomas Rowe Price, Jr., pioneered the growth stock theory of investing over
60 years ago. It is based on the premise that inflation represents a more
serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that, during periods
of adverse economic and market conditions, stock prices may fall despite
favorable earnings trends.
o Growth investors look for companies with above-average earnings gains.
What are some of the fund's potential risks?
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger company
securities. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
<PAGE>
What are some of the fund's potential rewards?
Small-company stocks may offer greater opportunities for capital appreciation
than the shares of larger, more established companies. In addition, emerging
growth stocks are often overlooked by the investment community and may be
undervalued, providing the potential for significant capital appreciation.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the greater risk of investing in
smaller companies in an effort to achieve superior capital appreciation, the
fund can be an appropriate part of your overall investment strategy.
Who can purchase fund shares?
The fund was closed to new investors on June 18, 1996, with the following
exceptions and provisions:
. Purchases of additional shares are permitted for existing accounts directly
registered with T. Rowe Price.
. Persons executing direct rollovers from qualified retirement plans may open
a new IRA account.
. Retirement plan administrators having questions on the fund's availability
should contact T. Rowe Price.
<PAGE>
. When deemed to be in the fund's best interests, the fund reserves the right
in appropriate cases to extend the offering to other persons, to restrict
sales further, or to withdraw the offering altogether, all without notice.
. The closing does not restrict shareholders from making redemptions from
their fund accounts.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can
<PAGE>
redeem shares you own in this or another identically registered T. Rowe Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
<PAGE>
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1960 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
John H. Laporte, Chairman, Marc L. Baylin, Brian W. H. Berghuis, Charles A.
Morris, Michael F. Sola, Brian D. Stansky, and John F. Wakeman. The committee
chairman has day-to-day responsibility for managing the portfolio and works
with the committee in developing and executing the fund's investment program.
Mr. Laporte has been chairman of the fund's committee since 1988. He joined
T. Rowe Price in 1976 and has been managing investments since 1984.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $2,622,000
to T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $3,731,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $95,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------
0.300% Thereafter
- ---------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfo-
<PAGE>
lio'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). These risks are heightened for investments in developing countries,
and there is no limit on the amount of the fund's foreign investments that
may be made in such countries.
Operating policy The fund may invest up to 10% of its total assets (excluding
reserves) in foreign securities.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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.
<PAGE>
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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 45.2%, 41.4%, and 55.9%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
<PAGE>
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax--
<PAGE>
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment Services, / /Inc.,
Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F42-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Real Estate Fund
A fund seeking capital appreciation and current income through investments in
companies engaged in real estate.
T. Rowe Price
RAM LOGO
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FACTS AT A GLANCE
Real Estate Fund
Investment Goal
To provide long-term capital appreciation and current income.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest primarily in the stocks of companies involved in the real estate
business, such as REITs and real estate operating, development, management, and
financing companies.
Risk/Reward
The potential to provide long-term capital growth and current income. The fund
will invest primarily in real estate stocks, which can include small companies.
Consequently, the fund may be riskier than funds with more diversified
investments or those that invest in larger companies. However, stocks of real
estate companies provide a means of diversifying an investment portfolio. The
fund's share price may fall, causing a loss. See Fund, Market, and Risk
Characteristics for more detailed information about the fund.
Investor Profile
Individuals seeking long-term growth and current income through exposure to
real estate companies, who can accept the greater risk of price declines
inherent in a narrowly focused fund. Appropriate for both regular and
tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. Shares purchased and held for less than six months are subject to
a 1% redemption fee, paid to the fund. No fees or charges to buy shares or to
reinvest dividends; no 12b-1 marketing fees; free telephone exchange among T.
Rowe Price funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
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<TABLE>
CONTENTS
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<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
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Financial Highlights 4
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Fund, Market, and Risk Characteristics 4
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 9
Sale Proceeds
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Distributions and Taxes 11
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Transaction Procedures and 14
Special Requirements
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3 MORE ABOUT THE FUND
Organization and Management 17
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Understanding Performance Information 19
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Investment Policies and Practices 20
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4 INVESTING WITH T. ROWE PRICE
Account Requirements 29
and Transaction Information
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Opening a New Account 29
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Purchasing Additional Shares 31
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Exchanging and Redeeming 32
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Rights Reserved by the Fund 33
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Shareholder Services 33
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Discount Brokerage 36
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Investment Information 37
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</TABLE>
T. Rowe Price Real Estate Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
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o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate the fund for a year, based on 1997 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from the fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1 Transaction and Fund Expenses
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Shareholder Transaction Annual Fund Expenses Percentage of Fiscal 1997
Expenses (after reduction) Average Net Assets
Sales charge "load" on purchases None Management fee 0.00%a
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Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
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Redemption fees (on shares held 1.00% Total other (shareholder servicing, 1.00%a
less than six months) /a/ custodial, auditing, etc.)
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Exchange fees None Total fund expenses 1.00%a
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</TABLE>
/a/
Please see Contingent Redemption Fee under Pricing Shares and Receiving Sale
Proceeds for additional information.
/b/To limit the fund's expenses during its initial period of operations, T. Rowe
Price agreed to waive its fees and bear any expenses through December 31,
1999, which would have caused the fund's ratio of expenses to average net
assets to exceed 1.00%. Fees waived or expenses paid or assumed under this
agreement are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 1.00%; however, no reimbursement will be
made after December 31, 2001, or if it would result in the expense ratio
exceeding 1.00%. Any amounts reimbursed will have the effect of increasing
fees otherwise paid by the fund. Without this expense reimbursement, it is
estimated that the fund's management fee, other expenses, and total expense
ratio for the first full year of operation would have been 0.62%, 3.37%, and
3.99%, respectively. Organizational expenses will be charged to the fund over
a period not to exceed 60 months.
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Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.30%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
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Table 2 Hypothetical Fund Expenses
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1 year 3 years 5 years 10 years
$10 $32 $55 $122
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</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
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Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Price Waterhouse LLP, the fund's independent
accountants.
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Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value, End
Beginning Income Gain (Loss) on Activities Income Gain of Period
of Period Investments
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997/a/ $10.00 $0.08/b/ $0.70 $0.78 $(0.09) - $(0.09) $10.69
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on the next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Total Return Ratio of Ratio of Net Portfolio Average
Period (Includes Net Assets Expenses to Investment Turnover Commission Rate
Ended Reinvested ($ Thousands) Average Net Income to Rate Paid
Distributions) Assets Average Net
Assets
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<S> <C> <C> <C> <C> <C> <C>
1997/a/ 7.82%/b/ $7,259 1.00%/bc/ 6.07%/bc/ 8.4% $0.0366
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</TABLE>
/a/
For the period October 31, 1997 (commencement of operations) to December 31,
1997.
/b/
Excludes expenses in excess of a 1.00% voluntary expense limitation in effect
through 12/31/99.
/c/Annualized.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
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To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks long-term growth through a combination of capital appreciation
and income.
What is the fund's investment program?
The fund will invest at least 80% of total assets (under normal conditions)
in the equity securities of real estate companies. The fund's definition of
real estate companies is broad and includes those with a minimum of 50% of
revenues or profits derived from, or assets committed to, real estate
activities. Examples include (but are not limited to) the following:
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. Real estate investment trusts (REITs);
. Real estate operating companies;
. Real estate brokers, developers, and builders of residential, commercial,
and industrial properties;
. Property management firms;
. Finance, mortgage, and mortgage servicing firms;
. Construction supply and equipment manufacturing companies; and
. Firms dependent on real estate holdings for revenues and profits, including
lodging, leisure, timber, mining, and agriculture companies.
The fund will not own real estate directly and will have no restrictions on
the size of companies selected for investment.
Up to 20% of fund assets may be invested in companies deriving a substantial
portion of revenues or profits from servicing real estate firms, as well as
in companies unrelated to the real estate business.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
How does the fund select investments for the portfolio?
Stock selection is based on fundamental, bottom-up analysis that seeks to
identify high-quality companies with both good appreciation prospects and
income-producing potential. Factors considered by the portfolio manager in
selecting real estate companies include: relative valuation; free cash flow;
undervalued assets; quality and experience of management; type of real estate
owned; and the nature of a company's real estate activities.
At different times, the market may favor one type of real estate investment
over another, and the fund's flexible investment charter enables it to seek
opportunities wherever they exist in the industry. Both capital appreciation
(or depreciation) and current income will be important components of total
return, and the contribution made by each at any time will depend on the
composition of the portfolios and market conditions.
What are some of the fund's potential risks?
While the fund will not invest directly in property, many of the risks
involved in direct real estate investing will apply to the fund as well. The
fund will be less diversified than stock funds investing in a broad range of
industries, and, therefore, its share price could decline when conditions are
perceived as unfavorable for the real estate industry. For example, changes
in the tax laws, overbuilding, environmental regulations or hazards, the
quality of property management in the case of REITs, and other factors could
have a negative impact on the fund.
Real estate is also affected by general economic conditions. When economic
growth is slowing, demand for property decreases and prices may decline.
Rising interest rates, which drive up mortgage and financing costs, can
restrain construction and buying and selling activity and can make other
investments more attractive.
Generally, a fund limited to one area of economic activity represents greater
potential risk of price fluctuation than a more diversified fund, although
the relatively high income offered by certain real estate companies moderates
this risk to some extent.
