PAGE 1
Prospectus for the T. Rowe Price Virginia Tax-Free Funds, dated
November 29, 1994, should be inserted here.
TO OPEN AN ACCOUNT
INVESTOR SERVICES
1-800-977-1577
FOR EXISTING ACCOUNTS
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
FOR YIELDS & PRICES
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1-800-638-2587
24 HOURS, 7 DAYS
INVESTOR CENTERS
101 EAST LOMBARD ST.
BALTIMORE, MD
T. ROWE PRICE
FINANCIAL CENTER
10090 RED RUN BLVD.
OWINGS MILLS, MD
FARRAGUT SQUARE
900 17TH STREET, N.W.
WASHINGTON, D.C.
ARCO TOWER
31ST FLOOR
515 SOUTH FLOWER ST.
LOS ANGELES, CA
INVEST WITH CONFIDENCE
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.
Prospectus
T. Rowe Price
Virginia tax-free
Funds
T. Rowe Price
State Tax-free
Income Trust
November 29, 1994
_____________________________________________________________________________
Short- and long-term bond funds for investors seeking income that is exempt
from federal and Virginia state income taxes.
Facts at a Glance
Investment Goal
The highest level of income exempt from federal and Virginia state income
taxes consistent with each fund's prescribed investment program.
As with all mutual funds, these funds may not meet their objective.
Strategy and Risk/Reward
Virginia Short-Term Tax-Free Bond Fund. Invests primarily in short-term,
investment-grade Virginia municipal bonds. Dollar weighted average maturity
will range between one and three years.
Risk/Reward: Higher income than a municipal money market fund and less
potential share-price fluctuation than the Virginia Tax-Free Bond Fund.
Virginia Tax-Free Bond Fund. Invests primarily in investment-grade Virginia
municipal bonds. Dollar weighted average maturity is expected to be 10 years
or longer.
Risk/Reward: Higher income than the Virginia Short-Term Bond Fund but also
greater potential price fluctuation than shorter-term municipal bond funds.
Investor Profile Virginia taxpayers who, because of their tax bracket, can
benefit from income that is exempt from federal and Virginia state income
taxes. Not appropriate for tax-deferred retirement plans, 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.
Investment Manager Founded in 1937 by the late Thomas Rowe Price, Jr.,
T. Rowe Price Associates and its affiliates currently manage over $54 billion,
including over $5 billion in municipal bond assets, for approximately 3
million individual and institutional investor accounts as of June 30, 1994.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
T. ROWE PRICE
STATE TAX-FREE
INCOME TRUST
NOVEMBER 29, 1994
PROSPECTUS
CONTENTS
______________________________________________________________________________
1 ABOUT THE FUNDS
______________________________________________________________________
TRANSACTION AND FUND EXPENSES . . . . . . . . . . . . . . . . 2
______________________________________________________________________
FINANCIAL HIGHLIGHTS. . . . . . . . . . . . . . . . . . . . . 3
______________________________________________________________________
FUND, MARKET, AND
RISK CHARACTERISTICS. . . . . . . . . . . . . . . . . . . . 4
______________________________________________________________________
2 ABOUT YOUR ACCOUNT
______________________________________________________________________
PRICING SHARES; RECEIVING
SALE PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 10
______________________________________________________________________
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . 11
______________________________________________________________________
TRANSACTION PROCEDURES AND
SPECIAL REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . 12
______________________________________________________________________
3 MORE ABOUT THE FUNDS
______________________________________________________________________
ORGANIZATION AND MANAGEMENT . . . . . . . . . . . . . . . . . 15
______________________________________________________________________
UNDERSTANDING FUND PERFORMANCE. . . . . . . . . . . . . . . . 16
______________________________________________________________________
INVESTMENT POLICIES AND PRACTICES . . . . . . . . . . . . . . 17
______________________________________________________________________
4 INVESTING WITH T. ROWE PRICE
______________________________________________________________________
MEETING REQUIREMENTS
FOR NEW ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . 23
______________________________________________________________________
OPENING A NEW ACCOUNT . . . . . . . . . . . . . . . . . . . . 23
______________________________________________________________________
PURCHASING ADDITIONAL SHARES. . . . . . . . . . . . . . . . . 24
______________________________________________________________________
EXCHANGING AND REDEEMING. . . . . . . . . . . . . . . . . . . 25
______________________________________________________________________
SHAREHOLDER SERVICES. . . . . . . . . . . . . . . . . . . . . 25
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE INVESTING. PLEASE
KEEP IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION ABOUT THE
FUNDS, DATED JULY 1, 1994, AMENDED TO NOVEMBER 29, 1994, HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED BY REFERENCE IN
THIS PROSPECTUS. TO OBTAIN A FREE COPY, CALL 1-800-625-5660.
1 ABOUT THE FUNDS
Transaction and Fund Expenses
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a Fund shareholder.
____________________________________________________________________________
LIKE ALL T. ROWE PRICE FUNDS, THE FUNDS ARE 100% NO LOAD.
Table 1 below, "Shareholder Transaction Expenses," shows that you pay no sales
charges. All the money you invest in a 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 each fund for a year, based on 1994 fiscal year
expenses (and any applicable expense limitation). 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.
____________________________________________________________________________
FOR THE FISCAL PERIOD ENDED OCTOBER 31, 1994, THE TAX-FREE BOND FUND PAID
$117,000 TO T. ROWE PRICE SERVICES, INC. FOR TRANSFER AND DIVIDEND DISBURSING
FUNCTIONS AND SHAREHOLDER SERVICES, AND $86,000 TO T. ROWE PRICE FOR
ACCOUNTING SERVICES. FOR THE FISCAL YEAR ENDING FEBRUARY 28, 1995, THE
SHORT-TERM BOND FUND IS EXPECTED TO PAY $19,712, TO T. ROWE PRICE SERVICES,
INC. FOR TRANSFER AND DIVIDEND DISBURSING FUNCTIONS AND SHAREHOLDER SERVICES,
AND $15,000 TO T. ROWE PRICE FOR ACCOUNTING SERVICES.
Shareholder Transaction Expenses
Short-Term Bond Tax-Free Bond
____________________________________________________________________________
Sales charge "load" on purchases None None
____________________________________________________________________________
Sales charge "load" on reinvested dividends None None
____________________________________________________________________________
Redemption fees None None
____________________________________________________________________________
Exchange fees None None
____________________________________________________________________________
Annual Fund Expenses Percentage of Fiscal 1994
Average Net Assets
Short-Term Bond Tax-Free Bond
____________________________________________________________________________
Management fee (after reduction) 0.0%* 0.36%
____________________________________________________________________________
Marketing fees (12b-1) None None
____________________________________________________________________________
Total other (Shareholder servicing,
custodial, auditing, etc.)
0.65%** 0.29%
____________________________________________________________________________
Total fund expenses (after reduction) 0.65%* 0.65%**
____________________________________________________________________________
* To limit the fund's expenses during its initial period of operations, T.
Rowe Price has agreed to waive its fees and bear any expenses through
February 28, 1996, to the extent such fees or expenses would cause the
fund's ratio of expenses to average net assets to exceed 0.65%. 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 the previously stated ratio; however, no reimbursement will
be made after February 28, 1998, or if it would result in the expense ratio
exceeding the ratio as previously stated. Without this expense limitation,
it is estimated that the fund's management fee and total expense ratio for
the first full year of operation would be 1.46%. Organizational expenses
will be charged to the fund over a period not to exceed 60 months.
** The fund's management fee and its total expense ratio would have been 0.44%
and 0.73%, respectively, had T. Rowe Price not agreed to reduce management
fees in accordance with the expense limitation. 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 February 28, 1993, to the
extent such fees or expenses would cause the fund's ratio of expenses to
average net assets to exceed 0.65%. Effective March 1, 1993, T. Rowe Price
agreed to extend the fund's 0.65% expense limitation for a period of two
years through February 28, 1995. Effective March 1, 1995, T. Rowe Price
agreed to extend the fund's 0.65% expense limitation for a period of two
years through February 28, 1997. Fees waived or expenses paid or assumed
under each agreement are subject to reimbursement to T. Rowe Price by the
fund whenever the fund's expense ratio is below 0.65%; however, no
reimbursement will be made after February 28, 1995 (for the first
agreement), February 28, 1997 (for the second agreement), or February 28,
1999 (for the third agreement), or if it would result in the expense ratio
exceeding 0.65%.
Note: The funds charge a $5 fee for wire redemptions under $5,000, subject
to change with out notice.
____________________________________________________________________________
Table 1
The main types of expenses, which all mutual funds may charge against fund
assets, are:
o A management fee: the percent of fund assets paid to the funds' investment
manager. Each fund's fee is comprised of a group fee, discussed later, and
an individual fund fee of 0.10%.
o "Other" administrative expenses: primarily the servicing of shareholder
accounts, such as providing statements, reports, disbursing dividends, as
well as custodial services.
o 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 "The Fund's Organization and Management."
o Hypothetical example: Assume you invest $1,000, the fund returns 5%
annually, expense ratios remain as previously listed, and you close your
account at the end of the time periods shown. Your expenses would be:
____________________________________________________________________________
THE TABLE AT RIGHT IS JUST AN EXAMPLE; ACTUAL EXPENSES CAN BE HIGHER OR LOWER
THAN THOSE SHOWN.
____________________________________________________________________________
Fund
1 year 3 years 5 years 10 years
____________________________________________________________________________
Short-Term Bond $7 $21 $36 $81
____________________________________________________________________________
Tax-Free Bond $7 $21 $36 $81
____________________________________________________________________________
Table 2
Financial Highlights
The table on page 4 provides information about the Tax-Free Bond Fund's
financial history. It is based on a single share outstanding throughout each
fiscal year, and for the six months ended August 31, 1994. The table is part
of the Tax-Free Bond Fund's audited and unaudited financial statements which
are included in the fund's annual and semi-annual reports, respectively, which
are incorporated by reference into the Statement of Additional Information.
This document is available to shareholders upon request. The financial
statements in the annual report have been audited by Coopers & Lybrand,
L.L.P., independent accountants, whose unqualified report covers the period
shown. The financial statements in the semi-annual report are unaudited.
