<PAGE>
FELLOW SHAREHOLDERS
Before we review the financial markets and your Fund's performance, we want to
mention that you have received two consecutive annual reports because your
Fund's fiscal year-end was recently changed from February 28 to May 31.
MARKET ENVIRONMENT
The recent quarter was a reminder to all of us who invest in high-yield bonds
that the trade-off for above-average yields can be periods of above-average
volatility. After generating strong returns for three consecutive years, the
high-yield bond market faltered in February of this year after the Federal
Reserve moved to a tighter monetary policy, and then spiraled downwards along
with most of the world's major bond markets. By the close of your Fund's
quarter on May 31, the worst seemed to be over, and prices for both
high-quality and high-yield (junk) bonds had moved up a bit from their lows.
As we mentioned in our previous report, the high-yield market had gradually
become more vulnerable to potential setbacks because of the lengthy decline in
its yield advantage over top-quality issues. It is important to note, however,
that the narrowing yield spread was the result of this market's superior
performance. When the Fed initiated what turned out to be the first of four
monthly increases in the federal funds rate, high-yield bonds did indeed fall
harder than their high-quality counterparts. As market sentiment worsened, the
bonds of any company with disappointing earnings were quickly trounced,
whereas last year similar news would probably have been shrugged off.
These developments were exacerbated by outflows from mutual funds, a
dominant presence in the high-yield market, which sold bonds to meet
redemptions. Given the high-yield market's illiquid nature, persistent selling
soon produced the same exaggerated price changes on the downside that
consistently strong demand had recently generated on the upside.
The chart below is a picture of market turmoil: sharply rising yields from
February to early April followed by unnerving seesaw activity and a semblance
of stability in May.
The stock market's 6% correction from February through April (measured by
the S&P 500 Stock Index) also cast a pall on the high-yield market. Many junk
bond issuers look to a healthy stock market to help them reduce debt loads by
issuing stock, and a falling market is inhospitable to this activity. New bond
issues likewise faced poor reception. Many were postponed, and the high yields
required of those that were sold triggered instant price reductions on
existing, comparable issues.
YIELD COMPARISON CHART
A line graph compares the yields of the First Bostone BB-Rated Bond Index and
the 10-Year Treasury Note from January to May 1994.
<PAGE>
The U.S. markets also suffered from overseas developments. The Fed's first
tightening in five years was "a shot heard 'round the world" as bond yields in
both industrialized and emerging countries rose. Falling bond prices abroad
boomeranged back to the U.S. through their effect on large U.S. hedge funds
that had invested heavily in foreign bonds, frequently using borrowed money.
In February, many of these funds had to dump bonds of all kinds---whatever
could be sold---to meet margin calls, thus accelerating the U.S. bond market's
tailspin. In March, wealthy, highly leveraged private investors, primarily in
Latin America, became heavy sellers of foreign bonds. In the third week of
March, following the Fed's third hike in the fed funds rate, an incipient
rally in emerging country bonds was torpedoed by the assassination of the
leading Mexican presidential candidate.
PERFORMANCE AND STRATEGY REVIEW
Your Fund's results followed the high-yield market pattern, with a negative
quarter coming on the heels of a cumulative return of 85% for the three years
ended December 31, 1993. Specifically, the Fund was in the path of two
downward price spirals, one involving junk bonds, which compose most of our
portfolio, and one involving emerging country bonds, which accounted for about
9% to 10% of assets during the quarter. Our foreign investments had
contributed significantly to the Fund's strong absolute and relative results
last year and, by the same token, were largely responsible for our lagging
results shown below.
PERFORMANCE COMPARISON
Periods Ended 5/31/94
3 Months 12 Months
---------------------
High Yield Fund -6.52% 2.34%
Lipper High Yield Fund
Average -4.33 6.70
- ---------------------------------------------
Despite the difficult environment, we made few changes in our sector
weightings during the quarter because we believe the fundamentals of the
high-yield market and of most individual issuers remain sound. In the universe
of high-yield bond issuers, many continue to improve their financial
conditions and the default rate is at an all-time low. Although some of our
holdings with lower-than-expected earnings were punished severely by
investors, the vast majority are experiencing no credit problems. Gaming
continued to be our largest sector because we believe the long-term prospects
of this very profitable industry remain favorable despite some recent
setbacks.
OUTLOOK
The economy continues to expand, corporate earnings are increasing, and,
recent events notwithstanding, interest rates remain quite low by historical
standards. All these are positive for high-yield bonds. We were encouraged by
signs of an improvement in our market's psychology in May and by positive
inflows into high-yield mutual funds. We certainly hope both trends are
sustained. The sharp rise in junk bond yields has begun to attract bargain
hunters as well as some institutional investors like insurance companies, not
seen in this market since 1989, and some pension funds.
In our last report we commented on the volatility and unpredictability of
the high-yield bond market, so we will not hazard a short-term forecast here.
Over the long term, however, these bonds and your Fund have provided high
returns to investors who rode out the sometimes nail-biting periods of falling
prices. We see no reason why this will not be true in the future.
Respectfully submitted,
/s/Richard S. Swingle
Richard S. Swingle
President and Chairman of the
Investment Advisory Committee
June 23, 1994
<PAGE>
STATISTICAL HIGHLIGHTS
T. ROWE PRICE HIGH YIELD FUND / MAY 31, 1994
KEY STATISTICS
Dividend Yield* Periods Ended 5/31/94
- ------------------------------- ---------------------
3 Months 8.54%
12 Months 9.15
Dividend Per Share
- -------------------------------
3 Months $0.18
12 Months 0.79
Change in Per-Share Value
- -------------------------------
3 Months (From $9.15 to $8.37) $-0.78
12 Months (From $8.93 to $8.37) -0.56
- -----------------------------------------------------
*Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period.