To the extent that the portfolio has substantial exposure to small companies,
it will be subject to the greater price fluctuations typical of small-cap
stocks (those with a total market capitalization of $500 million or less).
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger-company
securities. Small companies often have limited liquidity, markets, or
financial resources, and their management may lack depth and experience.
To the extent that the fund invests in foreign companies, its share price
will be subject to the additional risk of fluctuations in the foreign
exchange value of the dollar.
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o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The stocks of companies engaged in the real estate area could provide
significant long-term total return through capital growth and income. Other
potential benefits include:
. Diversification While the long-term returns from real estate stocks have
been attractive, periods of strong performance have not always coincided with
those of the broad market. Therefore, real estate stocks may provide
beneficial diversification when combined with other stocks and asset classes
in an investment portfolio;
. Current income Many real estate stocks, including REITs, pay relatively high
dividends, which could serve to cushion a portfolio's overall return in a
general market decline; and
. Inflation hedge Historically, real estate has tended to appreciate during
times of accelerating inflation. Therefore, a fund investing in real estate
companies may provide a hedge against inflation.
What is a REIT?
The fund may invest a substantial portion of its assets in real estate
investment trusts or REITs, which are pooled investment vehicles that
typically invest directly in real estate, in mortgages and loans
collateralized by real estate, or in a combination of the two. "Equity" REITs
invest primarily in real estate that produces income from rentals. "Mortgage"
REITs invest primarily in mortgages and derive their income from interest
payments.
The types of properties owned, and sometimes managed, by REITs include:
<TABLE>
Table 1
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. office buildings . health care facilities
. apartments and condominiums . manufactured housing
. retail properties . self-storage facilities
. industrial and commercial sites . golf courses
. hotels and resorts
</TABLE>
REITs usually specialize in a particular type of property and may concentrate
their investments in particular geographical areas. For this reason and
others, a fund investing in REITs provides investors with an efficient,
low-cost means of diversifying among various types of property in different
regions.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you seek capital growth and current income
through a more narrowly focused fund and are willing to accept the price
swings that can affect real estate stocks, the fund could be an appropriate
part of your long-term investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
You should also review the information in Section 2 that discusses contingent
redemption fees.
Important Note on Tax Reporting for the Real Estate Fund
Distributions from the Real Estate Fund will not be included in your
consolidated 1099-DIV, which we send to you in January of each year. The Real
Estate Fund's distributions will be reported on a separate 1099-DIV, mailed
to you in February. The reasons for this are:
. A sizable portion of the dividends paid by REITs may represent a return of
capital. Consequently, a portion of the fund's distributions may also
represent a return of capital. Return of capital distributions are not
taxable to you, but you must deduct them from the cost basis of your
investment in the fund. Returns of capital are listed as "nontaxable
distributions" on Form 1099-DIV.
. REITs typically have not indicated what proportion of their dividends
represent return of capital in time to allow the fund to meet its January 31
deadline for 1099-DIV reporting. Therefore, to ensure accurate and complete
tax information, we will send you a separate 1099-DIV for this fund in
February (subject to approval by the IRS).
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ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
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Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
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If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
Contingent Redemption Fee
The fund is not designed for short-term traders, whose frequent purchases,
redemptions, and exchanges can unnecessarily disrupt the fund's investment
program and drive up the fund's transaction costs. For these reasons, the
fund assesses a 1.00% fee on redemptions (including exchanges) of shares held
for less thansix months.
Redemption fees are paid to the fund to help offset transaction costs and to
protect the fund's long-term shareholders. The fund will use the "first-in,
first-out" (FIFO) method to determine the six-month holding period. Under
this method, the date of the redemption or exchange will be compared to the
earliest purchase date of shares held in the account. If this holding period
is less than six months, the fee will be charged.
The fee does not apply to any shares purchased through reinvested
distributions (dividends and capital gains) or to shares held in retirement
plans such as 401(k), 403(b), 457, Keogh, profit sharing, SIMPLE IRA,
SEP-IRA, and money purchase pension accounts. The fee does apply to shares
held in IRA accounts and to shares purchased through automatic investment
plans (described under Shareholder Services). The fee may apply to shares in
retirement plans held in broker omnibus accounts.
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In determining "six months," the fund will use the anniversary date of a
transaction. Thus, shares purchased on May 1, 1998, for example, will be
subject to the fee if they are redeemed on or prior to October 31, 1998. If
they are redeemed on or after November 1, 1998, they will not be subject to
the fee.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
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o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) quarterly.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month. If a second distribution is necessary,
it is usually declared and paid during the first quarter of the following
year.
<PAGE>
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
After year-end, you will be sent Form 1099-DIV, indicating the tax status of
any dividend and capital gain distribution made to you. This information will
also be reported to the IRS. All taxable distributions made by the fund are
taxable to you for the year in which they were paid. The only exception is
that distributions declared during the last three months of a calendar year
and paid in January are taxed as though they were paid by December 31. You
will be sent any additional information you need to determine your taxes on
fund distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same
<PAGE>
rate as ordinary income. Reflecting recent changes in the tax code, gains on
securities held more than 12 months but not more than 18 months are taxed at
a maximum rate of 28%, and gains on securities held for more than 18 months
are taxed at a maximum rate of 20%. If you realize a loss on the sale or
exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Because the fund invests in REITs, a portion of its capital gain
distributions may fall into a special capital gains tax category (currently
25%). Such gains are identified as "unrecaptured Section 1250 gains" on Form
1040.
A portion of your dividends and distributions received from the fund will
represent earnings and gains passed through from the fund's REIT investments.
Like mutual funds, REITs are required to pay out their income dividends and
capital gains to shareholders each year. Unlike mutual fund dividends, a
REIT's cash dividend frequently exceeds its taxable income, because a portion
is reduced by noncash expenses like depreciation. Therefore, at year-end, a
portion of a REIT's dividend may be reclassified as a return of capital,
causing a similar reclassification of a portion of the dividend paid by the
fund. The amount of your dividend that is a return of capital is not subject
to federal or state income taxes, but you must reduce the cost basis of your
fund shares by that amount.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in the fund's dividend being classified as a return of capital.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
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TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
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o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
<PAGE>
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are
expected to take place during the last five business days of September. The
fee will be deducted from accounts with balances below $2,000, except for
UGMA/ UTMA accounts, for which the limit is $500. The fee will be waived for
any investor whose aggregate T. Rowe Price mutual fund investments total
$25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1997 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
David M. Lee, Chairman, Stephen W. Boesel, Anna M. Dopkin, Charles M. Ober,
Brian C. Rogers, and William J. Stromberg. The committee chairman has
day-to-day responsibility for managing the portfolio and works with the
committee in developing and executing the fund's investment program. Mr. Lee
joined T. Rowe Price in 1993 as an investment analyst following six years
with IBM. He is a Chartered Financial Analyst and holds an MBA from Stanford.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $1,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services and $10,000 to T. Rowe Price for
accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if more than 10% of
the voting securities of the issuer would be held by the fund.
Real Estate Industry Concentration
Fundamental policy The fund will concentrate (invest more than 25% of its
total assets) in the real estate industry as defined in this prospectus.
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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
<PAGE>
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 25% of its total assets (excluding
reserves) in foreign securities.
Private Placements
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, others may be illiquid, and their sale may involve
substantial delays and additional costs.
Operating policy The fund will not invest more than 15% of its net assets in
illiquid securities.
Debt Securities
A bond or money market instrument is usually an interest-bearing security- an
IOU-issued by companies or governmental units. The issuer has a contractual
obligation to pay interest at a stated rate on specific dates and to repay
principal (the bond's face value) on a specified date. An issuer may have the
right to redeem or "call" a bond before maturity, and the investor may have
to reinvest the proceeds at lower market rates. Money market securities and
bonds (such as zero coupon bonds) may also be issued in discounted form to
reflect the rate of interest paid. In such a case, no coupon interest is
paid, but the security's price is discounted so that the interest is realized
when the security matures at face value.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. Except for adjustable
rate instruments,
a money market security's interest rate, as reflected in the coupon rate or
discount, is usually fixed for the life of the security. Its current yield
(coupon or discount as a percent of current price) will fluctuate to reflect
changes in interest rate levels. A bond's price usually rises when interest
rates fall, and vice versa, so its yield stays current.
Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).
Certain bonds have interest rates, adjusted periodically. These interest rate
adjustments tend to minimize fluctuations in the bonds' principal values. The
maturity of those securities may be shortened under certain conditions.
Bonds may be senior or subordinated obligations. Senior obligations generally
have the first claim on a corporation's earnings and assets and, in the event
of liquidation, are paid before subordinated debt.
In addition to conventional corporate bonds, some of the debt securities in
which the fund may invest are described below. Unless otherwise indicated
here or in the fund's overall program, there is no limit on the amount that
may be committed to any of these securities.
Asset-Backed Securities
An underlying pool of assets, such as credit card or automobile trade
receivables or corporate loans or bonds, backs these bonds and provides the
interest and principal payments to investors. Credit quality depends
primarily on the quality of the underlying assets and the level of credit
support, if any, provided by the issuer. The underlying assets (i.e., loans)
are subject to prepayments which can shorten the securities' weighted average
life and may lower their return. The value of these securities also may
change because of actual or perceived changes in the creditworthiness of the
originator, the servicing agent, or the financial institution providing the
credit support.