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________
Investment Activities Distribution
Net
Net Realized
Year Asset and Total
Ended Value, Net Unrealized from Net Net
February Beginning Investment Gain (Loss) Investment Investment Realized Total
28 of Period Income of Investments Activities Income Gain Distributions
_______________________________________________________________________________________________________
<C> <C> <C> <C> <C> <C> <C> <C>
1992ad $10.00 $ .48b $ .31 $ .79 $ (.48) $ (.04) $ (.52)
1993 10.27 .58b .82 1.40 (.58) (.03) (.61)
1994 11.06 .56b .09 .65 (.56) (.15) (.71)
1994e 11.00 .28b (.44) (.16) (.28) (.01) (.29)
<CAPTION>
_______________________________________________________________________________________________________
End of Period
Net Total Ratio of Ratio of Net
Asset Value, Return (Includes Net Expenses to Investment Income Portfolio
End of Reinvested Assets Average Net to Average Turnover
Period Dividends) ($Thousands) Assets Net Assets Rate
_______________________________________________________________________________________________________
<C> <C> <C> <C> <C> <C>
$10.27 8.12% $44,198 0.65%bc 5.80%b 76.3b
11.06 14.11% 111,705 0.65%c 5.53% 68.5%
11.00 5.99% 168,715 0.65%c 5.03% 61.8%
10.55 (1.41)% 159,704 0.65%bc 5.29%b 95.9%b
_______________________________________________________________________________________________________
<FN>
a For the period April 30, 1991 (commencement of operations) to February 29, 1992.
b Annualized.
c Excludes expenses in excess of a 0.65% voluntary expense limitation in effect through February 28, 1995.
d Year ended February 29.
e Six months ended August 31, 1994.
</FN>
_______________________________________________________________________________________________________
Table 3
</TABLE>
Fund, Market, and Risk Characteristics: What to Expect
To help you decide which of the T. Rowe Price Virginia bond funds may be
appropriate for you, this section takes a closer look at their investment
programs and the securities markets in which they invest.
____________________________________________________________________________
INCOME FROM VIRGINIA MUNICIPAL SECURITIES IS EXEMPT FROM FEDERAL AND VIRGINIA
STATE INCOME TAXES.
What are the objectives and other characteristics of these Virginia bond
funds?
The Virginia Short-Term Tax-Free Bond Fund's objective is to provide the
highest level of income exempt from federal and Virginia state income taxes
consistent with modest fluctuation in principal value. The fund will invest
primarily (at least 65% of its total assets) in investment-grade Virginia
municipal bonds. While the portfolio's dollar-weighted average maturity will
range between one and three years, there is no maturity limit on individual
securities. The fund is expected to provide a higher level of after-tax income
than a money market fund and less share price volatility than the Virginia
Tax-Free Bond Fund. Unlike a money market fund, the fund's share price will
fluctuate.
____________________________________________________________________________
THE SHARE PRICE AND YIELD OF EACH FUND WILL FLUCTUATE WITH CHANGING MARKET
CONDITIONS AND INTEREST RATE LEVELS. WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.
The Virginia Tax-Free Bond Fund's investment objective is to provide,
consistent with prudent portfolio management, the highest level of income
exempt from federal and Virginia state income taxes by investing primarily in
investment grade Virginia municipal bonds. The fund's dollar weighted average
maturity will usually exceed 10 years.
Due to seasonal variations or shortages in the supply of suitable short-term
Virginia securities, each fund may invest periodically in municipals whose
interest is exempt from federal but not Virginia state income taxes. Every
effort will be made to minimize such investments, but they could compose up to
10% of each fund's annual income.
What are the funds' credit quality guidelines?
The funds will generally purchase investment-grade securities-securities whose
ratings are within the four highest credit categories (e.g., AAA, AA, A, BBB)
as determined by a national rating organization or, if unrated, by T. Rowe
Price. The funds may occasionally purchase below-investment-grade securities
(including those with the lowest or no rating), but no such purchase will be
made if it would cause a fund's noninvestment-grade bonds to exceed 5% of its
net assets. Unrated bonds may be less liquid than rated bonds.
Investment-grade securities include a range from the highest rated to medium
quality (BBB). Securities in the BBB category may be more susceptible to
adverse economic conditions or changing circumstances, and the securities at
the lower end of the BBB category have certain speculative characteristics.
____________________________________________________________________________
NEITHER FUND SHOULD BE RELIED UPON AS A COMPLETE INVESTMENT PROGRAM, NOR BE
USED FOR SHORT-TERM TRADING PURPOSES.
What are the main types of investment risk for these funds?
As with all fixed-income funds, your investment is subject to interest rate
risk (share-price declines when interest rates rise) and credit risk (rating
downgrades and/or bond defaults). Both are explained in more detail beginning
on page 7 along with other market fundamentals. Be sure to review this
information. Funds that invest primarily in the securities of a single state
also have additional risks.
What are the particular risks associated with single-state funds versus funds
that invest nationally?
A fund investing within a single state is, by definition, less diversified
geographically than one investing across many states. The risk arises from the
fund's greater exposure to that state's economy and politics, factors that
loom large in establishing the credit quality of bonds issued by the state and
its political subdivisions. For example, general obligation bonds of a state
that has a high income level, reasonable debt levels, and a positive long-term
outlook should have a higher credit rating than those of a state without those
attributes.
Of course, many municipal bonds are not general obligations backed by the
state's "full faith and credit" (its full taxing and revenue raising
resources) and may not rely on the state government for money to service their
debt. Bonds issued by governmental authorities may depend wholly on revenues
generated by the project they financed or on other dedicated revenue streams.
The credit quality of these "revenue" bonds may vary significantly from that
of the state's general obligations.
____________________________________________________________________________
SIGNIFICANT POLITICAL AND ECONOMIC DEVELOPMENTS WITHIN A STATE MAY HAVE
REPERCUSSIONS, DIRECT AND INDIRECT, ON VIRTUALLY ALL MUNICIPAL BONDS ISSUED IN
THE STATE.
What is the credit quality of Virginia general obligations?
The major rating agencies (Moody's, Standard & Poor's, and Fitch) assigned a
triple-A rating to Virginia general obligations as of November 1, 1994 and
have never rated the state below that level. For more than a century, the
State has paid the principal and interest on its general obligation bonds when
due and has not issued short-term tax anticipation notes or other similar
short-term debt for its own needs. The Virginia constitution limits the
issuance of general obligation bonds to 1.15 times average tax revenues for
the past three fiscal years. Additional restrictions are imposed for bonds
issued for certain other purposes. The state has substantial capacity to
issue additional debt within these legal debt limits.
____________________________________________________________________________
CREDIT RATINGS AND THE FINANCIAL AND ECONOMIC CONDITIONS OF THE STATE, LOCAL
GOVERNMENTS, PUBLIC AUTHORITIES, AND OTHERS IN WHICH THE FUNDS MAY INVEST ARE
SUBJECT TO CHANGE AT ANY TIME.
What about the quality of the funds' other holdings?
In addition to the state's general obligations, the funds will invest a
substantial portion of their assets in bonds that are rated according to the
issuer's individual creditworthiness, such as bonds of local governments and
public authorities. While local governments in Virginia depend principally on
their own revenue sources, they could experience budget shortfalls due to
cutbacks in state aid.
The funds may invest in certain sectors with special risks, for example,
health care, which could be affected by federal or state legislation, electric
utilities with exposure to nuclear power plants, and private activity bonds
without governmental backing.
The funds may invest in obligations of the Commonwealth of Puerto Rico and its
public corporations (as well as the U.S. territories of Guam and the Virgin
Islands) that are exempt from federal and Virginia state income taxes. These
investments require careful assessment of certain risk factors, including
reliance on substantial federal assistance and favorable tax programs. As of
November 1, 1994, Puerto Rico's general obligation bonds were rated Baa1 by
Moody's and A by Standard & Poor's.
____________________________________________________________________________
YOU MAY WANT TO REVIEW THESE FUNDAMENTALS OF FIXED-INCOME INVESTING.
Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
Is a fund's "yield" the same thing as the "total return"?
No. Your total return is the result of reinvested income and the change in
share price for a given time period.
What is "credit quality" and how does it affect a fund's yield?
Credit quality refers to a bond issuer's expected ability to make all required
interest and principal payments in a timely manner. Because highly rated bond
issuers represent less risk, they can borrow at lower interest rates than less
creditworthy issuers. Therefore, a fund investing in high-quality securities
should have a lower yield than an otherwise comparable fund investing in lower
credit-quality securities.
What is meant by a bond's or bond fund's maturity?
Every bond has a stated maturity date when the issuer must repay the bond's
entire principal value to the investor. Some types of bonds may also have an
"effective maturity" that is shorter than the stated date. Many corporate and
municipal bonds are "callable," meaning the principal can be repaid before
their stated maturity dates on (or after) specified call dates. Bonds are most
likely to be called when interest rates are falling, because the issuer wants
to refinance at a lower rate. In such an environment, a bond's "effective
maturity" is usually its nearest call date.
A bond mutual fund has no maturity in the strict sense of the word, but does
have a weighted average maturity. This number is an average of the stated
maturities of the underlying bonds, with each maturity "weighted" by the
percentage of fund assets it represents. Funds that target effective
maturities would use the effective (rather than stated) maturities of the
underlying bonds when computing the average.
What is meant by a bond's or bond fund's "duration?"
Duration is a better measure than maturity of a bond's sensitivity to interest
rate changes, because it measures the recovery of the original investment by
taking into account the cash flows generated over the bond's life. Future
interest and principal payments are discounted to reflect their present value,
weighted as a percent of total cash flows, and then are multiplied by the
number of years they will be received to produce a value that is expressed in
years, i.e., the duration. Effective duration takes into account call
features and sinking fund payments which may shorten a bond's life.
You can multiply the duration by the potential change in interest rates to
estimate the effect on principal value.
For example, the price of a bond or bond fund with a duration of five years
would rise or fall roughly 5% if rates fell or rose by one percentage point.
____________________________________________________________________________
A MORE DETAILED DISCUSSION OF THESE AND OTHER RISK CONSIDERATIONS IS CONTAINED
IN THE FUNDS' STATEMENT OF ADDITIONAL INFORMATION.
What are the main risks of investing in bond funds?
o Interest rate or market risk-the decline in bond prices that accompanies a
rise in the level of interest rates.
o Credit risk-the chance that any of a fund's holdings will have its credit
rating downgraded or will default (fail to make scheduled interest and
principal payments), potentially reducing the fund's income level and/or
share price.
How is a municipal's price affected by changes in interest rates?
When interest rates rise, a municipal's price usually falls, and vice versa.