QUALITY DIVERSIFICATION
Percent of Net Assets
TRPA Quality Rating* 5/31/93 2/28/94 5/31/94
- -------------------- ------- ------- -------
1 1% 4% 3%
2 5 0 2
3 0 0 0
4 1 1 1
5 13 7 5
6 73 73 69
7 2 2 6
8 1 2 1
9 0 1 2
10 2 3 2
Not Rated 2 7 9
- --------------------------------------------
WEIGHTED AVERAGE 5.6 5.6 5.4
- --------------------------------------------
*On a scale of 1 to 10, with Grade 1 representing highest
quality.
MATURITY DIVERSIFICATION
Percent of Net Assets
Range 5/31/93 2/28/94 5/31/94
- ------------------------- ------- ------- -------
Short-Term (0 to 1 Year) 4% 5% 6%
Short Intermediate-Term
(1+ to 5 Years) 12 11 7
Long Intermediate-Term
(5+ to 10 Years) 59 54 57
Long-Term (Over 10 Years) 25 30 30
- -------------------------------------------------
WEIGHTED AVERAGE (YEARS) 9.0 9.9 10.3
- -------------------------------------------------
SECTOR DIVERSIFICATION*
Percent of Net Assets
5/31/93 2/28/94 5/31/94
- ------------------------- ------- ------- -------
Hotels & Gaming 11% 12% 11%
Foreign 3 9 10
Health Care 8 6 8
Paper & Paper Products 2 5 7
Textiles & Apparel 4 5 5
Specialty Chemicals 1 3 5
Aerospace & Defense 0 4 4
Manufacturing 8 3 3
Beverages 1 3 3
Building Products 3 3 3
Telecommunications 0 3 3
Cable Operators 5 4 2
Containers 8 5 2
Miscellaneous 4 3 2
Specialty Retailers 4 3 2
Service 1 2 2
- -------------------------------------------------
*Sectors representing at least 2% of net assets on 5/31/94.
<PAGE>
FISCAL-YEAR PERFORMANCE COMPARISON
A line graph compares the 5/31/94 value of a hypothetical $10,000 investment
made in the High-Yield Fund at its inception (12/31/94) and a similar
investment made concurrently in the First Boston High-Yield Index. At 5/31/94,
the Fund investment would have been worth $33416 and the First Boston Index
investment would have been worth $27657.
FISCAL-YEAR PERFORMANCE
Periods Ended May 31, 1994
Since
1 Year 5 Years* Inception (12/31/84)*
------ -------- ---------------------
2.34% 7.97% 10.62%
- --------------------------------------
* Average Annual Compound Total Return
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
<PAGE>
INVESTMENT RECORD
T. ROWE PRICE HIGH YIELD FUND
The table below shows the investment record of one share of the T. Rowe Price
High Yield Fund, purchased at the original offering price of $10.00. Over this
time, interest rates have been volatile.
The results shown should not be considered a representation of the dividend
income or capital gain or loss which may be realized from an investment made
in the Fund today.
- ------------------------------------------------------------------------------
With
Net Capital With Dividends and
Fiscal Asset Income Gains Dividends Capital Gains Total
Year Ended Value Dividends Distributions/2/ Reinvested Reinvested Return
- ------------ ------ --------- ---------------- ---------- ------------- ------
2/28/85 /1/ $9.99 $0.22 - $10.21 $10.21 1.96%
1986 10.99 1.37 - 12.79 12.79 25.45
1987 11.26 1.28 $0.13 14.71 14.88 16.36
1988 10.21 1.25 0.14 15.03 15.40 3.49
1989 10.24 1.26 - 17.04 17.46 13.37
1990 8.20 1.26 - 15.57 15.96 -8.62
1991 7.13 1.07 - 15.59 15.98 0.12
1992 8.23 0.88 - 20.14 20.65 29.15
1993 8.58 0.82 - 23.15 23.75 14.96
1994 9.15 0.81 - 26.99 27.66 16.59
5/31/94 /3/ 8.37 0.18 - 25.23 25.85 -6.52
- ------------------------------------------------------------------------------
TOTAL $10.40 $0.27
- ------------------------------------------------------------------------------
/1/ From inception 12/31/84 to 2/28/85.
/2/ Includes short-term capital gain of $0.09 on 3/11/86.
/3/ Fiscal year-end changed from February 28 to May 31; figures are for three
months from 3/1/94 to 5/31/94.