Mortgage-Backed Securities
The fund may invest in a variety of mortgage-backed securities. Mortgage
lenders pool individual home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the fund. Interest
and principal payments generated by the underlying mortgages are passed
through to the investors. The "big three" issuers are the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association
(Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
GNMA certificates are backed by the full faith and credit of the U.S.
government, while others, such as Fannie Mae and Freddie Mac certificates,
are only supported by the ability to borrow from the U.S. Treasury or by the
credit of the agency. Private mortgage bankers and other institutions also
issue mortgage-backed securities.
<PAGE>
Mortgage-backed securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, these securities are
not an effective means of locking in long-term interest rates. In addition,
when interest rates fall, the pace of mortgage prepayments picks up. These
refinanced mortgages are paid off at face value (par), causing a loss for any
investor who may have purchased the security at a price above par. In such an
environment, this risk limits the potential price appreciation of these
securities and can negatively affect the fund's net asset value. When rates
rise, the prices of mortgage-backed securities can be expected to decline,
although historically these securities have experienced smaller price
declines than comparable quality bonds. In addition, when rates rise and
prepayments slow, the effective duration of mortgage-backed securities
extends, resulting in increased volatility.
Additional mortgage-related securities in which the fund may invest include:
. Collateralized Mortgage Obligations (CMOs) CMOs are debt securities that are
fully collateralized by a portfolio of mortgages or mortgage-backed
securities. All interest and principal payments from the underlying mortgages
are passed through to the CMOs in such a way as to create, in most cases,
more definite maturities than is the case with the underlying mortgages. CMOs
may pay fixed or variable rates of interest, and certain CMOs have priority
over others with respect to the receipt of prepayments.
. Stripped Mortgage Securities Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest and
principal payments generated by a pool of mortgage-backed securities or a CMO
to create additional classes of securities. Generally, one class receives
only interest payments (IOs), and another receives principal payments (POs).
Unlike with other mortgage-backed securities and POs, the value of IOs tends
to move in the same direction as interest rates. The fund can use IOs as a
hedge against falling prepayment rates (interest rates are rising) and/or a
bear market environment. POs can be used as a hedge against rising prepayment
rates (interest rates are falling) and/or a bull market environment. IOs and
POs are acutely sensitive to interest rate changes and to the rate of
principal prepayments.
A rapid or unexpected increase in prepayments can severely depress the price
of IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. These securities are very volatile in price and may have
lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially those that pay
variable rates of interest that adjust inversely with, and more rapidly than,
short-term interest rates. In addition, if interest rates rise rapidly and
prepayment rates slow more than expected, certain CMOs, in addition to losing
value, can exhibit character-
<PAGE>
istics of longer-term securities and become more volatile. There is no
guarantee the fund's investment in CMOs, IOs, or POs will be successful, and
the fund's total return could be adversely affected as a result.
Operating policy The fund may invest up to 10% of its total assets in
stripped mortgage securities.
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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
o At its discretion, the fund may retain a security whose credit quality is
down- graded after purchase.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some commodity, currency, or securities index or
another interest rate (each a "benchmark"). Hybrids can be used as an
efficient means of pursuing a variety of investment goals, including currency
hedging, duration management, and increased total return. Hybrids may not
bear interest or pay dividends. The value of a hybrid or its interest rate
may be a multiple of a benchmark and, as a result, may be leveraged and move
(up or down) more steeply and rapidly than the benchmark. These benchmarks
may be sensitive to economic and political events, such as commodity
shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a
hybrid could be zero. Thus, an investment in a hybrid may entail significant
market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed principal
<PAGE>
amount and pays a fixed rate or floating rate of interest. The purchase of
hybrids also exposes the fund to the credit risk of the issuer of the hybrid.
These risks may cause significant fluctuations in the net asset value of the
fund.
o 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.
Deferrable Subordinated Securities
Recently, securities have been issued which have long maturities and are
deeply subordinated in the issuer's capital structure. They generally have
30-year maturities and permit the issuer to defer distributions for up to
five years. These characteristics give the issuer more financial flexibility
than is typically the case with traditional bonds. As a result, the
securities may be viewed as possessing certain "equity-like" features by
rating agencies and bank regulators. However, the securities are treated as
debt securities by market participants, and the fund intends to treat them as
such as well. These securities may offer a mandatory put or remarketing
option that creates an effective maturity date significantly shorter than the
stated one. The fund will invest in these securities to the extent their
yield, credit, and maturity characteristics are consistent with the fund's
investment objective and program.
Types of Management Practices
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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.
<PAGE>
Fundamental policy Borrowings may not exceed 33 1/3% of total fund
assets.
Operating policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions involve the risk that
anticipated currency movements will not occur, and the fund's total return
could be reduced.
<PAGE>
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 total fund assets.
When-Issued Securities and Forward Commitment Contracts
The fund may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. The price
of these securities is fixed at the time of the commitment to buy, but
delivery and payment can take place a month or more later. During the interim
period, the market value of the securities can fluctuate, and no interest
accrues to the purchaser. At the time of delivery, the value of the
securities may be more or less than the purchase or sale price. To the extent
the fund remains fully or almost fully invested (in securities with a
remaining maturity of more than one year) at the same time it purchases these
securities, there will be greater fluctuations in that fund's net asset value
than if the fund did not purchase them.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rate for its initial period of operations (October 31,
1997 through December 31, 1997) was 8.4%.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment Services, / /Inc.,
Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F12-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Science & Technology Fund
An aggressive stock fund seeking long-term capital growth through investments
in companies expected to benefit from scientific and technological progress.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Science & Technology Fund
Investment Goal
To provide long-term capital appreciation.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest primarily in common stocks of companies expected by T. Rowe Price to
benefit from the development, advancement, and use of science and technology.
Income is not a consideration in choosing stocks.
Risk/Reward
Likely to have more severe price fluctuations than the overall stock market but
offering the potential for superior returns over time. The fund's share price
may decline, causing a loss.
Investor Profile
Individuals seeking an aggressive approach to capital growth who can accept the
risk of loss inherent in common stock investing. Appropriate for both regular
and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 3
---------------------------------------------
Fund, Market, and Risk Characteristics 4
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 7
Sale Proceeds
---------------------------------------------
Distributions and Taxes 8
---------------------------------------------
Transaction Procedures and 10
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 13
---------------------------------------------
Understanding Performance Information 15
---------------------------------------------
Investment Policies and Practices 16
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 21
and Transaction Information
---------------------------------------------
Opening a New Account 21
---------------------------------------------
Purchasing Additional Shares 23
---------------------------------------------
Exchanging and Redeeming 23
---------------------------------------------
Rights Reserved by the Fund 25
---------------------------------------------
Shareholder Services 25
---------------------------------------------
Discount Brokerage 28
---------------------------------------------
Investment Information 29
---------------------------------------------
</TABLE>
T. Rowe Price Science & Technology Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Percentage of Fiscal 1997
Expenses Annual Fund Expenses Average Net Assets
Sales charge "load" on purchases None Management fee 0.67%
- -------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- -------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.27%
custodial, auditing, etc.)
- -------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.94%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
<PAGE>
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.35%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$10 $30 $52 $115
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
<PAGE>
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income (Loss) Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <S>
1988 $ 8.02 $ 0.06/a/ $ 1.00 $ 1.06 $(0.07) $(0.44) $(0.51) $ 8.57
- ---------------------------------------------------------------------------------------------------------------------
1989 8.57 0.05/a/ 3.36 3.41 (0.06) (1.39) (1.45) 10.53
- ---------------------------------------------------------------------------------------------------------------------
1990 10.53 0.09/b/ (0.24) (0.15) (0.09) (0.24) (0.33) 10.05
- ---------------------------------------------------------------------------------------------------------------------
1991 10.05 (0.01)/b/ 6.01 6.00 - (0.48) (0.48) 15.57
- ---------------------------------------------------------------------------------------------------------------------
1992 15.57 (0.10)/b/ 2.98 2.88 - (1.12) (1.12) 17.33
- ---------------------------------------------------------------------------------------------------------------------
1993 17.33 (0.05)/b/ 4.18 4.13 - (2.51) (2.51) 18.95
- ---------------------------------------------------------------------------------------------------------------------
1994 18.95 (0.09) 3.08 2.99 - (0.30) (0.30) 21.64
- ---------------------------------------------------------------------------------------------------------------------
1995 21.64 (0.03) 12.05 12.02 - (4.54) (4.54) 29.12
- ---------------------------------------------------------------------------------------------------------------------
1996 29.12 (0.09) 4.28 4.19 - (3.60) (3.60) 29.71
- ---------------------------------------------------------------------------------------------------------------------
1997 29.71 (0.12) 0.54 0.42 - (2.87) (2.87) 27.26
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <S>
1988 13.30%/a/ $ 12,426 1.20%/a/ 0.68%/a/ 92.0% -
- ------------------------------------------------------------------------------------------
1989 40.70/a/ 23,798 1.20/a/ 0.50/a/ 203.0 -
- ------------------------------------------------------------------------------------------
1990 (1.30)/b/ 61,535 1.25/b/ 0.91/b/ 182.5 -
- ------------------------------------------------------------------------------------------
1991 60.20/b/ 166,048 1.25/b/ (0.07)/b/ 148.2 -
- ------------------------------------------------------------------------------------------
1992 18.76/b/ 281,045 1.25/b/ (0.81)/b/ 144.3 -
- ------------------------------------------------------------------------------------------
1993 24.25/b/ 501,454 1.25/b/ (0.68)/b/ 163.4 -
- ------------------------------------------------------------------------------------------
1994 15.79 915,052 1.11 (0.58) 113.3 -
- ------------------------------------------------------------------------------------------
1995 55.53 2,285,263 1.01 (0.15) 130.3 -
- ------------------------------------------------------------------------------------------
1996 14.23 3,291,797 0.97 (0.33) 125.6 $0.0427
- ------------------------------------------------------------------------------------------
1997 1.71 3,538,492 0.94 (0.44) 133.9 0.0388
- -----------------------------------------------------------------------------------------------
</TABLE>
a Excludes expenses in excess of a 1.20% voluntary expense limitation in effect
through December 31, 1989.
b Excludes expenses in excess of a 1.25% voluntary expense limitation in effect
through December 31, 1993.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks long-term growth of capital. Total return will consist of
capital appreciation or depreciation; current income is incidental to the
fund's objective.