____________________________________________________________________________
GENERALLY SPEAKING, THE LONGER THE SECU-RITY'S MATURITY, THE GREATER THE PRICE
INCREASE OR DECREASE IN RESPONSE TO A CHANGE IN INTEREST RATES, AS SHOWN IN
THE TABLE AT RIGHT.
____________________________________________________________________________
How Interest Rates Affect Bond Prices
Maturity Coupon Price Per $1,000 of Bond Face Value if Interest Rates
Increase Decrease
1% 2% 1% 2%
____________________________________________________________________________
1 Year 3.60% $990 $981 $1,010 $1,020
____________________________________________________________________________
5 Years 4.80 957 916 1,045 1,093
____________________________________________________________________________
10 Years 5.30 927 860 1,081 1,169
____________________________________________________________________________
20 Years 5.90 892 801 1,127 1,276
____________________________________________________________________________
30 Years 6.00 875 774 1,155 1,348
____________________________________________________________________________
Table 4 Coupons reflect yields on AAA-rated municipals as of May 31, 1994.
This is an illustration and does not represent expected yields or
share-price changes of any T. Rowe Price fund.
How do T. Rowe Price fund managers try to reduce risk?
Consistent with each fund's objectives, the portfolio manager actively manages
the funds to manage risk and increase total return. Risk management tools
include:
o Diversification of assets to reduce the impact of a single holding on a
fund's net asset value;
o Thorough credit research by our own analysts; and
o Maturity adjustments to reflect the fund manager's interest rate outlook.
____________________________________________________________________________
THIS SECTION DESCRIBES SOME CHARACTERISTICS OF MUNICIPAL SECURITIES.
Who issues municipal securities?
State and local governments and governmental authorities sell notes and bonds
(usually called "municipals") to pay for public projects and services.
Who buys municipal securities?
Individuals are the primary investors, and a principal way they invest is
through mutual funds. Prices of municipals may be affected by major changes in
flows of money into or out of municipal funds. For example, substantial and
sustained redemptions from municipal bond funds could result in lower prices
for these securities.
Is interest income from municipal issues always exempt from federal taxes?
No. For example, since 1986, income from so-called "private activity"
municipals must be included in the computation of the federal alternative
minimum tax (AMT). For example, some bonds financing airports, stadiums, and
student loan programs fall into this category. Relatively few taxpayers are
required to pay the tax. The funds will report annually to shareholders the
portion of income, if any, subject to AMT. (Please see "Distributions and
Taxes - Taxes on Fund Distributions.")
MUNICIPAL SECURITIES ARE ALSO CALLED "TAX-EXEMPTS" BECAUSE THE INTEREST INCOME
THEY PROVIDE IS USUALLY EXEMPT FROM FEDERAL INCOME TAXES.
Why are yields on municipals usually below those on otherwise comparable
taxable securities?
Since the income provided by most municipals is exempt from federal taxation,
investors are willing to accept lower yields on a municipal bond than on an
otherwise similar (in quality and maturity) taxable bond.
Why are yields on Virginia bonds often below those of comparable issues from
other states?
Strong demand for Virginia securities, due to a relatively high state income
tax rate and an often limited supply, tends to push their prices up and yields
down.
Is there an easy way to compare after-tax yields on a Virginia fund with a
similar fund that invests nationally?
Subtract your state tax rate from 1 and multiply this number times the yield
on the national bond fund. The result is the yield to you on the national fund
after paying Virginia income tax. Compare this with the Virginia fund's yield.
How can I decide which Virginia fund is most appropriate for me?
Review your own financial objectives, time horizon, and risk tolerance. Use
the table below, which summarizes the funds' main characteristics, to choose a
fund (or funds) suitable for your particular needs. If you will need your
principal in a relatively short time, and/or want to minimize share-price
volatility, the Short-Term Bond Fund may be a good choice. However, if you are
investing for the highest possible tax-free income and can tolerate greater
price volatility, you should consider the longer-term bond fund.
____________________________________________________________________________
Differences Between Funds
Fund Credit Income Expected Expected
Quality Share-Price Average Maturity
Categories Fluctuation
____________________________________________________________________________
Short-Term Bond Primarily four Low to Low to One to
highest moderate moderate three years
____________________________________________________________________________
Tax-Free Bond Primarily four High Greater 10 years
highest or longer
____________________________________________________________________________
Table 5
Is there additional information about the two funds to help me make a
decision?
You should review the investment policies and practices section (pages 17-22)
which discusses the following: Types of Portfolio Securities (municipal
securities, private activity bonds, municipal lease obligations, securities
with "puts" or other demand features, securities with credit enhancements,
synthetic or derivative securities, embedded interest rate swaps and caps,
repurchase agreements, and private placements); Types of Fund Management
Practices (cash position, when-issued securities and forwards, interest rate
futures, borrowing money and transferring assets, portfolio turnover, taxable
money market securities, and credit quality considerations).
2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds
Here are some procedures you should know when investing in a fund. This
section applies to all T. Rowe Price tax-free bond and money funds.
____________________________________________________________________________
THE VARIOUS WAYS YOU CAN BUY, SELL, AND EXCHANGE SHARES ARE EXPLAINED AT THE
END OF THIS PROSPECTUS AND ON THE NEW ACCOUNT FORM.
How and when shares are priced
Bond and Money Funds. The share price (also called "net asset value" or NAV)
for each 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 priced and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding.
Money fund NAV's, which are managed to remain at $1.00, are calculated at noon
ET each day as well as 4 p.m. Amortized cost or amortized market value is used
to value money fund securities that mature in 60 days or less.
____________________________________________________________________________
WHEN FILLING OUT THE NEW ACCOUNT FORM, YOU MAY WISH TO GIVE YOURSELF THE
WIDEST RANGE OF OPTIONS FOR RECEIVING PROCEEDS FROM A SALE.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form before 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.
Note: The time at which transactions are priced and orders 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.
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IF FOR SOME REASON WE CANNOT ACCEPT YOUR REQUEST TO SELL SHARES, WE WILL
CONTACT YOU.
How you can receive the 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 ACH transfer or bank wire. Proceeds sent by bank wire should
be credited to your bank account the next business day, and proceeds sent by
ACH transfer should be credited the second day after the sale. ACH (Automated
Clearing House) is an automated method of initiating payments from and
receiving payments in your financial institution account. ACH is a payment
system supported by over 20,000 banks, savings banks and credit unions, which
electronically exchanges the transaction primarily through the Federal Reserve
Banks.
Exception:
o 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
receiving 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.
Useful Information on Distributions and Taxes
Dividends and other distributions
Dividend and capital gain distributions are reinvested in additional fund
shares unless you select another option on your New Account Form. The
advantage of reinvesting distributions arises from compounding, that is, you
receive interest and capital gain distributions on a rising number of shares.
____________________________________________________________________________
THE FUNDS DISTRIBUTE ALL NET INVESTMENT INCOME AND NET REALIZED CAPITAL GAINS
TO SHAREHOLDERS.
Dividends not reinvested are paid by check or transmitted to your bank account
via ACH. If the Postal Service cannot deliver your check, or if your check
remains uncashed for six months, the fund reserves the right to reinvest your
distribution check in your account at the then current NAV and to reinvest all
subsequent distributions in shares of the fund.
Income dividends
o Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.
o Money funds declare income dividends daily at noon ET to shareholders of
record at that time provided payment has been received by that time.
o Bond and money funds pay dividends on the last business day of each month.
o Bond and money fund shares will earn dividends through the date of
redemption; also shares redeemed on a Friday or prior to a holiday will
continue to earn dividends until the next business day. Generally, if you
redeem all of your shares at any time during the month, you will also
receive all dividends earned through the date of redemption in the same
check. When you redeem only a portion of your shares, all dividends accrued
on those shares will be reinvested, or paid in cash, on the next dividend
payment date.
Capital gains
o A capital gain or loss is the difference between the purchase and sale
price of a security.
o If the 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.
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T. ROWE PRICE SENDS TIMELY INFORMATION FOR YOUR TAX FILING NEEDS.
Tax information
Although the regular monthly income dividends you receive from the funds are
expected to be exempt from federal and state and local (if any) income taxes,
you need to be aware of the possible tax consequences when:
o you sell fund shares, including an exchange from one fund to another, or
o the fund makes a short- and\or long-term capital gain distribution to your
account.
Due to 1993 tax legislation, a portion of the capital gains realized on the
sale of market discount bonds with maturities beyond one year may be treated
as ordinary income and cannot be offset by other capital losses. Therefore, to
the extent the fund invests in these securities, the likelihood of a taxable
gain distribution will be increased.
Note: You must report your total tax-exempt income on IRS Form 1040. The IRS
uses this information to help determine the tax status of any social security
payments you may have received during the year.
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THE FUNDS FURNISH AVERAGE COST AND CAPITAL GAIN (LOSS) INFORMATION ON MOST
SHARE REDEMPTIONS.
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, the funds will send you and the IRS Form 1099-B indicating the
date and amount of each sale you made in the fund during the prior year. We
will also tell you the average cost of the shares you sold during the year.
Average cost 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.
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CAPITAL GAIN DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN ADDITIONAL SHARES
OR RECEIVED IN CASH.
Taxes on fund distributions. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until you withdraw
money from them.
In January, the funds will send you and the IRS Form 1099-DIV indicating the
tax status of any dividend and capital gain distribution made to you. All
capital gain distributions 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 the year and paid in January are taxed as though they were paid by
December 31. Dividends are expected to be tax exempt.
Short-term capital gains are taxable as ordinary income and long-term gains at
the applicable rate for long-term gains. The gain is long or short term
depending on how long the fund held the securities, not how long you held
shares in the fund.
If the funds invest in certain "private activity" bonds, shareholders who are
subject to the alternative minimum tax (AMT) must include income generated by
these bonds in their AMT computation. The portion of your fund's income that
should be included in your AMT calculation, if any, will be reported to you in
January.
Tax effect of buying shares before a capital gain 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 in the form
of a taxable distribution a portion of the money you just invested. Therefore,
you may wish to find out a fund's record date before investing. Of course, a
fund's share price may reflect undistributed capital gains or unrealized
appreciation, at any time.
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TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
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 cancelled. 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 purchases paid for by bank wire; cashier's, certified, or
treasurer's checks; or automatic purchases through your paycheck.)