<PAGE>
STATEMENT OF NET ASSETS (AMOUNTS IN THOUSANDS)
T. ROWE PRICE HIGH YIELD FUND / MAY 31, 1994
<TABLE>
<CAPTION>
Corporate Bonds & Notes, Common & Preferred Stocks---85.0%
Face Amount Value
-------------------- ----------
<S> <C> <C> <C> <C>
AEROSPACE & DEFENSE---4.1%
[double dagger] Abex, Common Stock............................................................ 620 shs. $4,498
IMO Industries, Sr. Sub. Deb., 12.00%, 11/1/01................................ $23,300 23,999
12.25%, 8/15/97............................................................. 1,970 1,960
K & F Industries, Sr. Secured Notes, 11.875%, 12/1/03......................... 9,650 8,878
Sr. Sub. Notes, 13.75%, 8/1/01.............................................. 9,725 8,947
[double dagger] Tracor, Common Stock.......................................................... 374 shs. 2,992
[double dagger] Tracor Technology Resources, Common Stock..................................... 40 40
51,314
AUTOMOBILES & RELATED---2.0%
[double dagger]# Borg Warner Automotive, Common Stock, Class A................................. 319 7,733
Exide, Sr. Notes, 10.75%, 12/15/02............................................ $8,250 8,663
[double dagger] Lear Seating, Common Stock.................................................... 379 shs. 6,965
[double dagger] Motor Wheel, Common Stock, Class A............................................ 6 1,200
[dagger] 24,561
BEVERAGES---3.4%
Coca-Cola Bottling Group, Sr. Sub. Notes, 9.00%, 11/15/03..................... $5,200 4,732
Dr Pepper Bottling Holdings, Sr. Disc. Notes, STEP, Zero Coupon,
2/15/98; 11.625%, 2/15/98-2/15/03........................................... 17,850 11,602
[double dagger] Common Stock, Class A......................................................... 1,184 shs. 4,736
[double dagger]# Common Stock, Class A......................................................... 120 480
[double dagger] Dr Pepper/Seven-Up, Common Stock.............................................. 533 13,048
Texas Bottling Group, Sr. Sub. Notes, 9.00%, 11/15/03......................... $8,000 7,200
41,798
BROADCASTING---1.1%
[double dagger] SCI Television, Common Stock, Class B......................................... 50 shs. 0
Spectravision, Sr. Sub. Notes, 11.50%, 12/1/02................................ $23,523 13,408
13,408
BUILDING PRODUCTS---3.1%
Acme Holdings, Sr. Notes, 11.75%, 6/1/00...................................... 12,000 6,600
Maxxam Group, Sr. Secured Notes, 11.25%, 8/1/03............................... 10,100 9,595
Overhead Door, Sr. Notes, 12.25%, 2/1/00...................................... 9,825 10,316
Southdown, Sr. Sub. Notes, 14.00%, 10/15/01................................... 5,175 5,822
Waxman Industries, Sr. Secured Notes, 12.25%, 9/1/98.......................... 6,850 6,713
[double dagger] Warrants.................................................................... 133 wts. 7
39,053
BUILDING & REAL ESTATE---0.0%
[double dagger] Gulfstream Housing, Warrants.................................................. 30 3
Mid Atlantic Realty Trust, Common Stock....................................... 33 shs. 304
307
CABLE OPERATORS---2.5%
Adelphia Communications, Sr. Deb., 11.875%, 9/15/04........................... $2,000 2,020
Sr. Notes, 12.50%, 5/15/02.................................................. 5,600 5,768
[double dagger] Cencom Cable Entertainment, Warrants#......................................... 10 wts. 500
[dagger]
Continental Cablevision, Sr. Sub. Deb., 11.00%, 6/1/07........................ $6,450 $6,643
[double dagger] Insight Communications, Warrants.............................................. 80 wts. 80
[double dagger] Peachtree Cable Associates Ltd., Common Stock................................. 10 shs. 170
[dagger]
Summit Communications Group, Sr. Sub. Deb., 10.50%, 4/15/05................... $15,675 15,636
30,817
CONGLOMERATES---1.7%
[double dagger] Insilco, Common Stock......................................................... 1 shs. 9
Jordan Industries, Sr. Sub. Disc. Notes, STEP, Zero Coupon, 8/1/98;
11.75%, 8/1/98-8/1/05....................................................... $31,400 18,212
[double dagger] Reeves Industries, Common Stock............................................... 75 shs. 337
[dagger]
[double dagger] Thermadyne Holdings, Common Stock............................................. 26 341
[double dagger] Triton Group Limited, Common Stock............................................ 1,119 1,679
20,578
CONTAINERS---2.3%
Owens-Illinois, Sr. Deb., 11.00%, 12/1/03..................................... $6,050 6,473
Plastic Containers, Sr. Secured Notes, 10.75%, 4/1/01......................... 12,300 12,300
Silgan Holdings, Sr. Sub. Notes, 11.75%, 6/15/02.............................. 10,000 10,250
29,023
COSMETICS---1.0%
Revlon Worldwide, Sr. Secured Disc. Notes, Zero Coupon, 3/15/98............... 30,750 12,915
ELECTRONIC COMPONENTS---1.7%
[double dagger] Amphenol, Common Stock, Class A............................................... 150 shs. 2,548
[double dagger] Berg Electronics Holdings, Common Stock....................................... 740 1,294
[dagger]
Sr. Exch. Pfd. Stock, Series E.............................................. 707 17,861
21,703
ENTERTAINMENT & LEISURE---0.9%
[double dagger] Fair Lanes Entertainment, Sr. Notes, Zero Coupon, 1/31/01..................... $4,485 112
[double dagger] PIK, Series A, 9.50%, 1/31/98............................................. 10,618 531
[double dagger] Sr. Secured Notes, 11.875%, 8/15/97......................................... 6,400 5,056
[double dagger] Common Stock, Class A....................................................... 257 shs. 13
Sam Houston Race Park, Sr. Secured Notes, 11.75%, 7/15/99..................... $6,000 5,100
[double dagger] Warrants.................................................................... 24 wts. 180
[dagger] 10,992
EXPLORATION & PRODUCTION---1.8%
[double dagger] Argo Petroleum, Sub. Deb., 16.50%, 1/1/02..................................... $2,000 86
Gulf Canada Resources Limited, Sr. Sub. Deb., 9.25%, 1/15/04.................. 2,260 2,068
Maxus Energy, Sr. Notes, 9.875%, 10/15/02..................................... 2,910 2,619
Mesa, Secured Disc. Notes, STEP, Zero Coupon, 6/30/95;
12.75%, 6/30/95-6/30/98..................................................... 6,562 5,742