What is the fund's investment program?
The fund will invest at least 65% of total assets in the common stocks of
companies expected to benefit from the development, advancement, and use of
science and technology. Industries likely to be represented in the portfolio
include computers and peripheral products, software, electronic components
and systems, telecommunications, media and information services,
pharmaceuticals, hospital supply and medical devices, biotechnology,
environmental services, chemicals and synthetic materials, and defense and
aerospace. Investments may also include companies that should benefit from
the commercialization of technological advances even if they are not directly
involved in research and development.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
How does the fund select investments for the portfolio?
Stock selection is not based on company size but rather on an assessment of
the company's fundamental prospects. As a result, holdings can range from
small companies developing new technologies or pursuing scientific
breakthroughs to large, blue chip firms with established track records of
developing and marketing such advances.
<PAGE>
What are some of the fund's potential risks?
. Science and technology stocks Companies in the rapidly changing fields of
science and technology face special risks. For example, their products or
services may not prove commercially successful or may become obsolete
quickly. Therefore, a portfolio of these stocks will likely be more volatile
in price than one with broader diversification that includes investments in
more economic sectors.
. Small stocks The level of risk will be increased to the extent that the fund
has significant exposure to smaller or unseasoned companies (those with less
than a three-year operating history). Small companies often have limited
product lines, markets, or financial resources, and they may depend on a
small group of inexperienced managers. The securities of small companies may
be subject to more abrupt or erratic market declines than securities of
larger companies or the market averages in general.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
The fund's program reflects the view of T. Rowe Price that rapid advances in
science and technology offer substantial opportunities for superior long-term
capital appreciation.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
<PAGE>
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you seek an aggressive approach to capital
growth, and can accept the above-average level of price fluctuations that
this fund is expected to experience, this fund could be an appropriate part
of your overall investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can
redeem shares you own in this or another identically registered T. Rowe Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1987 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Charles A. Morris, Chairman, Marc L. Baylin, Robert N. Gensler, Jill L.
Hauser, Stephen C. Jansen, and Michael F. Sola. The committee chairman has
day-to-day responsibility for managing the portfolio and works with the
committee in developing and executing the fund's investment program. Mr.
Morris has been chairman of the fund's committee since 1991. He joined T.
Rowe Price in 1987, and has been managing investments since 1991.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $4,584,000
to T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $1,853,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $70,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfo-
lio'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). These risks are heightened for investments in developing countries,
and there is no limit on the amount of the fund's foreign investments that
may be made in such countries.
Operating policy The fund may invest up to 30% of its total assets (excluding
reserves) in foreign securities.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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.
<PAGE>
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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 133.9%, 125.6%, and 130.3%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
<PAGE>
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any
<PAGE>
purchase order; to cancel or rescind any purchase or exchange (for example, for
excessive trading or fraud) upon notice to the shareholder within five business
days of the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
<PAGE>
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
<PAGE>
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through
<PAGE>
Tele-Trader save you an additional 10% on commissions. Plus, you will save 20%
on commissions for equity trades when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment / /Services,
Inc., Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
<PAGE>
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F61-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Small-Cap Stock Fund
A stock fund seeking long-term capital growth through investments in securities
of small to medium-sized companies.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Small-Cap Stock Fund
Investment Goal
To provide long-term capital growth by investing primarily in stocks of small
to medium-sized companies.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest primarily in stocks of small to medium-sized companies that are
believed to offer either superior earnings growth or appear undervalued.
Risk/Reward
The potential for significant long-term capital growth, but also for
above-average price volatility. While investing in small to medium-sized
companies is generally riskier than investments in more established companies,
it may offer greater capital appreciation potential. The fund's share price may
decline, causing a loss.
Investor Profile
Individuals seeking significant capital appreciation who can accept the
possibility of more share price volatility than is associated with larger
companies or the broad market averages. Appropriate for both regular and
tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
Note; Prior to May 1, 1997, the fund was called the OTC Fund.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses
---------------------------------------------
Financial Highlights
---------------------------------------------
Fund, Market, and Risk Characteristics
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving
Sale Proceeds
---------------------------------------------
Distributions and Taxes
---------------------------------------------
Transaction Procedures and
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management
---------------------------------------------
Understanding Performance Information
---------------------------------------------
Investment Policies and Practices
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements
and Transaction Information
---------------------------------------------
Opening a New Account
---------------------------------------------
Purchasing Additional Shares
---------------------------------------------
Exchanging and Redeeming
---------------------------------------------
Rights Reserved by the Fund
---------------------------------------------
Shareholder Services
---------------------------------------------
Discount Brokerage
---------------------------------------------
Investment Information
---------------------------------------------
</TABLE>
T. Rowe Price Small-Cap Stock Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C>
Shareholder Transaction Percentage of Fiscal 1997
Expenses Annual Fund Expenses Average Net Assets
Sales charge "load" on purchases None Management fee 0.77%
- -------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- -------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.25%
custodial, auditing, etc.)
- -------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 1.02%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
<PAGE>
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.45%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$10 $32 $56 $125
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
<PAGE>
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income (Loss) Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 $13.19 $0.11 $3.47 $3.58 $(0.13) $(2.50)/a/ $(2.63) $14.14
- -----------------------------------------------------------------------------------------------------------------------
1989 14.14 0.09 2.61 2.70 (0.13) (0.48) (0.61) 16.23
- -----------------------------------------------------------------------------------------------------------------------
1990 16.23 0.11 (3.43) (3.32) (0.09) (0.10) (0.19) 12.72
- -----------------------------------------------------------------------------------------------------------------------
1991 12.72 0.07 4.84 4.91 (0.09) (0.68) (0.77) 16.86
- -----------------------------------------------------------------------------------------------------------------------
1992/b/ 16.86 0.02 2.20 2.22 (0.07) (4.64) (4.71) 14.37
- -----------------------------------------------------------------------------------------------------------------------
1993 14.37 - 2.60 2.60 - (1.58) (1.58) 15.39
- -----------------------------------------------------------------------------------------------------------------------
1994 15.39 0.04 (0.04) - (0.03) (1.56) (1.59) 13.80
- -----------------------------------------------------------------------------------------------------------------------
1995 13.80 0.12 4.53 4.65 (0.12) (2.01) (2.13) 16.32
- -----------------------------------------------------------------------------------------------------------------------
1996 16.32 0.09 3.33 3.42 (0.09) (1.58) (1.67) 18.07
- -----------------------------------------------------------------------------------------------------------------------
1997 18.07 0.05 5.13 5.18 (0.04) (1.01) (1.05) 22.20
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988 27.20% $292,104 1.55% 0.69% 27.2% -
---------------------------------------------------------------------------------
1989 19.10 315,939 1.45 0.63 33.1 -
---------------------------------------------------------------------------------
1990 (20.50) 215,299 1.47 0.73 34.8 -
---------------------------------------------------------------------------------
1991 38.60 266,584 1.34 0.48 31.2 -
---------------------------------------------------------------------------------
1992/b/ 13.91 186,838 1.32 0.03 30.7 -
---------------------------------------------------------------------------------
1993 18.40 204,609 1.20 (0.01) 40.8 -
---------------------------------------------------------------------------------
1994 0.08 196,726 1.11 0.24 41.9 -
---------------------------------------------------------------------------------
1995 33.85 278,613 1.11 0.74 57.8 -
---------------------------------------------------------------------------------
1996 21.05 415,604 1.07 0.56 31.1 $0.0305
---------------------------------------------------------------------------------
1997 28.81 816,374 1.02 0.33 22.9 0.0352
- ------------------------------------------------------------------------------------------
</TABLE>
/a/Return of capital distribution.
/b/ T. Rowe Price became the fund's investment manager on August 31, 1992.
<PAGE>
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks long-term growth of capital by investing primarily in stocks
of small to medium-sized companies.
What is the fund's investment program?