Telephone transactions. Telephone exchange and redemption are established
automatically when you sign the New Account Form unless you check the box
which states that you do not want these services. The fund uses reasonable
procedures (including shareholder identity verification) to confirm that
instructions given by telephone are genuine. If these procedures are not
followed, it is the opinion of certain regulatory agencies that the fund may
be liable for any losses that may result from acting on the instructions
given. All conversations are recorded, and a confirmation is sent promptly
after the telephone transaction.
Redemptions over $250,000. Large sales can adversely affect the 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 the fund's net assets, the fund has the right to delay sending your
proceeds for up to five business days after receiving your request, or to pay
the difference between the redemption amount and the lesser of the two
previously mentioned figures with securities from the fund.
Excessive Trading
____________________________________________________________________________
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. We define "excessive trading" as exceeding
one purchase and sale involving the same fund within any 120-day period.
For example, you are in fund A. You can move substantial assets from 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 the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: (1)
trades solely between money market funds, (2) redemptions that are not part of
exchanges, and (3) systematic purchases or redemptions (see "Shareholder
Services").
Keeping Your Account Open
Due to the relatively high cost to the 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, the fund has the right to close your
account after giving you 60 days in which to increase your balance.
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A SIGNATURE GUARANTEE IS DESIGNED TO PROTECT YOU AND THE FUND FROM FRAUD BY
VERIFYING YOUR SIGNATURE.
Signature Guarantees
You may need to have your signature guaranteed in certain situations, such as:
o Written requests 1) to redeem over $50,000 or 2) to wire redemption
proceeds.
o Remitting redemption proceeds to any person, address, or bank account not
on record.
o Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration from yours.
o 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 other organizations that do not
provide reimbursement in the case of fraud.
3 MORE ABOUT THE FUNDS
The Funds' Organization and Management
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SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 57 YEARS OF INVEST-MENT MANAGEMENT
EXPERIENCE.
How are the funds organized?
The T. Rowe Price State Tax-Free Income Trust was organized in 1986 as a
Massachusetts business trust and is a "non-diversified, open-end investment
company," or mutual fund. Mutual funds pool money received from shareholders
and invest it to try to achieve specified objectives.
What is meant by "shares"?
As with all mutual funds, investors purchase "shares" when they invest 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:
o receive a proportional interest in a fund's income and capital gain
distributions;
o cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
a fund's management contract.
Does each fund have an annual shareholder meeting?
The funds are not required to hold annual meetings and do not intend to do so
except when certain matters, such as a change in the fund's fundamental
policies, are to 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. 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.
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ALL DECISIONS REGARDING THE PURCHASE AND SALE OF FUND INVESTMENTS ARE MADE BY
T. ROWE PRICE ASSOCIATES-SPECIFICALLY BY THE FUNDS' PORTFOLIO MANAGERS.
Who runs the funds?
General Oversight. The funds are 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 funds' officers. The policy of each
fund is that a majority of Board members will be independent of T. Rowe Price.
Portfolio Management. Each fund has an Investment Advisory Committee, composed
of the following members: Short-Term Bond Fund-Charles B. Hill, Chairman,
Patricia S. Deford, Mary J. Miller, Laura L. McAree, Hugh D. McGuirk, William
T. Reynolds, and Michael P. Buckley; Tax-Free Bond Fund-Mary J. Miller,
Chairman, Michael P. Buckley, Patricia S. Deford, Charles B. Hill, Hugh D.
McGuirk, and William T. Reynolds. The Committee Chairman has day-to-day
responsibility for managing the portfolio and works with the Committee in
developing and executing the funds' investment programs. Mr. Hill has been
Chairman of the Short-Term Bond Fund's Committee since the fund's inception in
1994. He joined T. Rowe Price in 1991 and has been managing investments since
1986. Mrs. Miller has been Chairman of the Tax-Free Bond Fund since the fund's
inception in 1991. She joined T. Rowe Price in 1983 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 funds' transfer and dividend disbursing agent and
provides shareholder and administrative services. The address for T. Rowe
Price Investment Services, Inc., and T. Rowe Price Services is 100 East Pratt
St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, each fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and shareholder reports; registration fees
and expenses; proxy and annual meeting expenses (if any); and director/trustee
fees and expenses.
The Management Fee. This fee has two parts-an "individual fund fee" (discussed
on page 2), which reflects the fund's particular investment management costs,
and a "group fee." The group fee, which reflects the benefits each Price fund
derives from sharing the resources of the T. Rowe Price investment management
complex, is calculated monthly based on the net combined assets of all T. Rowe
Price funds (except Equity Index and the Spectrum 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.
0.480% First $1 billion 0.370% Next $1 billion 0.330% Next $10 billion
0.450% Next $1 billion 0.360% Next $2 billion 0.320% Next $10 billion
0.420% Next $1 billion 0.350% Next $2 billion 0.310% Thereafter
0.390% Next $1 billion 0.340% Next $5 billion
Each 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 Price funds as described above.
Based on combined Price funds' assets of approximately $35.5 billion at June
30, 1994, the group fee was 0.34%.
Understanding Performance Information
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TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED PERFORMANCE
INFORMATION IS INCLUDED IN THE FUNDS' ANNUAL REPORT AND QUARTERLY SHAREHOLDER
REPORTS.
This section should help you understand the terms used to describe the funds'
performance. You will come across them in shareholder reports you receive from
us four times a year, in our newsletter, "Insights" reports, in T. Rowe Price
advertisements, and in the media.
Total Return
This tells you how much an investment in the 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. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual, cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
____________________________________________________________________________
YOU WILL SEE FREQUENT REFERENCES TO THE FUNDS' YIELDS AND TAX EQUIVALENT
YIELDS IN OUR REPORTS, ADVERTISEMENTS, IN MEDIA STORIES, AND SO ON.
Yield
The current or "dividend yield" on the fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the average
price during the given period. For example, a fund providing $5 of annual
income per share and a price of $50 has a current yield of 10%. Yields can be
calculated for any time period.
The advertised or "SEC yield" is found by determining the net income per share
(as defined by the SEC) earned by the fund during a 30-day base period and
dividing this amount by the per-share price on the last day of the base
period. The "SEC yield" may differ from the dividend yield.
Investment Policies and Practices
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FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING SECURITIES THEY BELIEVE WILL HELP THE FUNDS ACHIEVE THEIR
OBJECTIVES.
This section takes a detailed look at some of the types of securities the
funds may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. Each 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 each fund's
objectives 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. Each 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.
Types of Portfolio Securities
In seeking to meet their investment objectives, the funds may invest in any
type of interest-bearing security or instrument (including certain potentially
high risk derivatives) whose yield, credit quality, and maturity
characteristics are consistent with the funds' investment programs. These and
some of the other investment techniques the funds may use are described in the
following pages.
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IN PURCHASING MUNICIPALS, THE FUNDS RELY ON THE OPINION OF THE ISSUER'S BOND
COUNSEL REGARDING THE TAX-EXEMPT STATUS OF THE INVESTMENT.
Municipal Securities. Each fund's assets are invested primarily in various
income-producing tax-free municipal debt securities. The issuers have 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 or dates. 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 rates.
There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as charges for water and sewer service to
generate money for debt service.
Private Activity Bonds. While income from most municipals is exempt from
federal income taxes, the income from certain types of so-called private
activity bonds (a type of revenue bond) may be subject to the alternative
minimum tax (AMT). However, only persons subject to AMT pay this tax. Private
activity bonds may be issued for purposes such as housing or airports or to
benefit a private company. (Being subject to the AMT does not mean the
investor necessarily pays this tax. For further information, please see
"Distributions and Taxes.")
Fundamental policy: Under normal market conditions, the funds will not
purchase any security if, as a result, less than 80% of the funds' income
would be exempt from federal and Virginia state income taxes. The income
included under the 80% test does not include income from securities subject to
the alternative minimum tax.
Operating policy: During periods of abnormal market conditions, for temporary
defensive purposes, the funds may invest without limit in high-quality,
short-term securities whose income is subject to federal and Virginia state
income tax.
In addition to general obligation and revenue bonds, the funds' investments
may include, but are not limited to, the following types of securities:
Municipal Lease Obligations. A lease is not a full faith and credit obligation
of the issuer and is usually backed only by the borrowing government's
unsecured pledge to make annual appropriation for lease payments. There have
been challenges to the legality of lease financing in numerous states and,
from time to time, certain municipalities have considered not appropriating
money to make lease payments. In deciding whether to purchase a lease
obligation, the funds would assess the financial condition of the borrower,
the merits of the project, the level of public support for the project, and
the legislative history of lease financing in the state. These securities may
be less readily marketable than other municipals. The funds may also purchase
unrated lease-obligations. Based on information supplied by T. Rowe Price, the
funds' Board of Trustees will periodically review the credit quality of
nonrated leases and assess the likelihood of their being cancelled.
Operating policy: Each fund may invest no more than 20% of its total assets in
lease obligations.
Securities with "Puts" or other Demand Features. Some longer-term municipals
give the investor the right to "put" or sell the security at par (face value)
within a specified number of days following the investor's request-usually one
to seven days. This demand feature enhances a security's liquidity by
dramatically shortening its effective maturity and enables it to trade at a
price equal to or very close to par. If the demand feature were terminated
prior to being exercised, the funds would hold the longer-term security.
Securities with Credit Enhancements.
o Letters of Credit. Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and/or ensure repayment of principal and any
accrued interest if the underlying municipal security should default.
o Municipal Bond Insurance. This insurance, which is usually purchased by the
bond issuer from a private, nongovernmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond's principal
and interest will be paid when due. Insurance does not guarantee the price
of a bond or the share price of any fund. The credit rating of an insured
bond reflects the credit rating of the insurer, based on its claims paying
ability. T. Rowe Price periodically reviews the credit quality of the
insurer.
THE NUMBER OF MUNICIPAL BOND INSURERS IS RELATIVELY SMALL, AND NOT ALL OF THEM
HAVE THE HIGHEST RATING.
The obligation of a municipal bond insurance company to pay a claim extends
over the life of each insured bond. Although defaults on insured municipal
bonds have been low to date and municipal insurers have met these claims,
there is no assurance this will continue. A higher than expected default rate
could strain the insurer's loss reserves and adversely affect its ability to
pay claims to bondholders, such as the funds.
o Standby Repurchase Agreements. A Standby Bond Purchase Agreement is a
liquidity facility provided to pay the purchase price of bonds that cannot
be remarketed. The obligation of the liquidity provider (usually a bank) is
only to advance funds to purchase tendered bonds which cannot be remarketed
and does not cover principal or interest under any other circumstances. The
liquidity provider's obligations under the SBPA are usually subject to
numerous conditions, including the continued creditworthiness of the
underlying borrower.