[double dagger] Common Stock................................................................ 323 shs. 2,181
[dagger]
Plains Resources, Sr. Sub. Notes, 12.00%, 10/1/99............................. $10,000 9,900
22,596
FOOD PROCESSING---1.3%
Mafco, Sr. Sub. Notes, 11.875%, 11/15/02...................................... 12,750 12,877
Rymer Foods, Sr. Notes, 11.00%, 12/15/00...................................... 2,782 2,521
[double dagger] Common Stock................................................................ 604 shs. 1,058
16,456
FOOD SERVICES---0.3%
ARA Group, Sub. Deb., 12.00%, 4/15/00......................................... $3,000 $3,240
GENERAL MERCHANDISERS---0.8%
[double dagger] Federated Department Stores, Common Stock..................................... 1 shs. 1
[double dagger] G.C. Murphy, Deb., 7.375%, 1/1/97............................................. $2,310 809
[double dagger] Lamonts Apparel, Common Stock................................................. 309 shs. 618
[dagger]
[double dagger] Warrants.................................................................... 25 wts. 0
[double dagger] Macy Swiss Bank Debt, 10.41%, 6/24/98......................................... $9,500 8,455
[dagger] 9,883
HEALTH CARE---7.7%
Continental Medical Systems, Sr. Sub. Notes, 10.875%, 8/15/02................. 35,575 32,996
Healthsouth Rehabilitation, Sr. Sub. Notes, 9.50%, 4/1/01..................... 5,125 4,971
Healthtrust, Sub. Notes, 10.25%, 4/15/04...................................... 22,500 22,612
Quorum Health Group, Notes, 11.875%, 12/15/02................................. 19,225 21,148
[double dagger] The Kendall Company, Rights................................................... 2 rts. 54
[double dagger] Warrants, Series A.......................................................... 3 wts. 90
[double dagger] Series B.................................................................. 3 90
Wright Medical Technology, Sr. Secured Notes, Series B, 10.75%, 7/1/00........ $14,100 13,395
[double dagger] Warrants.................................................................... 4 wts. 305
[dagger] 95,661
HOTELS & GAMING---11.2%
Aztar, Sr. Sub. Notes, 11.00%, 10/15/02....................................... $12,600 12,096
[double dagger] Bally's Grand, Common Stock................................................... 112 shs. 1,229
[double dagger] Warrants.................................................................... 51 wts. 203
[double dagger] Becker Gaming, Warrants#...................................................... 425 1,062
[dagger]
[dagger] Belle Casinos, 1st Mtg. Notes, 12.00%, 10/15/00............................... $6,650 5,819
[double dagger] Warrants.................................................................... 7 wts. 33
[dagger]
[dagger]# Capital Gaming International, Sr. 2nd Mtg. Bonds, 11.50%, 2/1/01.............. $8,300 9,130
[double dagger] Warrants#................................................................... 21 wts. 21
[dagger]
[dagger]# Capital Queen and Casino, 1st Mtg. Notes, 12.00%, 11/15/00.................... $6,800 5,780
[dagger] Elsinore, Units, (144a), (Each unit consists of a $1,000 par 1st Mtg. Note,
12.50%, 10/1/00 and 40.794 warrants)........................................ 19,500 15,795
GNF, 1st Mtg. Notes, Series B, 10.625%, 4/1/03................................ 8,000 6,000
Grand Casino Resorts, Gtd. 1st Mtg. Bonds, Series B, 12.50%, 2/1/00........... 15,250 16,127
[double dagger] Grand Casinos, Common Stock................................................... 161 shs. 2,779
[double dagger] GTech Holdings, Common Stock.................................................. 8 169
[dagger] Hemmeter Enterprises, PIK Units, (Each unit consists of a $1,000 par
Sr. Sec. Note, 11.50%, 12/15/00, and 12 warrants) .......................... $10,500 9,765
[double dagger] Hollywood Casino, Common Stock, Class A....................................... 633 shs. 4,750
[double dagger] Hollywood Park, Common Stock.................................................. 130 2,860
President Riverboat Casinos, Sr. Sub. Notes, 11.75%, 9/15/01.................. $18,225 17,314
[double dagger] Common Stock................................................................ 30 shs. 285
[double dagger] Warrants.................................................................... 147 wts. 110
[dagger]
PRT Funding, Sr. Notes, 11.625%, 4/15/04...................................... $3,000 2,400
[double dagger] Resorts International, Secured Notes, PIK, Series B, 15.00%, 4/15/94.......... 5,447 3,541
Showboat, 1st Mtg. Bonds, 9.25%, 5/1/08....................................... $4,350 $4,035
Trump Taj Mahal, 1st Mtg. Bonds, PIK, 11.35%, 11/15/99........................ 21,023 18,282
139,585
MANUFACTURING---3.5%
American Standard, Sr. Deb., 11.375%, 5/15/04................................. 19,250 20,212
Calmar, Sr. Secured Notes, 12.00%, 12/15/97................................... 1,000 980
Calmar Spraying Systems, Sr. Sub. Notes, 14.00%, 2/15/99...................... 4,100 3,916
Coltec Industries, Sr. Sub. Notes, 10.25%, 4/1/02............................. 9,000 9,000
Plastic Specialties & Technologies, Common Stock.............................. 70 shs. 70
[double dagger] Simplicity Manufacturing, Common Stock........................................ 23 23
Uniroyal Technology, Sr. Secured Notes, 11.75%, 6/1/03........................ $9,100 8,827
[double dagger] Warrants.................................................................... 131 wts. 327
43,355
MEDIA & ADVERTISING---1.3%
Heritage Media, Sr. Sub. Notes, 11.00%, 10/1/02............................... $15,300 15,682
METALS & MINING---0.2%
Freeport McMoRan Copper & Gold, Conv. Pfd. Stock.............................. 125 shs. 2,891
MISCELLANEOUS---2.3%
[double dagger] Allied Waste Industries, Common Stock......................................... 305 1,220
Anacomp International N.V., Conv. Sub. Deb., 9.00%, 1/15/96................... $1,900 1,810
Convex Computer, Conv. Sub. Deb., 6.00%, 3/1/12............................... 7,500 4,162
Cooper Industries, Conv. Pfd. Stock........................................... 100 shs. 2,325
[double dagger] Efficient Market Services, Conv. Pfd. Stock, Series C*........................ 364 6,055
[dagger]
Envirotest Systems, Sr. Sub. Notes, 9.125%, 3/15/01........................... $1,470 1,404
9.625%, 4/1/03............................................................ 3,750 3,543