Under normal conditions, the fund will invest at least 65% of net assets in
stocks and equity-related securities of small companies ($1 billion or less
in market capitalization) that are believed by T. Rowe Price to offer either
superior earnings growth or appear undervalued based on various measures such
as price/earnings ratios. Holdings will be widely diversified by industry and
company; under most circumstances, the average position will be less than
1.5% of the fund's net assets. Current income is not an objective and is not
a prerequisite in the selection of securities.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
Does the fund only invest in small-company stocks?
Most of the stocks purchased by the fund will be small companies. However,
the fund will not sell a stock just because the company has grown to a market
capitalization of more than $1 billion. Additionally, the fund may, on
occasion, purchase companies with a market capitalization of more than $1
billion.
How does the fund select investments for the portfolio?
When reviewing investments in small and mid-size companies, T. Rowe Price
looks for the following characteristics: capable management; attractive
business niches; pricing flexibility; sound financial and accounting
practices; and a demonstrated ability to grow revenues, earnings, and cash
flow consistently. Stocks may also be selected on certain value
considerations, including whether: (1) the
<PAGE>
current stock price appears undervalued in relation to earnings, projected
cash flow, or asset value per share; or (2) the price/earnings ratio is
attractive relative to the company's underlying earnings growth rate; and (3)
the potential exists for some catalyst (such as increased investor attention,
asset sales, or a change in management) to cause the stock's price to rise.
o Stock selection may reflect either a growth or value investment approach.
What is meant by a "growth" investment approach?
Thomas Rowe Price, Jr., pioneered the growth stock theory of investing over
60 years ago. It is based on the premise that inflation represents a more
serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that, during periods
of adverse economic and market conditions, stock prices may fall despite
favorable earnings trends.
o Growth investors look for companies with above-average earnings gains.
What is meant by a "value" investment approach?
Value investors seek to invest in companies whose stock prices are low in
relation to their real worth or future prospects. By identifying companies
whose stocks are currently out of favor or misunderstood, value investors
hope to realize significant appreciation as other investors recognize the
stock's intrinsic value and the price rises accordingly.
o Value investors look for undervalued assets.
What are some of the fund's potential risks?
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger company
securities. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience.
A value approach to investing includes the risks that 1) the market will not
recognize a security's intrinsic value for an unexpectedly long time, and 2)
a stock that is judged to be undervalued is actually appropriately priced due
to intractable or fundamental problems that are not yet apparent.
<PAGE>
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
Small and mid-size companies are often overlooked by the investment community
and their securities may be undervalued, providing the potential for
significant capital appreciation. The fund is designed for long-term
investors who are willing to accept greater risks in search of substantial
long-term rewards.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the price fluctuations inherent in
small-company investing in an effort to achieve long-term capital
appreciation, the fund could be an appropriate part of your overall
investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can
<PAGE>
redeem shares you own in this or another identically registered T. Rowe Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
<PAGE>
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
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. Effective May 1,
1997, the fund changed its name to the T. Rowe Price Small-Cap Stock Fund,
Inc. The fund is a "diversified, open-end investment company," or mutual
fund. Mutual funds pool money received from shareholders and invest it to try
to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Gregory A. McCrickard, Chairman, Preston G. Athey, Hugh M. Evans III, Joseph
Milano, Charles G. Pepin, and Lauren Romeo. The committee chairman has
day-to-day responsibility for managing the portfolio and works with the
committee in developing and executing the fund's investment program. Mr.
McCrickard has been chairman of the fund's committee since 1992. He joined T.
Rowe Price in 1986 and has been managing investments since 1991.
T. Rowe Price became the fund's investment adviser on August 31, 1992.
Investment performance of the fund prior to that date is attributable to
persons other than T. Rowe Price.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
<PAGE>
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $741,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $46,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $85,000 to T. Rowe Price for accounting services.
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
<PAGE>
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge
<PAGE>
of the potential risk of such investments. For example, in a given period, a
5% investment in hybrid instruments could have significantly more of an
impact on the fund's share price than its weighting in the portfolio. The net
effect of a particular investment depends on its volatility and the size of
its overall return in relation to the performance of all the fund's other
investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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
<PAGE>
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
anytime during the life of the warrants (generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 10% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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
<PAGE>
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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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.
<PAGE>
Futures and Options
Futures (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
<PAGE>
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 22.9%, 31.1%, and 57.8%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax--
<PAGE>
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment Services, /
/Inc., Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F65-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Small-Cap Value Fund
A stock fund seeking long-term capital growth through investments in small U.S.
companies whose stocks appear undervalued.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Small-Cap Value Fund
Investment Goal
To provide long-term capital appreciation by investing primarily in
small-capitalization stocks that appear to be undervalued.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest primarily in stocks with a market value of $500 million or less that
appear undervalued by various measures, such as price/earnings or price/book
value ratios.
Risk/Reward
The potential for greater appreciation than a fund emphasizing large companies,
but accompanied by greater risk of price decline. The fund's value approach to
stock selection is conservative, but its focus on small-company stocks adds
substantial risk. The fund's share price may decline, causing a loss.
Investor Profile
Investors seeking an aggressive, long-term approach to building capital who can
accept the higher price fluctuations inherent in small-stock investing.
Appropriate for both regular and tax-deferred accounts, such as IRAs. The fund
is currently closed to new investors.
Fees and Charges
100% no load. Shares purchased and held for less than one year are subject to a
1% redemption fee, paid to the fund. No fees or charges to buy shares or to
reinvest dividends; no 12b-1 marketing fees; free telephone exchange among T.
Rowe Price funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 3
---------------------------------------------
Fund, Market, and Risk Characteristics 4
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 9
Sale Proceeds
---------------------------------------------
Distributions and Taxes 11
---------------------------------------------
Transaction Procedures and 13
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 16
---------------------------------------------
Understanding Performance Information 18
---------------------------------------------
Investment Policies and Practices 19
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 25
and Transaction Information
---------------------------------------------
Opening a New Account 25
---------------------------------------------
Purchasing Additional Shares 27
---------------------------------------------
Exchanging and Redeeming 28
---------------------------------------------
Rights Reserved by the Fund 29
---------------------------------------------
Shareholder Services 30
---------------------------------------------
Discount Brokerage 33
---------------------------------------------
Investment Information 34
---------------------------------------------
</TABLE>
T. Rowe Price Small-Cap Value Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate the fund for a year, based on 1997 fiscal year
expenses. These are costs you pay indirectly because they are deducted from
the fund's total assets before the daily share price is calculated and before
dividends and other distributions are made. In other words, you will not see
these expenses on your account statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Annual Fund Expenses Percentage of Fiscal 1997
Expenses (after reduction) Average Net Assets
Sales charge "load" on purchases None Management fee 0.67%/b/
- -------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- -------------------------------------------------------------------------------------------------------------
Redemption fees (on shares held % Total other (shareholder servicing, 0.20%/b/
less than one year) /a/ custodial, auditing, etc.)
- -------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 0.87%/b/
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
/a/
Please see Contingent Redemption Fee under Pricing Shares and Receiving Sale
Proceeds for additional information.
Note:
A $5 fee is charged for wire redemptions under $5,000, subject to change without
notice, and a $10 fee is charged for small accounts, when applicable (see Small
Account Fee under Transaction Procedures and Special Requirements).
The main types of expenses, which all mutual funds may charge against fund
assets, are:
<PAGE>
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.35%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$9 $28 $48 $107
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
<PAGE>
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income (Loss) Gain (Loss) on Activities Income Gain End of Period
of Period Investments
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988/a/ $11.51 $0.01 $(1.52) $(1.51) - - - $10.00
- ---------------------------------------------------------------------------------------------------------------------
1988/b/ 10.00 0.08/c/ (0.47) (0.39) $(0.08) $(0.55) $(0.63) 8.98
- ---------------------------------------------------------------------------------------------------------------------
1989 8.98 0.14/c/ 1.45 1.59 (0.14) (0.90) (1.04) 9.53
- ---------------------------------------------------------------------------------------------------------------------
1990 9.53 0.23/c/ (1.31) (1.08) (0.24) (0.12) (0.36) 8.09
- ---------------------------------------------------------------------------------------------------------------------
1991 8.09 0.13/c/ 2.61 2.74 (0.12) (0.34) (0.46) 10.37
- ---------------------------------------------------------------------------------------------------------------------
1992 10.37 0.11 2.05 2.16 (0.10) (0.15) (0.25) 12.28
- ---------------------------------------------------------------------------------------------------------------------
1993 12.28 0.12 2.73 2.85 (0.10) (0.35) (0.45) 14.68
- ---------------------------------------------------------------------------------------------------------------------
1994 14.68 0.13 (0.35) (0.22) (0.14) (0.92) (1.06) 13.40
- ---------------------------------------------------------------------------------------------------------------------
1995 13.40 0.18 3.74 3.92 (0.18) (0.61) (0.79) 16.53
- ---------------------------------------------------------------------------------------------------------------------
1996 16.53 0.22 3.84 4.06 (0.23) (0.80) (1.03) 19.56
- ---------------------------------------------------------------------------------------------------------------------
1997 19.56 0.21 5.22 5.43 (0.20) (1.39) (1.59) 23.40
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1988/a/ (11.80)% $ 25,497 1.20% 0.10% 50.0% -
- ------------------------------------------------------------------------------------------
1988/b/ (3.80)/c/ 25,574 1.25/c/ 1.81/c/ 54.2 -
- ------------------------------------------------------------------------------------------
1989 18.10/c/ 32,837 1.25/c/ 1.42/c/ 43.3 -
- ------------------------------------------------------------------------------------------
1990 (11.30)/c/ 26,438 1.25/c/ 2.57/c/ 33.1 -
- ------------------------------------------------------------------------------------------
1991 34.20/c/ 53,228 1.25/c/ 1.31/c/ 30.5 -
- ------------------------------------------------------------------------------------------
1992 20.87 264,021 1.25 0.98 12.1 -
- ------------------------------------------------------------------------------------------
1993 23.30 452,116 1.05 0.91 11.8 -
- ------------------------------------------------------------------------------------------
1994 (1.38) 408,432 0.97 0.93 21.4 -
- ------------------------------------------------------------------------------------------
1995 29.29 936,425 0.98 1.59 18.1 -
- ------------------------------------------------------------------------------------------
1996 24.61 1,409,829 0.94 1.28 15.2 $0.0296
- ------------------------------------------------------------------------------------------
1997 27.92 2,088,217 0.87 1.01 14.6 0.0305
- ------------------------------------------------------------------------------------------
</TABLE>
a Information for each of the two years in the period ending June 30, 1988,
represents the activities of the fund's predecessor, PEMCO.