Synthetic or Derivative Securities. These securities are created from existing
municipal bonds:
o Residual Interest Bonds. The income stream provided by an underlying bond
is divided to create two securities, one short-term and one long-term. The
interest rate on the short-term component is reset by an index or auction
process normally every seven to 35 days. After income is paid on the
short-term securities at current rates, the residual income goes to the
long-term securities. Therefore, rising short-term interest rates result in
lower income for the longer-term portion, and vice versa. The longer-term
bonds can be very volatile and may be less liquid than other municipals of
comparable maturity.
Operating policy: Each fund will not invest more than 10% of its total assets
in residual interest bonds.
o Participation Interests. This term covers various types of securities
created by converting fixed-rate bonds into short-term, variable-rate
certificates. These securities have been developed in the secondary market
to meet the demand for short-term, tax-exempt securities. The funds will
invest only in securities deemed tax-exempt by a nationally recognized bond
counsel, but there is no guarantee the interest will be exempt because the
IRS has not issued a definitive ruling on the matter.
____________________________________________________________________________
EMBEDDED INTEREST RATE SWAPS ENHANCE YIELDS, BUT ALSO INCREASE INTEREST RATE
RISK.
o Embedded Interest Rate Swaps and Caps. In a fixed-rate, long-term municipal
bond with an interest rate swap attached to it, the bondholder usually
receives the bond's fixed-coupon payment as well as a variable rate payment
that represents the difference between a fixed rate for the term of the
swap (which is typically shorter than the bond it is attached to) and a
variable rate short-term municipal index. The bondholder receives excess
income when short-term rates remain below the fixed interest rate swap
rate. If short-term rates rise above the fixed-income swap rate, the
bondholder's income is reduced. At the end of the interest rate swap term,
the bond reverts to a single fixed-coupon payment.
An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates.
Both instruments may be volatile and of limited liquidity and their use may
adversely affect the fund's total return.
Operating policy: Each fund will not invest more than 10% of its total assets
in embedded interest rate swaps and caps.
Private Placements. The funds may seek to enhance their yield through the
purchase of private placements. These securities are sold through private
negotiations, usually to institutions or mutual funds, and may have resale
restrictions. Their yields are usually higher than comparable public
securities to compensate the investor for their limited marketability.
Operating policy: Each fund may not invest more than 15% of its net assets in
illiquid securities, including unmarketable private placements.
____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.
Types of Fund Management Practices
Cash Position. Each fund will hold a portion of its assets in short-term,
tax-exempt money market securities maturing in one year or less. The reserve
position provides flexibility in meeting redemptions, expenses, and the timing
of new investments; can help in structuring a fund's weighted average
maturity; and serves as a short-term defense during periods of unusual market
volatility. Each fund's cash reserve position will be composed of short-term,
investment-grade securities, including tax-exempt commercial paper, municipal
notes, and short-term maturity bonds. Some of these securities may have
adjustable, variable or floating rates.
When-Issued Securities and Forwards. New issues of municipals are often sold
on a "when-issued" basis, that is, delivery and payment take place 15-45 days
after the buyer has agreed to the purchase. Some bonds, called "forwards,"
have longer than standard settlement dates, in some cases one to three years
or greater. When buying these securities, each fund identifies cash or
high-grade marketable securities held by its custodian equal in value to its
commitment for these securities. The funds do not earn interest on when-issued
and forward securities until settlement, and the value of the securities may
fluctuate between purchase and settlement. Municipal "forwards" typically
carry a substantial yield premium to compensate the buyer for their greater
interest rate, credit, and liquidity risks.
Interest Rate Futures. Futures are often used to manage risk, because they
enable the investor to buy or sell an asset in the future at an agreed upon
price. Specifically, the funds may use futures (and options on futures) to
hedge against a potentially unfavorable change in interest rates and to adjust
their exposure to the municipal bond market. The use of futures for hedging
and nonhedging purposes may not always be successful. Their prices can be
highly volatile: using them could lower the fund's total return, and the
potential loss from their use could exceed a fund's initial investment in such
contracts.
Operating policy: Initial margin deposits on futures and premiums on options
used for non-hedging purposes will not equal more than 5% of a fund's net
asset value.
____________________________________________________________________________
BORROWINGS MAY BE COLLATERALIZED WITH FUND ASSETS, SUBJECT TO RESTRICTIONS.
Borrowing Money and Transferring Assets. Each fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other proper purposes consistent with each fund's investment
objective and program.
Fundamental policy: Borrowings may not exceed 331_3% of a fund's total assets.
Operating policy: Each 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 331_3% of a fund's total
assets. Each fund may not purchase additional securities when borrowings
exceed 5% of total assets.
Portfolio Turnover. The funds generally purchase securities with the intention
of holding them for investment; however, when market conditions or other
circumstances warrant, securities may be purchased and sold without regard to
the length of time held. Due to the nature of each fund's investment program,
a fund's portfolio turnover rate may exceed 100%. Although the funds do not
expect to generate any taxable income, a high turnover rate may increase
transaction costs and may affect taxes paid by shareholders to the extent
short-term gains are distributed. The Short-Term Bond Fund's portfolio
turnover rate is not expected to exceed 200% during its first year of
operations, in part reflecting the short maturities of its expected
investments. The Tax-Free Bond Fund's portfolio turnover rates for the fiscal
years ended February 28, 1994 and February 28, 1993 were 61.8% and 68.5%,
respectively, and the annualized portfolio turnover rate for the fiscal period
ended February 29, 1992, was 76.3%.
Sector Concentration. It is possible that each fund could have a considerable
amount of assets (25% or more) in securities that would tend to respond
similarly to particular economic or political developments. An example would
be, securities of issuers related to a single industry, such as health care or
nuclear energy.
Operating policy: Each fund will not invest more than 25% of total assets in
industrial development bonds of projects in the same industry (such as solid
waste, nuclear utility or airports). Bonds which are refunded with escrowed
U.S. Government securities are not subject to the 25% limitation.
Credit Quality Considerations. The credit quality of most bond issues is
evaluated by rating agencies such as Moody's and Standard & Poor's. Credit
quality refers to the issuer's ability to meet all required interest and
principal payments. The highest ratings are assigned to issuers perceived to
be the best credit risks. T. Rowe Price research analysts also evaluate all
portfolio holdings of each fund, including those rated by outside agencies.
The lower the rating on a bond, the higher the yield, other things being
equal.
Table 6 shows the rating scale used by the major rating agencies.
____________________________________________________________________________
T. ROWE PRICE CONSIDERS PUBLICLY AVAILABLE RATINGS, BUT EMPHASIZES ITS OWN
CREDIT ANALYSIS WHEN SELECTING INVESTMENTS.
____________________________________________________________________________
Ratings of Municipal Debt Securities
Moody's Standard Fitch Investors Definition
Investors & Poor's Service, Inc.
Service, Inc. Corporation
____________________________________________________________________________
Long-Term Aaa AAA AAA Highest quality
________________________________________________________________
Aa AA AA High quality
________________________________________________________________
A A A Upper medium grade
________________________________________________________________
Baa BBB BBB Medium grade
________________________________________________________________
Moody's S&P Fitch
____________________________________________________________________________
Short-Term MIG1/VMIG1 Best quality SP1+ Very F-1+ Exceptionally
strong quality quality
SP1 Strong F-1 Very strong
grade quality
_______________________________________________________________
MIG2/VMIG2 High quality SP2 Satisfactory F-2 Good credit
grade quality
_______________________________________________________________
Commercial P-1 Superior quality A-1+ Extremely F-1+ Exceptionally
Paper strong quality strong quality
A-1 Strong quality F-1 Very strong
quality
_______________________________________________________________
P-2 Strong quality A-2 Satisfactory F-2 Good credit
quality quality
____________________________________________________________________________
Table 6
4 INVESTING WITH T. ROWE PRICE
Meeting Requirements for New Accounts
____________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES.
Tax Identification Number
We must have your correct social security or corporate tax identification
number and a signed New Account Form or W-9 Form. Otherwise, federal law
requires the fund to withhold a percentage (currently 31%) of your dividends,
capital gain distributions, and redemptions, and may subject you to an IRS
fine. You will also be prohibited from opening another account by exchange. If
this information is not received within 60 days after your account is
established, your account may be redeemed, priced at the NAV on the date of
redemption.
Unless you request otherwise, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to shareholders who have requested that their account be combined
with someone else's for financial reporting.
Opening a New Account: $2,500 minimum initial investment; $1,000 for 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.)
____________________________________________________________________________
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 Mail
Please make your check payable to T. Rowe Price Funds otherwise it will be
returned (we do not accept third party checks to open new accounts) and send
it together with a completed New Account Form to one of the appropriate
addresses at left.
By Wire
o Call Investor Services for an account number and give the following wire
address to your bank: Morgan Guaranty Trust Co. of New York, ABA#
021000238, T. Rowe Price [fund name], AC-00153938. Provide fund name,
account name(s), and account number.
o Complete a New Account Form and mail it to one of the appropriate addresses
listed at left.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.
By Exchange
Call Shareholder Services. The new account will have the same registration as
the account from which you are exchanging. Services for the new account may be
carried over by telephone request if preauthorized on the existing account.
(See explanation of "Excessive Trading" under "Transaction Procedures.")
In Person
Drop off your completed New Account Form and obtain a receipt at any of the
investor center locations listed below.
Drop-off locations
101 East Lombard St. T. Rowe Price Farragut Square ARCO Tower
Baltimore, MD Financial Center 900 17th St.,N.W. 31st Floor
10090 Red Run Blvd.Washington, D.C. 515 South Flower
Owings Mills, MD St.
Los Angeles, CA
Note: The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; cancel or
rescind any purchase or exchange 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 (for example, if an account
has been restricted due to excessive trading or fraud); to otherwise modify
the conditions of purchase or any services at any time; or to act on
instructions believed to be genuine.
Purchasing Additional Shares: $100 minimum purchase; $50 minimum for Automatic
Asset Builder; $5,000 minimum for telephone purchases
By ACH Transfer
Use Tele*Access(registered trademark), PC*Access(registered trademark) 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."