[double dagger] Common Stock, Class A....................................................... 183 shs. 3,439
[double dagger] Miramar Marine, Warrants...................................................... 54 wts. 1
[double dagger] Nutri System, Warrants........................................................ 150 0
[double dagger] Wang Laboratories, Common Stock............................................... 411 shs. 4,830
28,789
PAPER & PAPER PRODUCTS---7.5%
Container Corporation of America, Sr. Notes, 11.25%, 5/1/04................... $4,350 4,481
[double dagger] Gaylord Container, Common Stock, Class A...................................... 1,615 shs. 8,275
[double dagger] Jefferson Smurfit, Common Stock............................................... 400 5,500
[double dagger] Kane Industries, Sr. Sub. Disc. Notes, STEP, Zero Coupon, 8/1/95;
8.00%, 8/1/95-2/1/98...................................................... $1,050 3
[double dagger] Warrants.................................................................... 45 wts. 0
[double dagger] Papercraft Holding, Common Stock.............................................. 9 shs. 0
Repap Enterprises, Conv. Notes, 8.50%, 8/1/97................................. $7,500 6,750
[double dagger] Common Stock................................................................ 2,783 shs. 8,870
Repap Wisconsin, Sr. Secured 2nd Priority Notes, 9.875%, 5/1/06............... $11,325 10,419
Stone Container, Sr. Sub. Notes, 9.875%, 2/1/01............................... 18,500 17,575
10.75%, 4/1/02............................................................ 17,750 16,907
[double dagger] Common Stock................................................................ 700 shs. 10,238
Conv. Exch. Pfd. Stock, Series E............................................ 178 3,380
[double dagger] Stone Savannah River Pulp & Paper, Common Stock............................... 5 62
[dagger] 92,460
PRINTING & PUBLISHING---0.0%
[double dagger] New Century Communications, Pfd. Stock........................................ 124 shs. $124
[dagger]
[double dagger] Warrants, Series A.......................................................... 46 wts. 5
[dagger]
[double dagger] Series B.................................................................. 29 0
[dagger] 129
REAL ESTATE---0.8%
[double dagger] Prime Retail, Conv. Pfd. Stock, Series B...................................... 390 shs. 9,555
REFINING---1.5%
Tesoro Petroleum, Sub. Deb., 12.75%, 3/15/01.................................. $18,881 18,881
SERVICE---2.2%
[double dagger] Borg Warner Security, Common Stock............................................ 10 shs. 141
[dagger] Protection One Alarm Monitoring, Sr. Sub. Notes, Series A, 12.00%, 11/1/03.... $4,750 4,513
[double dagger] Warrants.................................................................... 133 wts. 427
[dagger]
Solon Automated Services, Sr. Notes, 12.75%, 7/15/01.......................... $18,750 19,687
Sr. Sub. Notes, 13.75%, 10/15/02............................................ 2,900 3,031
27,799
SPECIALTY CHEMICALS---4.7%
Agriculture Minerals and Chemicals, Sr. Notes, 10.75%, 9/30/03................ 14,300 14,407
IMC Fertilizer Group, Sr. Notes, Series B, 9.25%, 10/1/00..................... 6,000 5,670
9.45%, 12/15/11............................................................. 4,600 4,370
10.125%, 6/15/01............................................................ 4,690 4,596
10.75%, 6/15/03............................................................. 16,750 16,918
Sherritt, Sr. Notes, 10.50%, 3/31/14.......................................... 12,000 11,805
57,766
SPECIALTY RETAILERS---2.3%
Barry's Jewelers, Sub. Notes, 12.625%, 5/16/96................................ 77 62
[double dagger] Common Stock................................................................ 968 shs. 968
[double dagger] Dart Drug Stores, Pfd. Stock, $4.00........................................... 46 0
[double dagger] Warrants.................................................................... 6 wts. 0
Loehmann's Holdings, Sr. Secured Notes, 10.50%, 10/1/97....................... $7,500 6,675
Sr. Sub. Notes, 13.75%, 2/15/99............................................. 10,850 10,199
[double dagger] Common Stock................................................................ 476 shs. 476
[dagger]
[double dagger] Class B................................................................... 321 65
Pfd. Stock, Series A........................................................ 524 157
[double dagger] Merry Go Round Enterprises, 5.50%, 7/3/95..................................... $10,594 9,217
[dagger]
[double dagger] Payless Cashways, Warrants.................................................... 10 wts. 163
[double dagger] The Southland Company, Common Stock........................................... 1 shs. 0
27,982
SUPERMARKETS---1.9%
Grand Union Capital, Sr. Sub. Notes, STEP, Zero Coupon, 7/15/99;
15.00%, 7/15/99-7/15/04................................................... $10,000 4,100
Zero Coupon, 1/15/07........................................................ 15,760 1,852
Grand Union Holdings, Pfd. Stock, Series A.................................... 33 shs. 3,861
[double dagger] Warrants, Class A........................................................... 1 wts. 361
[dagger]
GU Acquisition, Sr. Sub. Notes, 13.00%, 3/2/98................................ $1,200 $1,212
The Grand Union Company, Sr. Sub. Notes, 12.25%, 7/15/02...................... 12,600 12,600
23,986
TELECOMMUNICATIONS---3.0%
[double dagger] ALC Communications, Warrants.................................................. 60 wts. 60
Allnet Communication Services, Sr. Sub. Notes, 9.00%, 5/15/03................. $5,615 5,334
Dial Page, Sr. Notes, 12.25%, 2/15/00......................................... 14,530 14,748
[dagger] Mobile Telecommunication Technologies, (144a), Conv. Pfd. Stock............... 192 shs. 5,331
[dagger] Page America Group, Sr. Sub. Notes, 12.00%, 12/31/03.......................... $8,000 7,600
[double dagger] Common Stock................................................................ 500 shs. 1,841
[dagger]
[dagger] Conv. Pfd. Stock, Series I.................................................. 20 1,636
[double dagger] Warrants.................................................................... 711 wts. 253