b For the period June 30, 1988 (commencement of operations) to December 31,
1988.
c Excludes expenses in excess of a 1.25% voluntary expense limitation in effect
through December 31, 1993.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks long-term capital growth by investing primarily in small
companies whose common stocks are believed to be undervalued.
What is the fund's investment program?
Reflecting a value approach to investing, the fund will seek the stocks of
companies whose current stock prices do not appear to adequately reflect
their underlying value as measured by assets, earnings, cash flow, or
business franchises. Normally, the fund will invest at least 65% of its total
assets in companies with a market capitalization of $500 million or less.
Although the fund will invest primarily in U.S. common stocks, it may also
purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
Does the fund only invest in small-company stocks?
Most of the stocks purchased by the fund will be small companies. However,
the fund will not sell a stock just because the company has grown to a market
capitalization of more than $500 million. Additionally, the fund may, on
occasion, purchase companies with a market capitalization of more than $500
million.
<PAGE>
What is meant by a "value" investment approach?
Value investors seek to invest in companies whose stock prices are low in
relation to their real worth or future prospects. By identifying companies
whose stocks are currently out of favor or misunderstood, value investors
hope to realize significant appreciation as other investors recognize the
stock's intrinsic value and the price rises accordingly.
o Value investors look for undervalued assets.
Finding undervalued stocks requires considerable research to identify the
particular company, analyze its underlying financial condition and prospects,
and assess the likelihood that the stock's underlying value will be
recognized by the market and reflected in its price.
Some of the principal measures used to identify such stocks are:
. Price/earnings ratio Dividing a stock's price by its earnings per share
generates a price/earnings or P/E ratio. A stock with a P/E that is
significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.
. Price/book value ratio Dividing a stock's price by its book value per share
indicates how a stock is priced relative to the accounting (i.e., book) value
of the company's assets. A ratio below the market, that of its competitors,
or its own historic norm could indicate an undervalued situation.
. Dividend yield A stock's dividend yield is found by dividing its annual
dividend by its share price. A yield significantly above a stock's own
historic norm or that of its peers may suggest an investment opportunity.
o A stock selling at $10 with a dividend of $0.50 has a 5% yield.
. Price/cash flow Dividing a stock's price by the company's cash flow per
share, rather than by its earnings or book value, provides a more useful
measure of value in some cases. A ratio below that of the market or of its
peers suggests the market may be incorrectly valuing the company's cash flow
for reasons that may be temporary.
. Undervalued assets This analysis compares a company's stock price with its
underlying asset values, its projected value in the private (as opposed to
public) market, or its expected value if the company or parts of it were sold
or liquidated.
. Restructuring opportunities The market can react favorably to the
announcement of the successful implementation of a corporate restructuring,
financial reengineering, or asset redeployment. Such events can result in an
increase in a company's stock price. A value investor may try to anticipate
these actions and
<PAGE>
invest before the market places an appropriate value on any actual or
expected changes.
What are the advantages of a value approach to small-cap investing?
The fund invests in small companies with a capitalization (market value) of
$500 million or less which may be overlooked or undervalued by investors.
Small-capitalization stocks are less actively followed by stock analysts than
are larger-capitalization stocks, and less information is available to
evaluate small-cap stock prices. As a result, compared with
larger-capitalization stocks, there may be greater variations between the
current stock price and the estimated underlying value, which could represent
greater opportunity for appreciation.
What are some of the fund's potential risks?
Investing in small companies involves greater risk than is customarily
associated with more established companies. Stocks of small companies may be
subject to more abrupt or erratic price movements than larger company
securities. Small companies often have limited product lines, markets, or
financial resources, and their management may lack depth and experience.
A value approach to investing includes the risks that 1) the market will not
recognize a security's intrinsic value for an unexpectedly long time, and 2)
a stock that is judged to be undervalued is actually appropriately priced due
to intractable or fundamental problems that are not yet apparent.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
Small companies may offer greater opportunity for capital appreciation than
larger, more established companies. The careful selection of undervalued
issues can provide a sound basis for long-term appreciation while cushioning
against downside risk.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S.
<PAGE>
stock market has experienced 10 negative years as well as steep drops of
shorter duration. Its worst calendar quarter return in recent years was
-22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
Who can purchase fund shares?
The fund was closed to new investors on March 6, 1996, with the following
exceptions and provisions:
. Purchases of additional shares are permitted for existing accounts directly
registered with T. Rowe Price.
. Persons executing direct rollovers from qualified retirement plans may open
a new IRA account.
. Retirement plan administrators having questions on the fund's availability
should contact T. Rowe Price.
. When deemed to be in the fund's best interests, the fund reserves the right
in appropriate cases to extend the offering to other persons, to restrict
sales further, or to withdraw the offering altogether, all without notice.
. The closing does not restrict shareholders from making redemptions from
their fund accounts.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. This fund is expected to be appropriate for
investors seeking long-term capital growth who can accept the higher price
fluctuations inherent in small-stock investing.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
You should also review the information in Section 2 that discusses contingent
redemption fees.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
Contingent Redemption Fee
The fund is designed for long-term investors willing to accept the risks
associated with an investment in common stocks of small companies that are
not widely held by institutional investors. Such securities tend to be less
liquid than larger company stocks. The fund is not designed for short-term
traders, whose frequent purchases, redemptions, and exchanges can
unnecessarily disrupt the fund's investment program and drive up the fund's
transaction costs. For these reasons, the fund assesses a % fee on
redemptions (including exchanges) of shares held for less than one year.
Redemption fees are paid to the fund to help offset transaction costs and to
protect the fund's long-term shareholders. The fund will use the "first-in,
first-out" (FIFO) method to determine the one-year holding period. Under this
method, the date of the redemption or exchange will be compared to the
earliest purchase date of shares held in the account. If this holding period
is less than one year, the fee will be charged.
The fee does not apply to any shares purchased through reinvested
distributions (dividends and capital gains) or to shares held in retirement
plans such as 401(k), 403(b), 457, Keogh, profit sharing, SIMPLE IRA,
SEP-IRA, and money purchase pension accounts. The fee does apply to shares
held in IRA accounts and to shares purchased through automatic investment
plans (described under Shareholder Services). The fee may apply to shares in
retirement plans held in broker omnibus accounts.
<PAGE>
In determining "one year," the fund will use the anniversary date of a
transaction. Thus, shares purchased on May 1, 1998, for example, will be
subject to the fee if they are redeemed on or prior to April 30, 1999. If
they are redeemed on or after May 1, 1999, they will not be subject to the
fee.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) annually.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
<PAGE>
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
<PAGE>
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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
<PAGE>
transfer has not cleared. (The 10-day hold does not apply to the following:
purchases paid for by bank wire; cashier's, certified, or treasurer's checks;
or automatic purchases through your paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party
and hold them for less than 60 calendar days, you are in violation of our
excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
<PAGE>
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1988 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Preston G. Athey, Chairman, Hugh M. Evans III, Gregory A. McCrickard, and
Lauren Romeo. The committee chairman has day-to-day responsibility for
managing the portfolio and works with the committee in developing and
executing the fund's investment program. Mr. Athey has been chairman of the
fund's committee since 1991. He joined T. Rowe Price in 1978 and has been
managing investments since 1982.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $1,127,000
to T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $1,312,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $60,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfo-
lio'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). These risks are heightened for investments in developing countries,
and there is no limit on the amount of the fund's foreign investments that
may be made in such countries.
Operating policy The fund may invest up to 20% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 5% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o Hybrids can have volatile prices and limited liquidity, and their use by
the fund may not be successful.
<PAGE>
Operating policy The fund may invest up to 10% of its total assets in hybrid
instruments.
Private Placements
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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 policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure
to changes in securities prices and foreign currencies; as an efficient means
of adjusting its overall exposure to certain markets; in an effort to enhance
income; and to protect the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions 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 total fund assets.