____________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE FUNDS
ACCOUNT SERVICES
P.O. BOX 89000
BALTIMORE, MD
21289-1500
By Mail
o Provide your account number and the fund name on your check. Please make
your check payable to T. Rowe Price Funds (otherwise it may be returned).
o Mail the check to us at the address shown at left either with a
reinvestment slip or a note indicating the fund and account number in
which you wish to purchase shares.
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form ($50 minimum).
By Phone
Call Shareholder Services to lock in that day's closing price; payment is due
within five days ($5,000 minimum). Note: The current collected balance in your
fund account must equal at least 25% of your telephone purchase for additional
shares.
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 Tele*Access, PC*Access
or mailgram (if you have previously authorized telephone services), or by
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. For charges, see "Electronic Transfers - By
Wire" on page 26.
____________________________________________________________________________
MAILGRAM, EXPRESS, REGISTERED, OR CERTIFIED MAIL
(SEE ADDRESSES ON PAGE 23.)
By Mail
Provide account name(s) and numbers, fund name(s), and exchange or redemption
amount. For exchanges, mail to the appropriate address, indicate the fund you
are exchanging from and the fund(s) you are exchanging into. 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").
Shareholder Services
____________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500
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 contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide
with our Welcome Kit.
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.
Exchange Service
____________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308
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
funds are registered.) Some of the T. Rowe Price funds may impose a redemption
fee of .50% to 2%, payable to such funds, on shares held for less than one
year, or in some funds, six months.
Note: Shares purchased by telephone may not be exchanged to another fund until
payment for the original purchase has been received.
Automated Services
Tele*Access. 24-hour service via toll-free number provides information such as
yields, prices, dividends, account balances, the date and amount of your
latest transaction as well as the ability to request prospectuses and account
forms, reorder checks and initiate purchase, redemption and exchange orders in
your accounts (see "Electronic Transfers" below).
PC*Access. 24-hour service via dial-up modem provides the same information as
Tele*Access, but on a personal computer. Please call Investor Services for an
information guide.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our four investor center locations. For Investor Center
addresses, see "Drop-off locations" on page 24.
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, PC*Access
or call Shareholder Services.
By Wire. Electronic transfers can also 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 the High Yield Fund)
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:
o Automatic Asset Builder. You instruct us to move $50 or more once a month
or less often 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.
o Automatic Exchange. Enables you to set up systematic investments of $50 or
more from one fund account into another, such as from a money fund into a
stock fund.
Discount Brokerage
You can trade stocks, bonds, options, precious metals and other securities at
a substantial savings over regular commission rates. Call Investor Services
for information.
Note: If you buy or sell T. Rowe Price Funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you may be charged transaction or
service fees by those institutions. No such fees are charged by T. Rowe Price
Investment Services or the fund for transactions conducted directly with the
fund.
____________________________________________________________________________
DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING
AND PRINTED COPY
Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Price State Tax-Free Income Trust
(the "Trust")
New York Tax-Free Money Fund
New York Tax-Free Bond Fund
Maryland Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
Virginia Tax-Free Bond Fund
Virginia Short-Term Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
Georgia Tax-Free Bond Fund
Florida Insured Intermediate Tax-Free Fund
(collectively the "Funds" and individually the "Fund")
T. Rowe Price California Tax-Free Income Trust
(the "Trust")
California Tax-Free Bond Fund
California Tax-Free Money 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 July 1, 1994, (or November 29, 1994 for the
Virginia Tax-Free Bond Fund and Virginia Short-Term Tax-Free Bond
Fund) which may be obtained from T. Rowe Price Investment
Services, Inc., 100 East Pratt Street, Baltimore, Maryland 21202.
The purchase or exchange of shares in any of the above-listed
funds is limited to investors residing in states where the funds
are qualified for sale.
The date of this Statement of Additional Information is July
1, 1994 amended to November 29, 1994(for the Virginia Bond and
Virginia Short-Term Bond Funds).
PAGE 3
TABLE OF CONTENTS
Page Page
Code of Ethics . . . . . . 72 Pricing of Securities Being
Custodian . . . . . . . . . 72 Offered . . . . . . . . . 80
Determination of Maturity of Principal Holders of
Money Market Securities . 43 Securities . . . . . . . 64
Distributor for the Trusts 71 Ratings of Commercial Paper 61
Dividends . . . . . . . . . 83 Ratings of Municipal Debt
Federal and State Registration Securities . . . . . . . 59
of Shares . . . . . . . . 104 Ratings of Municipal Notes
Forwards . . . . . . . . . 42 and Variable Securities 60
Futures Contracts . . . . . 43 Risk Factors Associated with a
Independent Accountants . . 104 California Portfolio . . 12
Investment Management Risk Factors Associated with a
Services . . . . . . . . 64 Florida Portfolio . . . . 28
Investment in Taxable Money Risk Factors Associated with a
Market Securities . . . . . 42 Georgia Portfolio . . . . 25
Investment Objectives and Risk Factors Associated with a
Policies . . . . . . . . . 3 Maryland Portfolio . . . 16
Investment Performance . . 96 Risk Factors Associated with a
Investment Programs . . . . 33 New Jersey Portfolio . . 22
Investment Restrictions . . 54 Risk Factors Associated with a
Legal Counsel . . . . . . . 104 New York Portfolio . . . 8
Management of the Trusts . 62 Risk Factors Associated with a
Municipal Securities . . . 34 Virginia Portfolio . . . 19
Net Asset Value Per Share . 82 Tax-Exempt vs. Taxable Yield 88
Options . . . . . . . . . . 49 Tax Status . . . . . . . . 83
Organization of the Trusts 102 When-Issued Securities . . 41
Risk Factors . . . . . . . . 4 Yield Information . . . . . 85
Portfolio Transactions . . 73
Portfolio Management
Practices . . . . . . . . 43
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objectives and policies discussed in each
Fund's prospectus. The Funds will not make a material change in
their investment objectives without obtaining shareholder
approval. Unless otherwise specified, the investment programs
and restrictions of the Funds are not fundamental policies. Each
Fund's operating policies are subject to change by each Trust's
Board of Trustees without shareholder approval. However,
shareholders will be notified of a material change in an
operating policy. The fundamental policies of each Fund 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 of the Fund are represented.
PAGE 4
RISK FACTORS
All Funds
The Funds are designed for investors who, because of their
tax bracket, can benefit from investment in municipal bonds whose
income is exempt from federal taxes. The Funds are not
appropriate for qualified retirement plans where income is
already tax deferred.
Municipal Securities
There can be no assurance that the Funds will achieve their
investment objectives. Yields on municipal securities are
dependent on a variety of factors, including the general
conditions of the money market and the municipal bond market, the
size of a particular offering, the maturity of the obligation,
and the rating of the issue. Municipal securities with longer
maturities tend to produce 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 municipal 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 all the Funds to achieve
their investment objectives is also dependent on the continuing
ability of the issuers of municipal securities in which the Funds
invest to meet their obligations for the payment of interest and
principal when due. The ratings of Moody's, S&P, and Fitch
represent their opinions as to the quality of municipal
securities which they undertake to rate. Ratings are not
absolute standards of quality; consequently, municipal securities
with the same maturity, coupon, and rating may have different
yields. There are variations in municipal securities, both
within a particular classification and between classifications,
depending on numerous factors. It should also be pointed out
that, unlike other types of investments, municipal securities
have traditionally not been subject to regulation by, or
registration with, the SEC, although there have been proposals
which would provide for regulation in the future.
The federal bankruptcy statutes relating to the debts of
political subdivisions and authorities of states of the United
States provide that, in certain circumstances, such subdivisions
or authorities may be authorized to initiate bankruptcy
proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in
the rights of holders of their obligations.
PAGE 5
Proposals have been introduced in Congress to restrict or
eliminate the federal income tax exemption for interest on
municipal securities, and similar proposals may be introduced in
the future. Some of the past proposals would have applied to
interest on municipal securities issued before the date of
enactment, which would have adversely affected their value to a
material degree. If such a proposal were enacted, the
availability of municipal securities for investment by the Funds
and the value of a Fund's portfolio would be affected and, in
such an event, a Fund would reevaluate its investment objectives
and policies.
Although the banks and securities dealers with which the
Fund will transact business will be banks and securities dealers
that T. Rowe Price believes to be financially sound, there can be
no assurance that they will be able to honor their obligations to
the Fund with respect to such securities.
After purchase by a Fund, a security may cease to be rated
or its rating may be reduced below the minimum required for
purchase by the Fund. For the Money Fund, the procedures set
forth in Rule 2a-7, under the Investment Company Act of 1940, may
require the prompt sale of any such security. For the other
Funds, neither event would require a sale of such security by the
Fund. However, T. Rowe Price Associates, Inc. ("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 Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), or Fitch Investors
Service, Inc. ("Fitch") 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. When
purchasing unrated securities, T. Rowe Price, under the
supervision of the Fund's Board of Trustees, determines whether
the unrated security is of a quality comparable to that which the
Fund is allowed to purchase.
Municipal Bond Insurance. All of the Funds may purchase
insured bonds from time to time. Municipal bond insurance
provides an unconditional and irrevocable guarantee that the
insured bond's principal and interest will be paid when due. The
guarantee is purchased from a private, non-governmental insurance
company.
There are two types of insured securities that may be
purchased by the Funds, bonds carrying either (1) new issue
insurance or (2) secondary insurance. New issue insurance is
purchased by the issuer of a bond in order to improve the bond's
credit rating. By meeting the insurer's standards and paying an
PAGE 6
insurance premium based on the bond's principal value, the issuer
is able to obtain a higher credit rating for the bond. Once
purchased, municipal bond insurance cannot be cancelled, and the
protection it affords continues as long as the bonds are
outstanding and the insurer remains solvent.
The Funds may also purchase bonds which carry secondary
insurance purchased by an investor after a bond's original
issuance. Such policies insure a security for the remainder of
its term. Generally, the Funds expect that portfolio bonds
carrying secondary insurance will have been insured by a prior
investor. However, the Funds may, on occasion, purchase
secondary insurance on their own behalf.
Each of the municipal bond insurance companies has
established reserves to cover estimated losses. Both the method
of establishing these reserves and the amount of the reserves
vary from company to company. The obligation of a municipal bond
insurance company to pay a claim extends over the life of each
insured bond. Municipal bond insurance companies are obligated
to pay a bond's interest and principal when due if the issuing
entity defaults on the insured bond. Although defaults on
insured municipal bonds have been low to date and municipal
insurers have met these claims, there is no assurance this low
rate will continue in the future. A higher than expected default
rate could deplete loss reserves and adversely affect the ability
of a municipal bond insurer to pay claims to holders of insured
bonds, such as the Fund.