[dagger] 36,803
TEXTILES & APPAREL---4.7%
[dagger] Acme Boot, Sr. Notes, 11.50%, 12/15/00........................................ $9,000 7,650
[dagger] Units, (Each unit consists of 1 share of 12.50% Cum. Pfd. Stock
and 7 shares of common stock)............................................. 4 3,230
Hartmarx, Sr. Sub. Notes, 10.875%, 1/15/02.................................... 10,875 10,440
Plaid Clothing Group, Sr. Sub. Notes, 11.00%, 8/1/03.......................... 14,275 13,704
Synthetic Industries, Sr. Sub. Deb., 12.75%, 12/1/02.......................... 21,300 23,430
58,454
TOBACCO---0.7%
Consolidated Cigar, Sr. Sub. Notes, 10.50%, 3/1/03............................ 9,245 8,321
TRANSPORTATION---1.5%
Sea Containers Ltd., 12.50%, 12/1/04.......................................... 17,200 17,974
Sr. Notes, Series B, 12.50%, 12/1/04........................................ 1,000 1,050
19,024
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES, COMMON & PREFERRED STOCKS
(COST---$1,108,938) 1,055,767
Hybrid Instruments---0.8%
Bankers Trust Bank Notes, 5.00%, 12/14/94; principal repayment value is
indexed to the spread between Mexican par bonds and U.S. Treasury Bonds..... 4,750 3,337
Goldman Sachs, L.P., CP, 3.80%, 12/2/94; principal repayment value is indexed 9,750 6,874
to the spread between Mexican par bonds and U.S. Treasury Bonds.............
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL HYBRID INSTRUMENTS (COST---$13,340) 10,211
U.S. $ Denominated Foreign Securities/1/---6.1%
Algeria Reprofiling Loans, FR, 5.00%, 3/4/00.................................. 3,000 1,200
Argentina Bonds, FR, 5.00%, 3/31/05........................................... 10,000 7,862
Argentina Discount Bonds, 5.8125%, 3/31/23.................................... 11,000 8,415
Argentina Par Bonds, FR, 4.25%, 3/31/23....................................... 8,000 4,450
Brazil Bonds, Series C, 4.00%, 12/31/08 When-&-If-Issued...................... 12,000 5,370
Brazil Exit Bonds, 6.00%, 9/15/13............................................. $5,000 $2,488
Brazil IDU, 4.3125%, 1/1/01................................................... 4,950 3,682
[double dagger] Bulgaria Syndicated, Non-performing Loans, 3.937%, 1/1/99..................... 4,000 1,140
Kingdom of Morrocco, FR, 4.50%, 1/1/09........................................ 26,500 19,908
Poland Debt Deferred Restructure Agreement, Zero Coupon, 12/31/99............. 5,000 1,888
[double dagger] Poland Revolving Short-Term Trade Agreement................................... 20,667 7,130
Venezuela DCB, FR, 4.3125%, 12/18/07.......................................... 3,000 1,661
Venezuela FLIRB, Series A, 7.00%, 3/31/07..................................... 2,000 1,130
Venezuela Par Bonds, 5.4375%, 3/31/20......................................... 5,000 2,913
[double dagger] Vnesheconombank Bilateral, Non-performing Loans............................... 2,767 837
[double dagger] Vnesheconombank Syndicated, Non-performing Loans.............................. 17,000 5,142
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. $ DENOMINATED FOREIGN SECURITIES (COST---$83,526) 75,216
Non-U.S. $ Denominated Foreign Securities/2/---3.0%
[double dagger] Bulgaria Letter of Credit..................................................... ATS 117,766 3,514
[double dagger] Bulgaria Syndicated, Non-performing Loans..................................... ATS 80,000 2,335
Eskom, Series E, 11.00%, 06/01/08............................................. ZAR 98,700 17,408
[double dagger] Poland Debt Deferred Restructure Agreement.................................... CHF 12,000 3,058
[double dagger] Poland Revolving Short-Term Trade Agreement................................... ECU 5,000 1,932
Vnesheconombank, 8.00%, 9/8/95................................................ ATS 35,000 2,558
[double dagger] Vnesheconombank Syndicated, Non-performing Loans.............................. FRF 30,750 1,340
[double dagger] Non-performing Loans.......................................................... ATS 32,415 666
[double dagger] Non-performing Loans.......................................................... ECU 5,500 1,529
[double dagger] Non-performing Loans.......................................................... GBP 8,749 3,142
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-U.S. $ DENOMINATED FOREIGN SECURITIES (COST---$44,614) 37,482
Commercial Paper---4.8%
Aon, 4.20-4.25%, 6/1/94....................................................... $8,186 8,181
BASF, 4.22%, 6/22/94.......................................................... 5,747 5,725
Countrywide Funding, 4.20%, 6/1/94............................................ 2,000 1,998
Hanson Finance, 4.25%, 6/23/94................................................ 1,200 1,196
Harvard University, 4.25%, 6/1/94............................................. 20,131 20,129
John Hancock Capital, 4(2), 4.27%, 6/1/94..................................... 2,025 2,025
Koch Industries, 4.28%, 6/1/94................................................ 20,200 20,197
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST---$59,453) 59,451
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES---99.7% (COST $1,309,871)...................................... $1,238,127
- -------------------------------------------------------------------------------------------------------------------------------
3,153
Other Assets Less Liabilities---0.3% ----------
NET ASSETS CONSISTING OF:
Accumulated net investment income---net of distributions....................................... $3,988
Accumulated realized gains/losses---net of distributions....................................... (129,505)
Unrealized depreciation of investments......................................................... (73,023)
Paid-in-capital applicable to 148,244,826 shares of $0.01 par value capital stock outstanding; 1,439,820
1,000,000,000 shares authorized.............................................................. ---------------
$1,241,280
----------
NET ASSETS---100.0%............................................................................ ----------
$8.37
----------
NET ASSET VALUE PER SHARE...................................................................... ----------
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
/1/ Marketable securities (payable in U.S. dollars) issued or
guaranteed by a foreign government or community.