Portfolio Turnover
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1997, 1996,
and 1995, were 14.6%, 15.2%, and 18.1%, respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could
be affected by the Year 2000 issue, but at this time the funds cannot predict
the degree of impact. To the extent the impact on a portfolio holding is
negative, a fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
<PAGE>
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order;
<PAGE>
to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax--
<PAGE>
free fund are limited to investors living in states where the fund is
registered.) Some of the T. Rowe Price funds may impose a redemption fee of 0.5%
to 2% on shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
<PAGE>
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
<PAGE>
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment Services, / /Inc.,
Member NASD/SIPC./
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F46-040 5/1/98
<PAGE>
PROSPECTUS
May 1, 1998
Value Fund
A stock fund seeking long-term capital growth through a value approach to stock
selection.
T. Rowe Price
RAM LOGO
<PAGE>
FACTS AT A GLANCE
Value Fund
Investment Goal
To provide long-term capital appreciation by investing in common stocks
believed to be undervalued. Income is a secondary goal.
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest primarily in common stocks regarded as undervalued. While
large-company stocks are expected to be predominant, the fund can also pursue
attractive opportunities in the smaller-cap sectors. A number of qualitative
and quantitative measures will be used in an effort to identify undervalued
investment opportunities.
Risk/Reward
The potential to provide an attractive return over time. The fund's price will
fluctuate with stock market conditions. The risk of price declines may be
greater for this fund than for one that emphasizes high-dividend stocks, but
should be less than for a fund emphasizing growth or small-cap stocks.
Investor Profile
Individuals seeking a relatively conservative approach to investing in stocks
who can accept the risk of loss inherent in common stock investing. Appropriate
for both regular and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $124 billion for more
than six million individual and institutional investor accounts as of December
31, 1997.
<PAGE>
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Transaction and Fund Expenses 2
---------------------------------------------
Financial Highlights 4
---------------------------------------------
Fund, Market, and Risk Characteristics 5
---------------------------------------------
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 9
Sale Proceeds
---------------------------------------------
Distributions and Taxes 10
---------------------------------------------
Transaction Procedures and 13
Special Requirements
---------------------------------------------
3 MORE ABOUT THE FUND
Organization and Management 16
---------------------------------------------
Understanding Performance Information 18
---------------------------------------------
Investment Policies and Practices 19
---------------------------------------------
4 INVESTING WITH T. ROWE PRICE
Account Requirements 25
and Transaction Information
---------------------------------------------
Opening a New Account 25
---------------------------------------------
Purchasing Additional Shares 27
---------------------------------------------
Exchanging and Redeeming 28
---------------------------------------------
Rights Reserved by the Fund 29
---------------------------------------------
Shareholder Services 30
---------------------------------------------
Discount Brokerage 33
---------------------------------------------
Investment Information 34
---------------------------------------------
</TABLE>
T. Rowe Price Value Fund, Inc.
Prospectus
May 1, 1998
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses provides an estimate of how
much it would cost to operate the fund for a year, based on 1997 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from the fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1 Transaction and Fund Expenses
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Annual Fund Expenses Percentage of Fiscal 1997
Expenses (after reduction) Average Net Assets
Sales charge "load" on purchases None Management fee 0.73%ab
- ------------------------------------------------------------------------------------------------------------
Sales charge "load" on reinvested None Marketing fees (12b-1) None
distributions
- ------------------------------------------------------------------------------------------------------------
Redemption fees None Total other (shareholder servicing, 0.32%ab
custodial, auditing, etc.)
- ------------------------------------------------------------------------------------------------------------
Exchange fees None Total fund expenses 1.05%ab
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
/a/The fund's management fee and other expenses presented include 0.05% of
management fees and 0.01% of other expenses repaid from prior years pursuant
to the expense limitation described below. Without this repayment, the fund's
management fee, other expenses, and total expense ratios would have been
0.67%, 0.32%, and 0.99%, respectively.
/b/To limit the fund's expenses during its initial period of operations, T. Rowe
Price agreed to waive its fees and bear any expenses through December 31,
1996, which would have caused the fund's ratio of expenses to average net
assets to exceed 1.10%. Fees waived or expenses paid or assumed under this
agreement are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 1.10%; however, no reimbursement will be
made after December 31, 1998, or if it would result in the expense ratio
exceeding 1.10%. Any amounts reimbursed will have the effect of increasing
fees otherwise paid by the fund. Organizational expenses will be charged to
the fund over a period not to exceed 60 months.
Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts, when applicable
(see Small Account Fee under Transaction Procedures and Special Requirements).
<PAGE>
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee comprises a group fee, 0.32% as of December 31, 1997,
and an individual fund fee of 0.35%.
. "Other" administrative expenses Expenses arising primarily from the
servicing of shareholder accounts, such as providing statements and reports,
disbursing dividends, and providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2 Hypothetical Fund Expenses
<CAPTION>
<C> <C> <C> <C>
1 year 3 years 5 years 10 years
$11 $33 $58 $128
- --------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
<PAGE>
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Total Value,
Beginning Income Gain (Loss) on Activities Income Gain Distributions End of Period
of Period Investments
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994/a/ $10.00 $0.08/b/ $0.23 $0.31 $(0.07) - $(0.07) $10.24
- ------------------------------------------------------------------------------------------------------------------
1995 10.24 0.27/b/ 3.78 4.05 (0.26) $(0.82) (1.08) 13.21
- ------------------------------------------------------------------------------------------------------------------
1996 13.21 0.27/b/ 3.45 3.72 (0.26) (0.91) (1.17) 15.76
- ------------------------------------------------------------------------------------------------------------------
1997 15.76 0.21 4.31 4.52 (0.21) (1.83) (2.04) 18.24
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on next page. (continued on next page)
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net Portfolio Average
Ended (Includes Net Assets Expenses to Investment Turnover Commission
Reinvested ($ Thousands) Average Net Income to Rate Rate Paid
Distributions) Assets Average Net
Assets
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994/a/ 3.10%/b/ $ 8,850 1.10%/bc/ 3.16%/bc/ 30.8%/c/ -
- ------------------------------------------------------------------------------------------
1995 39.85/b/ 46,582 1.10/b/ 2.03/b/ 89.7 -
- ------------------------------------------------------------------------------------------
1996 28.51/b/ 197,846 1.10/b/ 1.71/b/ 68.0 $0.0471
- ------------------------------------------------------------------------------------------
1997 29.25 546,375 1.05 1.26 67.2 0.0468
- ------------------------------------------------------------------------------------------
</TABLE>
/a/From September 30, 1994 (commencement of operations) to December 31, 1994.
/b/Excludes expenses in excess of a 1.10% voluntary expense limitation in effect
through December 31, 1996.
/c/Annualized.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
<PAGE>
What is the fund's objective?
The fund's principal objective is long-term capital appreciation by investing
primarily in common stocks believed to be undervalued. Income is a secondary
objective.
What is the fund's investment program?
Reflecting a "value approach" to investment selection, at least 65% of total
assets will be invested in common stocks the portfolio manager regards as
undervalued. A major portion of all stock holdings is expected to consist of
large-company issues, but the fund manager has the flexibility to select
among a variety of investments, including small-company stocks.
Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objective and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.
o For more detailed information about fund investments, see Investment
Policies and Practices and the Statement of Additional Information.
What is meant by a "value" investment approach?
Value investors seek to invest in companies whose stock prices are low in
relation to their real worth or future prospects. By identifying companies
whose stocks are currently out of favor or misunderstood, value investors
hope to realize significant appreciation as other investors recognize the
stock's intrinsic value and the price rises accordingly.
o Value investors look for undervalued assets.
Finding undervalued stocks requires considerable research to identify the
particular company, analyze its underlying financial condition and prospects,
and assess the likelihood that the stock's underlying value will be
recognized by the market and reflected in its price.
Some of the principal measures used to identify such stocks are:
. Price/earnings ratio Dividing a stock's price by its earnings per share
generates a price/earnings or P/E ratio. A stock with a P/E that is
significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.
. Price/book value ratio Dividing a stock's price by its book value per share
indicates how a stock is priced relative to the accounting (i.e., book) value
of the
company's assets. A ratio below the market, that of its competitors, or its
own historic norm could indicate an undervalued situation.
. Dividend yield A stock's dividend yield is found by dividing its annual
dividend by its share price. A yield significantly above a stock's own
historic norm or that of its peers may suggest an investment opportunity.
o A stock selling at $10 with a dividend of $0.50 has a 5% yield.
. Price/cash flow Dividing a stock's price by the company's cash flow per
share, rather than by its earnings or book value, provides a more useful
measure of value in some cases. A ratio below that of the market or of its
peers suggests the market may be incorrectly valuing the company's cash flow
for reasons that may be temporary.
. Undervalued assets This analysis compares a company's stock price with its
underlying asset values, its projected value in the private (as opposed to
public) market, or its expected value if the company or parts of it were sold
or liquidated.
. Restructuring opportunities The market can react favorably to the
announcement of the successful implementation of a corporate restructuring,
financial reengineering, or asset redeployment. Such events can result in an
increase in a company's stock price. A value investor may try to anticipate
these actions and invest before the market places an appropriate value on any
actual or expected changes.
What are some examples of undervalued situations?