Money Funds
The Funds will limit their purchases of portfolio
instruments to those U.S. dollar-denominated securities which the
Fund's Board of Trustees determines present minimal credit risk,
and which are Eligible Securities as defined in Rule 2a-7 under
the Investment Company Act of 1940 (1940 Act). Eligible
Securities are generally securities which have been rated (or
whose issuer has been rated or whose issuer has comparable
securities rated) in one of the two highest short-term rating
categories by nationally recognized statistical rating
organizations or, in the case of any instrument that is not so
rated, is of comparable high quality as determined by T. Rowe
Price pursuant to written guidelines established in accordance
with Rule 2a-7 under the Investment Company Act of 1940 under the
supervision of the Fund's Board of Trustees. In addition, the
Funds may treat variable and floating rate instruments with
demand features as short-term securities pursuant to Rule 2a-7
under the 1940 Act.
There can be no assurance that the Money Funds will achieve
PAGE 7
their investment objectives or be able to maintain their net
asset value per share at $1.00. The price stability and
liquidity of the Money Funds may not be equal to that of a
taxable money market fund which exclusively invests in short-term
taxable money market securities. The taxable money market is a
broader and more liquid market with a greater number of
investors, issuers, and market makers than the short-term
municipal securities market. The weighted average maturity of
the Funds varies: the shorter the average maturity of a
portfolio, the less its price will be impacted by interest rate
fluctuations.
Bond Funds
Because of their investment policies, the Bond Funds may not
be suitable or appropriate for all investors. The Funds are
designed for investors who wish to invest in non-money market
funds for income, and who would benefit, because of their tax
bracket, from receiving income that is exempt from federal income
taxes. The Funds' investment programs permit the purchase of
investment grade securities that do not meet the high quality
standards of the Money Funds. 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. In
addition, the principal value of long term lower-rated securities
generally will fluctuate more widely than higher quality
securities. Lower quality investments entail a higher risk of
default--that is, the nonpayment of interest and principal by the
issuer than higher quality investments. The value of the
portfolio securities of the Bond Funds will fluctuate based upon
market conditions. Although these Funds seek to reduce credit
risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. The Funds are also
not intended to provide a vehicle for short-term trading
purposes.
Special Risks of High Yield Investing
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
Funds invest in such bonds, achievement of their investment
objectives will be more dependent on T. Rowe Price's credit
analysis than would be the case if the Funds 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
PAGE 8
bond prices because the advent of such events could lessen the
ability of highly leverage issuers to make principal and interest
payments on their debt securities. In addition, the secondary
trading market for high yield bonds may be less liquid than the
market for higher grade bonds, which can adversely affect the
ability of a Fund to dispose of its portfolio securities. Bonds
for which there is only a "thin" market can be more difficult to
value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
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.
RISK FACTORS ASSOCIATED WITH A NEW YORK PORTFOLIO
The Funds' concentration in the debt obligations of one
state carries a higher risk than a portfolio that is
geographically diversified. In addition to State general
obligation bonds and notes and the debt of various state
agencies, the fund will invest in local bond issues, lease
obligations and revenue bonds, the credit quality and risk of
which will vary according to each security's own structure and
underlying economics.
The Funds' ability to maintain a high level of "triple-
exempt" income is primarily dependent upon the ability of New
York issuers to continue to meet debt service obligations in a
timely fashion. In 1975 the State, New York City, and other
related issuers experienced serious financial difficulties that
ultimately resulted in much lower credit ratings and loss of
access to the public debt markets. A series of fiscal reforms
and an improved economic climate allowed these entities to return
to financial stability by the early 1980s. Credit ratings were
restored or raised and access to the public credit markets was
also restored. During fiscal years 1990-1992, the State and City
experienced renewed fiscal pressures due to sharp shortfalls in
anticipated revenues. During fiscal years 1993 and 1994, the
financial situation of both the State and the City has
stabilized, with revenues coming in at or above budgeted amounts.
New York State
As of December 31, 1993, total State-related bonded debt was
$33.38 billion, of which $5.27 billion was general obligation
debt, $7.5 billion was State moral obligation debt, and $20.6
billion was financed under lease-purchase or other contractual
obligations. In addition, the State had $294 million in bond
PAGE 9
anticipation notes outstanding. For the first time since 1952,
the State has no outstanding Tax and Revenue Anticipation Notes.
As of June 1, 1994, the State's general obligation bonds were
rated A by Moody's, A- by Standard & Poor's and A+ by Fitch. All
general obligation bonds must be approved by the voter prior to
issuance.
The fiscal stability of the State is also important for
numerous authorities which have responsibilities for financing,
constructing, and operating revenue-producing public benefit
facilities. As of September 30, 1993 there were 18 authorities
that had aggregate debt outstanding, including refunding bonds,
of $63.5 billion.
The authorities most reliant upon annual direct State
support include the Metropolitan Transit Authority (MTA), the
Urban Development Authority (UDC), and the New York Housing
Finance Agency (HFA). In February 1975, the UDC defaulted on
approximately $1.0 billion of short-term notes. The default was
ultimately cured by the creation of the Project Finance Authority
(PFA), through which the State provided assistance to the UDC,
including support for debt service. Since then, there have been
no additional defaults by State authorities although substantial
annual assistance is required by the MTA and the HFA in
particular.
Subsequent to the fiscal crisis of the mid-70's New York
State maintained balanced operations on a cash basis, although by
1992 it had built up an accumulated general fund deficit of over
$6 billion on a "Generally Accepted Accounting Principles" (GAAP)
basis. This deficit consisted mainly of overdue tax refunds and
payments due localities.
To resolve its accumulated general fund deficit the State
established the Local Government Assistance Corporation (LGAC) in
1990. To date, a total of $4.0 billion in LGAC bonds have been
issued. The proceeds of these bonds are used to provide the
State's assistance to localities and school districts, enabling
the State to reduce its accumulated general fund deficit to $2.55
billion by the end of fiscal year 1993. State short-term
borrowing requirements, which peaked at a record $5.9 billion in
fiscal 1991, have been reduced to zero for fiscal year 1995.
New York State has a large, diversified economy which has
witnessed a basic shift away from manufacturing toward more
service sector employment. Growth in personal income has
exceeded national averages each year since 1981. In 1992, per
capita income in New York State was $23,842, 18.5% above the
national average. Like most northeastern states, New York
suffered a population loss during the 1970s. However, during the
PAGE 10
1980s that trend reversed and population actually increased
slightly, standing at 18,197,000 in 1993. During 1990-1992, the
State experienced a slowing of economic growth evidenced by the
loss of 425,000 jobs. Conditions improved slightly in 1993 as
the state added 40,000 jobs. Such economic trends are important
as they influence the growth or contraction of State revenues
available for operations and debt service.
New York City
The financial problems of New York City were acute between
1975 and 1979, highlighted by a default on the City's short-term
obligations. In the subsequent decade, the City made a
significant recovery. The most important contribution to the
City's fiscal recovery was the creation of the Municipal
Assistance Corporation for the City of New York (MAC). Backed by
sales, use, stock transfer, and other taxes, MAC issued bonds and
used the proceeds to purchase City bonds and notes. Although the
MAC bonds met with reluctance by investors at first, the program
has proven to be very successful over the past fifteen years.
Over the past six years, MAC returned substantial funds to the
City for general use as large surplus balances accumulated.
Much progress has been made since the fiscal crisis of 1975.
By 1981, the City achieved a budget balanced in accordance with
Generally Accepted Accounting Principles (GAAP) and has continued
to generate small surpluses on an operating basis. By 1983, the
City eliminated its accumulated General Fund deficit and as of
the fiscal year ending June 30, 1993, had a total General Fund
balance of $88 million. Although the City continues to finance
its seasonal cash flow needs through public borrowings, the total
amount of these borrowings has not exceeded 5% of any year's
revenues and all have been repaid by the end of the fiscal year.
As of June 1, 1994 the City's general obligation bonds are
rated BAA by Moody's, A- by Standard & Poor's and A- by Fitch.
While New York City has sustained a decade long record of
relative financial stability, during the last four fiscal years
budgetary pressures have been evident. Its major revenue
sources, income and sales taxes, were slowed and a downturn in
the real estate market reduced property tax revenues. Also,
State aid cuts were significant, in the $400 to 500 million range
in fiscal years 1992 and 1993. Nonetheless, the City concluded
the 1993 fiscal year with an operating surplus of $409 million,
which was used to prepay fiscal year 1994 operating expenses.
The City's financial plan projects that revenues and expenditures
for the 1994 fiscal year will be balanced in accordance with
GAAP. New York City will require substantial cuts in
expenditures and state approval of several hundred million
PAGE 11
dollars in new revenue sources to achieve permanent fiscal
balance in future fiscal years.
Long Island and LILCO
The Long Island Lighting Company (LILCO) is the single
largest property taxpayer in both Nassau and Suffolk Counties.
LILCO has experienced substantial financial difficulty primarily
arising from problems related to its completed but unlicensed 809
megawatt Shoreham Nuclear Power Facility located in Suffolk
County. In 1987, the State Legislature created the Long Island
Power Authority (LIPA). In February, 1989, an agreement was
reached with the state of New York to transfer ownership of the
Shoreham Plant to LIPA for one dollar in exchange for certain
rate benefits to LILCO. The New York Power Authority is
overseeing the decommissioning of Shoreham.
LILCO has challenged various property tax assessments levied
in Suffolk County on its facilities and seeks substantial
refunds. As a result of its Shoreham takeover, LIPA agreed to
make, in-lieu-of-tax payments to Suffolk County, in an amount
equal to the taxes or assessment which would have been paid by
LILCO in the year during which LIPA acquired the Shoreham
facility. In each succeeding year, payments decrease 10% until
such time as payments equal the taxes or assessment which would
have been paid by LILCO based on a nonoperative Shoreham plant.
Various provisions of this agreement are under appeal.