/2/ Denominated in foreign currency.
[double dagger] Non-income Producing
[dagger] Private Placement
* Security valued by the Fund's Board of Directors.
# Restricted as to the resale of the security.
CP - Commercial Paper
DCB - Debt Conversion Bond
FLIRB - Front Loaded Interest Reduction Bond
FR - Floating Rate
IDU - Interest Due & Unpaid
PIK - Paid in Kind
STEP - Stepped Coupon Bond.
144a - Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers.
4(2) - Commercial Paper sold within terms of a private-placement memorandum,
exempt from registration under Section 4.2 of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors."
ATS - Austrian schilling denominated
CHF - Swiss franc denominated
ECU - European currency unit denominated
FRF - French franc denominated
GBP - British sterling denominated
ZAR - South African financial rand denominated
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
T. ROWE PRICE HIGH YIELD FUND
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1994 Year Ended
[double dagger] Feb. 28, 1994
--------------------- -------------
Amounts in Thousands
-----------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest & dividend income...................... $31,313 $160,452
--------------------- -------------
Expenses
Investment management fees.................... 2,197 10,554
Shareholder servicing fees & expenses......... 513 2,569
Custodian and accounting fees & expenses...... 93 360
Prospectus & shareholder reports.............. 27 163
Legal & auditing fees......................... 25 67
Registration fees & expenses.................. 17 116
Directors' fees & expenses.................... 5 27
Miscellaneous ................................ 9 35
--------------------- -------------
Total expenses................................ 2,886 13,891
--------------------- -------------
Net investment income........................... 28,427 146,561
--------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss)
Securities.................................... (5,716) 84,762
Currencies and forward currency exchange
contracts................................... (535) 333
Options....................................... 306 (657)
--------------------- -------------
Net realized gain (loss)...................... (5,945) 84,438
--------------------- -------------
Change in unrealized appreciation or depreciation
Securities.................................... (118,340) 13,999
Other assets and liabilities denominated in
foreign currencies.......................... (1,240) (40)
--------------------- -------------
Change in unrealized appreciation or (119,580) 13,959
depreciation.................................... --------------------- -------------
Net gain (loss) on investments ................. (125,525) 98,397
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS ..................................... $(97,098) $244,958
--------------------- -------------
--------------------- -------------
- ------------------------------------------------------------------------------------
[double dagger] The Fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
T. ROWE PRICE HIGH YIELD FUND
</TABLE>
<TABLE>
<CAPTION>
Three
Months Ended
May 31, 1994 Year Ended
[double ---------------------------------------
dagger] Feb. 28, 1994 Feb. 28, 1993
------------ ------------- -------------
Amounts in Thousands
----------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income.................................. $28,427 $146,561 $120,882
Net realized gain (loss) on investments................ (5,945) 84,438 28,645
Change in unrealized appreciation or depreciation of
investments ......................................... (119,580) 13,959 22,971
------------ ------------- -------------
Increase (decrease) in net assets from
operations........................................... (97,098) 244,958 172,498
------------ ------------- -------------
Distributions to shareholders
Net investment income.................................. (28,787) (146,027) (121,009)
------------ ------------- -------------
Capital share transactions/1/
Sold .................................................. 65,217 706,868 840,145
Distributions reinvested .............................. 22,300 117,658 97,288
Redeemed .............................................. (344,528) (703,713) (692,913)
Redemption fees ....................................... 406 - -
------------ ------------- -------------
Increase (decrease) in net assets from capital share
transactions......................................... (256,605) 120,813 244,520
------------ ------------- -------------
Total increase (decrease) ............................... (382,490) 219,744 296,009
NET ASSETS
Beginning of period.................................... 1,623,770 1,404,026 1,108,017
------------ ------------- -------------
End of period.......................................... $1,241,280 $1,623,770 $1,404,026
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
/1/Share transactions
Sold .................................................. 7,539 shs. 78,966 shs. 101,010 shs.
Distributions reinvested .............................. 2,626 13,001 11,680
Redeemed .............................................. (39,312) (78,166) (83,750)
------------ ------------- -------------
Increase (decrease) in shares outstanding ............. (29,147) shs. 13,801 shs. 28,940 shs.
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
<FN>
[double dagger] The Fund's fiscal year-end was changed to May 31.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
T. ROWE PRICE HIGH YIELD FUND / MAY 31, 1994
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price High Yield Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
Effective March 1, 1994, the fiscal year-end of the Fund changed from February
28 to May 31.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields. Equity securities are valued
at the last bid price.
For purposes of determining the Fund's net asset value per share, all assets
and liabilities initially expressed in foreign currencies are converted into
U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by, or under the supervision of, the officers of
the Fund, as authorized by the Board of Directors.
B) Currency translation - Foreign currency amounts are translated into U.S.
dollars at prevailing exchange rates as follows: assets and liabilities at the
rate of exchange at the end of the respective period, purchases and sales of
securities and income and expenses at the rate of exchange prevailing on the
dates of such transactions.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Dividend income and distributions to
shareholders are recorded by the Fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income
tax regulations which may differ from generally accepted accounting
principles.