There are numerous situations in which a company's value may not be reflected
in its stock price. For example, a company may own a substantial amount of
real estate that is valued on its financial statements well below market
levels. If those properties were to be sold, or if their hidden value became
recognized in some other manner, the company's stock price could rise. In
another example, a company's management could spin off an unprofitable
division into a separate company, potentially increasing the value of the
parent. Or, in the reverse, a parent company could spin off a profitable
division that has not drawn the attention it deserves, potentially resulting
in higher valuations for both entities.
Sometimes new management can revitalize companies that have grown fat or lost
their focus, eventually leading to improved profitability. Management could
increase shareholder value by using excess cash flow to pay down debt, buying
back outstanding shares of common stock, or raising the dividend.
What are the potential risks and rewards of value investing?
Over time, careful stock selection can offer attractive appreciation
potential and limit the downside risk of a value-oriented portfolio compared
with the broad market. However, price volatility is associated with any
common stock invest-
<PAGE>
ment. In addition, the value approach includes the risks that 1) the market
will not recognize a security's intrinsic value for an unexpectedly long
time, and 2) a stock that is judged to be undervalued is actually
appropriately priced due to intractable or fundamental problems that are not
yet apparent.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some potential risks and rewards of investing in the stock market
through this fund?
Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. In addition, if our assessment of company prospects proves
incorrect, companies that our managers and analysts expect to do well may
perform poorly. Since 1950, the U.S. stock market has experienced 10 negative
years as well as steep drops of shorter duration. Its worst calendar quarter
return in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the price fluctuations inherent in
stock investing in an effort to achieve income and capital appreciation, the
fund could be an appropriate part of your overall investment strategy.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for a fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
and the information you receive about them may differ for institutional and
employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
<PAGE>
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. The ACH system is supported
by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
wire should be credited to your account the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. The fund declares and pays dividends (if any) quarterly.
. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.
<PAGE>
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month. If a second distribution is necessary,
it is usually declared and paid during the first quarter of the following
year.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For new accounts or those opened by exchange in
1983 or later, we will provide the gain or loss on the shares you sold during
the year, based on the "average cost," single category method. This
information is not reported to the IRS, and you do not have to use it. You
may calculate the cost basis using other methods acceptable to the IRS, such
as "specific identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
o The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions made by a fund are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
<PAGE>
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income. Reflecting recent changes in the tax code,
gains on securities held more than 12 months but not more than 18 months are
taxed at a maximum rate of 28%, and gains on securities held for more than 18
months are taxed at a maximum rate of 20%. If you realize a loss on the sale
or exchange of fund shares held six months or less, your short-term loss
recognized is reclassified to long term to the extent of any net capital gain
distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend. Net foreign currency losses
may result in a fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends but will still be included in your
taxable income. However, you may be able to claim an offsetting deduction on
your tax return for your portion of foreign taxes paid by a fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future distributions.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can
redeem shares you own in this or another identically registered T. Rowe Price
fund as reimbursement. The fund and its agents have the right to reject or
cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. 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 the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone are genuine and
are not liable for acting on these instructions. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the funds and
their agents may be liable for any losses that may result from acting on the
instructions given. A confirmation is sent promptly after a transaction. All
telephone conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
<PAGE>
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses.
. Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
Price, you can make one purchase and sale involving the same fund within any
120-day period. For example, if you are in fund A, you can move substantial
assets from fund A to fund B and, within the next 120 days, sell your shares
in fund B to return to fund A or move to fund C. If you exceed this limit,
you are in violation of our excessive trading policy.
Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a non-money fund are
not exempt); and 2) systematic purchases or redemptions (see Shareholder
Services).
. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.
. If you violate our excessive trading policy, you may be barred indefinitely
and without further notice from further purchases of T. Rowe Price funds.
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
The fund was incorporated in Maryland in 1994 and is a "diversified, open-end
investment company," or mutual fund. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 61 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in a fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include a voting
card for you to mail back.
<PAGE>
Who runs the fund?
General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Brian C. Rogers, Chairman, Stephen W. Boesel, Richard P. Howard, Kara Cheseby
Landers, Robert Sharps, and David J. Wallack. The committee chairman has
day-to-day responsibility for managing the portfolio and works with the
committee in developing and executing the fund's investment program. Mr.
Rogers has been chairman of the fund's committee since 1994. He joined T.
Rowe Price in 1982 and has been managing investments since 1983.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1997, fees paid by the fund to
various T. Rowe Price service companies included the following: $481,000 to
T. Rowe Price Services, Inc., for transfer and dividend disbursing
functions and shareholder services; $130,000 to T. Rowe Price Retirement
Plan Services, Inc., for recordkeeping services for certain retirement
plans; and $60,000 to T. Rowe Price for accounting services.
<PAGE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except the Spectrum Funds, and any institutional,
index, or private label mutual funds). The group fee schedule (shown below)
is graduated, declining as the asset total rises, so shareholders benefit
from the overall growth in mutual fund assets.
<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C>
0.334% First $50 billion/a/
- ----------------------------------------------------------------------------
0.305% Next $30 billion
- ----------------------------------------------------------------------------
0.300% Thereafter
- ----------------------------------------------------------------------------
/a/ Represents a blended group fee rate containing various break points.
</TABLE>
The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $76 billion
at December 31, 1997, the group fee was 0.32%.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in Insights articles; in T.
Rowe Price advertisements; and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.
Advertisements for a fund may include cumulative or average annual compound
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
<PAGE>
Cumulative Total Return
This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.
Average Annual Total Return
This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
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. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
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 a single issuer, or if 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 nonconvertible 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 anytime during the life of the warrants
(generally, two or more years).
<PAGE>
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers 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). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.
Operating policy The fund may invest up to 25% of its total assets (excluding
reserves) in foreign securities.
Fixed Income Securities
The fund may invest in debt securities of any type, including municipal
securities, without regard to quality or rating. Such securities would be
purchased in companies, municipalities, or entities 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 those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities. The
fund's investments in convertible securities are not subject to this limit.
<PAGE>
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) 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.
o 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
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, others may be illiquid, and their sale 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
Reserve Position
The fund will hold a certain portion of its assets in money market reserves.
The fund's reserve position can consist of shares of one or more T. Rowe
Price internal money market funds as well as short-term, high-quality U.S.
and foreign dollar-denominated money market securities, including repurchase
agreements. For temporary, defensive purposes, the fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments and can serve 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.
<PAGE>
Fundamental policy Borrowings may not exceed 33 1/3% of total fund
assets.
Operating policy 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 (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative) give the investor the right (where the investor
purchases the option), or the obligation (where the investor writes (sells)
the option), to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for any number of
reasons, including: to manage its exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting its overall
exposure to certain markets; in an effort to enhance income; and to protect
the value of portfolio securities. 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 and 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 exposure to 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 writes 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."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions involve the risk that
anticipated currency movements will not occur, and the fund's total return
could be reduced.
<PAGE>
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 total fund assets.
Portfolio Turnover
The fund will not generally trade in securities (either common stocks or
bonds) for short-term profits, but, when circumstances warrant, securities
may be purchased and sold without regard to the length of time held. A high
turnover rate may increase transaction costs and result in additional taxable
gains.The fund's portfolio turnover rates for the fiscal years ending
December 31, 1997, 1996, and 1995, were 67.2%, 68.0%, and 89.7%,
respectively.
Year 2000 Processing Issue
Many computer programs employed throughout the world use two digits rather
than four to identify the year. These programs, if not adapted, will not
correctly handle the change from "99" to "00" on January 1, 2000, and will
not be able to perform necessary functions. The Year 2000 issue affects
virtually all companies and organizations.
T. Rowe Price has implemented steps intended to assure that its major
computer systems and processes are capable of Year 2000 processing. We are
working with third parties to assess the adequacy of their compliance efforts
and are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.
Companies or governmental entities in which T. Rowe Price funds invest could be
affected by the Year 2000 issue, but at this time the funds cannot predict the
degree of impact. To the extent the impact on a portfolio holding is negative, a
fund's returns could be adversely affected.
<PAGE>
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
<PAGE>
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept thirdparty checks to
open new accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
<PAGE>
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
<PAGE>
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
<PAGE>
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see Opening a / /New
Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, for excessive
trading or fraud) upon notice to the shareholder within five business days of
the trade or if the written confirmation has not been received by the
shareholder, whichever is sooner; to freeze any account and suspend account
services when notice has been received of a dispute between the registered or
beneficial account owners or there is reason to believe a fraudulent transaction
may occur; to otherwise modify the conditions of purchase and any services at
any time; or to act on instructions believed to be genuine.
<PAGE>
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide, which is automatically mailed to all new shareholders, contains detailed
descriptions of these and other services.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held for
less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
<PAGE>
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
<PAGE>
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Through our discount brokerage, you can buy and sell stocks,
options, bonds, non-T. Rowe Price mutual funds, and more - at commission savings
over full-service brokers. We also provide a wide range of services, including:
Automated telephone and computer services
You can enter stock and option trades, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. Plus, you will save 20% on commissions for equity trades
when you trade through Internet-Trader.
Note: Subject to a $35 minimum commission for all trades except equity trades
placed through Internet-Trader, which are subject to a $29.95 minimum
commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of T. Rowe Price Investment Services, / /Inc.,
Member NASD/SIPC./
<PAGE>
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587
24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price Ram Logo
F07-040 5/1/98