NOTE 2 - FINANCIAL INSTRUMENTS
As a part of its investment program, the Fund engages in the following
activities, the nature and risk of which are set forth more fully in the
Fund's Prospectus and Statement of Additional Information.
A) Forward Currency Exchange Contracts - At May 31, 1994, the Fund had entered
into various forward currency exchange contracts under which it is obligated
to exchange currencies at specified future dates. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movements in currency values. Outstanding contracts at May 31, 1994 are
as follows:
Contract to
--------------------
Receive Deliver
Settlement --------- ---------- Unrealized Counter-
Date Amount in Thousands (Deprec.) party
- ---------- --------------------- ---------- ---------
9/2/94 USD 4,055 ATS 49,143 (193) Salomon
9/8/94 USD 238 ATS 2,800 (4) Citibank
9/12/94 USD 1,762 ATS 21,334 (82) Citibank
9/12/94 USD 4,814 CHF 6,913 (125) Citibank
9/26/94 USD 2,900 ATS 34,669 (99) Citibank/
Salomon
9/30/94 USD 2,688 ATS 31,671 (51) Citibank
10/11/94 USD 1,971 GBP 1,350 (67) Salomon
10/17/94 USD 368 GBP 251 (11) Citicorp
Aggregate unrealized depreciation of $632,000 on these contracts at May 31,
1994 is included in the accompanying financial statements.
<PAGE>
B) Other - Purchases and sales of portfolio and U.S. Government securities,
excluding short-term, were as follows:
Three Months Year Ended
Ended
May 31, 1994 Feb. 28, 1994
------------ --------------
Portfolio Securities
Purchases $200,179,000 $1,734,982,000
Sales 455,303,000 1,630,316,000
U.S. Government Securities
Purchases $--- $4,069,000
Sales 4,231,000 5,281,000
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income. The Fund has unused realized capital loss carryforwards
for federal income tax purposes of $130,610,000 at May 31, 1994, which expire
in 1998 through 2002.
At May 31, 1994, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,309,871,000 and net unrealized
depreciation aggregated $71,744,000, of which $54,444,000 related to
appreciated investments and $126,188,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.30% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at May 31, 1994,
and for the three months then ended was 0.34%. The rate at February 28, 1994
was 0.34%, and for the year then ended was 0.35%. The Fund pays a pro rata
portion of the Group Fee based on the ratio of the Fund's net assets to those
of the Group.
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc. (RPS)
are wholly owned subsidiaries of the Manager. TRPS provides transfer and
dividend disbursing agent functions and shareholder services for all accounts.
RPS provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Fund. The Manager, under a separate agreement,
calculates the daily share price and maintains the financial records of the
Fund. The Fund is one of several T. Rowe Price mutual funds (the Underlying
Funds) in which the T. Rowe Price Spectrum Income Fund (Spectrum) invests. In
accordance with an Agreement between Spectrum, the Underlying Funds, the
Manager and TRPS, expenses from the operation of Spectrum are borne by the
Underlying Funds based on each Underlying Fund's proportionate share of assets
owned by Spectrum. For the three months ended May 31, 1994, and the year ended
February 28, 1994, the Fund incurred fees totalling approximately $584,000 and
$2,389,000, respectively, for these services provided by related parties. At
May 31, 1994, investment management and service fees payable were $930,000.
<PAGE>
FINANCIAL HIGHLIGHTS
T. ROWE PRICE NEW INCOME FUND
<TABLE>
<CAPTION>
For a share outstanding throughout each period
-----------------------------------------------------------------
Three Months
Ended Year Ended
May 31, 1994 ----------------------------------------------------
[double Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
dagger] 1994 1993 1992 1991 1990
------------ ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of PERIOD.......... $9.15 $8.58 $8.23 $7.13 $8.20 $10.24
------------ ---------- ---------- ---------- ---------- --------
Investment Activities ........................
Net investment income....................... 0.18 0.81 0.82 0.88 1.07 1.26
Net realized and unrealized gain (loss)..... (0.78) 0.57 0.35 1.10 (1.07) (2.04)
------------ ---------- ---------- ---------- ---------- --------
Total from Investment Activities.............. (0.60) 1.38 1.17 1.98 - (0.78)
Distributions
Net investment income....................... (0.18) (0.81) (0.82) (0.88) (1.07) (1.26)
------------ ---------- ---------- ---------- ---------- --------
NET ASSET VALUE, END OF PERIOD................ $8.37 $9.15 $8.58 $8.23 $7.13 $8.20
------------ ---------- ---------- ---------- ---------- --------
------------ ---------- ---------- ---------- ---------- --------
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return.................................. (6.52)% 16.59% 14.96% 29.15% 0.12% (8.62)%
Ratio of Expenses to Average Net Assets....... 0.85% 0.85% 0.89% 0.97% 1.03% 1.02%
[dagger]
Ratio of Net Investment Income to Average Net 8.37%
Assets...................................... [dagger] 8.99% 9.85% 11.22% 14.02% 13.01%
Portfolio Turnover Rate....................... 62.5% 107.0% 104.4% 58.9% 82.6% 65.6%
[dagger]
Net Assets, End of Period (in thousands)...... $1,241,280 $1,623,770 $1,404,026 $1,108,017 $556,261 $660,014
- ----------------------------------------------------------------------------------------------------------------
[double dagger] The Fund's fiscal year-end was changed to May 31.
[dagger] Annualized.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
T. Rowe Price High Yield Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the selected per
share data and information (which appears under the heading "Financial
Highlights") present fairly, in all material respects, the financial position
of T. Rowe Price High Yield Fund, Inc. at May 31, 1994, the results of its
operations, the changes in its net assets and the selected per share data and
information for each of the fiscal periods presented in conformity with
generally accepted accounting principles. These financial statements and
selected per share data and information (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 1994 by correspondence with custodians
and brokers and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
June 17, 1994
</TABLE>