Sectors
Certain areas of potential investment concentration present
unique risks. In 1993, $3.1 billion of tax-exempt debt issued in
New York was for public or non-profit hospitals. A significant
portion of the Fund's assets may be invested in health care
issues. Since 1983, the hospital industry has been under
significant pressure to reduce expenses and shorten length of
stay, a phenomenon which has negatively affected the financial
health of many hospitals. While each hospital bond issue is
separately secured by the individual hospital's revenues, third
party reimbursement sources such as the federal Medicare and
state Medicaid programs or private insurers are common to all
hospitals. To the extent these third party payors reduce
reimbursement levels, the individual hospitals may be affected.
The Clinton Administration has developed a proposal for
national health care reform which would dramatically alter the
health care delivery system in the United States. Currently there
are numerous alternative proposals circulating in the legislative
branch, with sponsors hoping to displace or materially change the
President's proposal. There is no way to predict whether any
PAGE 12
reform package will be adopted or the ultimate impact of any such
changes upon hospitals in New York and other states.
The Funds may from time to time invest in electric revenue
issues which have exposure to or participate in nuclear power
plants which could affect the issuers' financial performance.
Such risks include delay in construction and operation due to
increased regulation, unexpected outages or plan shutdowns,
increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
The Funds may invest in private activity bond issues for
corporate and non-profit borrowers. These issues sold through
various governmental conduits, are backed solely by the revenues
pledged by the respective borrowing corporations. No
governmental support is implied. This category accounted for
7.4% of the tax-exempt debt issued in New York during 1993.
RISK FACTORS ASSOCIATED WITH A CALIFORNIA PORTFOLIO
The Funds' concentration in debt obligations of one state
carries a higher risk than a portfolio that is geographically
diversified. In addition to State general obligations and notes,
the funds will invest in local bond issues, lease obligations and
revenue bonds, the credit quality and risk of which will vary
according to each security's own structure and underlying
economics.
Debt. The State, its agencies and local governmental
entities issued $39.3 billion in long term municipal bonds in
1993. Approximately 9.9% was general obligation debt, backed by
the taxing power of the issuer, and 90.1% were revenue bonds and
lease backed obligations, issued for a wide variety of purposes,
including transportation, housing, education and healthcare.
As of April 22, 1994, the State of California had
approximately $18.1 billion outstanding general obligation bonds
secured by the State's revenue and taxing power. An additional
$5.5 billion authorized but unissued state general obligation
debt remains to be issued to comply with voter initiatives and
legislative mandates. Debt service on roughly 22% of the State's
outstanding debt is met from revenue producing projects such as
water, harbor, and housing facilities. As part of its cash
management program, the State regularly issues short-term notes
to meet its disbursement requirements in advance of revenue
collections. During fiscal 1994, the State issued $7.2 billion
in short-term notes for this purpose.
PAGE 13
The State also supports $4.9 billion in lease-purchase
obligations attributable to the State Public Works Board. These
obligations are not backed by the full faith and credit of the
State but instead, are subject to annual appropriations from the
State's General Fund.
In addition to the State obligations described above, bonds
have been issued by special public authorities in California that
are not obligations of the State. These include bonds issued by
the California Housing Finance Agency, the Department of Water
Resources, the Department of Veterans Affairs, California State
University and the California Transportation Commission.
Economy. California's economy is the largest among the 50
states and one of the largest in the world. The 1993 population
of 31.7 million represents 12.3% of the U.S. total. From 1983 to
1993 the State's population grew by 25.3% compared with a 10%
growth rate for the nation as a whole. The State's per capita
personal income in 1992 exceeded the U.S. average by 7%.
Due in part to its rapidly growing population, the
California economy has proven to be more cyclical than that of
the nation. During the recessionary period of the early 1980s
and again in the early 1990s, California's unemployment levels
averaged above the national rate. Federal defense spending cuts
and military base closings have negatively affected the
California economy in recent years. The level of economic
activity within the State is important as it influences the
growth or contraction of State and local government revenues
available for operations and debt service.
Recessionary influences and the effects of overbuilding in
selected areas have resulted in a contraction in real estate
values in many regions of the State during the last four years.
A decline in property values could have a negative effect on the
ability of certain local governments to meet their obligations.
As a state, California is more prone to earthquakes than
most other states in the country, creating potential economic
losses from damages. On January 17, 1994, a major earthquake,
measuring 6.8 on the Richter scale, hit Southern California
centered in the area of Northridge. Total damage has been
estimated at $20 billion. Significant federal aid has been
committed. Given the failure of a $2 billion general obligation
bond funding proposal on June 7, 1994, the state is uncertain
regarding the method of funding for its share of the earthquake
repairs.
Legislative. Due to the Funds' concentration in California
state and its municipal issuers, the Funds may be affected by
PAGE 14
certain amendments to the California constitution and state
statutes which limit the taxing and spending authority of
California governmental entities and may affect their ability to
meet their debt service obligations.
In 1978, California voters approved "Proposition 13" adding
Article XIIIA, an amendment to the state constitution which
limits ad valorem taxes on real property to 1% of "full cash
value" and restricts the ability of taxing entities to increase
real property taxes. The full cash value may be adjusted
annually to reflect increases (not to exceed 2%) or decreases in
the consumer price index or comparable local data, or declining
property value caused by damage, destruction or other factors.
In subsequent action, the State substantially increased General
Fund expenditures to provide assistance to its local governments
to offset the losses in revenues and to maintain essential local
services. Due to fiscal pressures at the State level, the
Administration is in the process of phasing out this aid, forcing
local governments to look for alternative revenue sources.
Another constitutional amendment, Article XIIIB, was passed
by voters in 1979 prohibiting the State from spending revenues
beyond its annually adjusted "appropriations limit". Any
revenues exceeding this limit must be returned to the taxpayers
as a revision in the tax rate or fee schedule over the following
two years. Such a refund, in the amount of $1.1 billion,
occurred in fiscal year 1987. Excluded from the appropriation
limit are certain expenditures including debt service on
indebtedness incurred or authorized prior to January 1, 1979 or
subsequently approved by voters.
An effect of the tax and spending limitations in California
has been a broad scale shift by local governments away from
general obligation debt that requires voter approval and pledging
future tax revenues, towards lease revenue financing that is
subject to annual appropriations and does not require voter
approval. Lease backed debt is generally viewed as a less secure
form of borrowing and therefore entails greater credit risk.
Local governments also raise capital through the use of Mello-
Roos, 1915 Act, and Tax Increment Bonds, all of which are
generally riskier than general obligation debt as they rely on
tax revenues to be generated by future development for their
support.
Proposition 98, enacted in 1988, changed the State's method
of funding education for grades below the university level.
Under this constitutional amendment, the schools are guaranteed a
minimum share of State General Fund revenues. The major effect
of Proposition 98 has been to restrict the State's flexibility to
respond to fiscal stress.
PAGE 15
Future initiatives, if proposed and adopted or future court
decisions could create renewed pressure on California governments
and their ability to raise revenues. The State and its
underlying localities have displayed flexibility, however, in
overcoming the negative effects of past initiatives.
Financial. California's finances have been under pressure
since 1990 as the effects of recession took their toll on the
State. During fiscal years 1990 through 1994, tax collections
have fallen below estimates and expenditures have risen above
budgeted levels. From 1991 through 1993, ending deficits were
carried over into the following years. Fiscal 1994 is now
expected to end with a negative general fund balance of $2
billion.
In addition to the announced General Fund deficit at the
fiscal year end, the State is also expecting an internal cash
imbalance to occur in the final months of fiscal 1994. Revenue
anticipation warrants in the amount of $3.2 billion were issued
in February 1994 to cover the State's year-end funding
requirements. In May of 1994, the California Attorney General
expressed concerns about potential imbalances in the proposed
fiscal 1994 budget. This may exacerbate the state's cash flow
problems in the coming year.
As a result of the State's continued fiscal imbalance, the
rating services have downgraded California's general obligation
bonds from their prior AAA levels. As of June 1, 1994, the
State's general obligation bonds are rated Aa by Moody's, A+ by
Standard & Poor's and Aa by Fitch.
The consequences of the State's financial problems reach
beyond its own general obligation bond ratings. Many state
agencies and local governments which depend upon state
appropriations have realized significant cutbacks in funding in
recent years. These entities have been forced to make program
reductions or to increase fees or raise special taxes to cover
their debt service and lease obligations.
Sectors
Certain areas of potential investment concentration present
unique risks. In 1993, $3 billion of tax-exempt debt issued in
California was for public or non-profit hospitals. A significant
portion of the Funds' assets may be invested in health care
issues. Since 1983 the hospital industry has been under
significant pressure to reduce expenses and shorten length of
stay, a phenomenon which has negatively affected the financial
health of many hospitals. While each hospital bond issue is
separately secured by the individual hospital's revenues, third
PAGE 16
party reimbursement sources such as the federal Medicare and
state MediCal programs or private insurers are common to all
hospitals. To the extent these third party payors reduce
reimbursement levels, the individual hospitals may be affected.
The Clinton Administration has developed a proposal for
national health care reform which would dramatically alter the
health care delivery system in the United States. Currently there
are numerous alternative proposals circulating in the legislative
branch, with sponsors hoping to displace or materially change the
President's proposal. There is no way to predict whether any
reform package will be adopted or the ultimate impact of any such
changes upon hospitals in California and other states.
The Funds may from time to time invest in electric revenue
issues which have exposure to or participate in nuclear power
plants which could affect the issuers' financial performance.
Such risks include delay in construction and operation due to
increased regulation, unexpected outages or plant shutdowns,
increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
The Funds may invest in private activity bond issues for
corporate and non-profit borrowers. These issues sold through
various governmental conduits, are backed solely by the revenues
pledged by the respective borrower corporations. No governmental
support is implied.
RISK FACTORS ASSOCIATED WITH A MARYLAND PORTFOLIO
Each Fund's concentration in the debt obligations of one
state carries a higher risk than a portfolio that is
geographically diversified. In addition to State of Maryland
general obligations and state agency issues, the fund will invest
in local bond issues, lease obligations and revenue bonds, the
credit quality and risk of which will vary according to each
security's own structure and underlying economics.
Debt. The State of Maryland and its local governments issue
three basic types of debt, with varying degrees of credit risk:
general obligation bonds backed by the unlimited taxing power of
the issuer, revenue bonds secured by specific pledged fees or
charges for a related project, and tax-exempt lease obligations,
secured by annual appropriations by the issuer, usually with no
implied tax or specific revenue appropriations by the issuer. In
1993, $6.6 billion in state and local debt was issued in
Maryland, with approximately 40% representing general obligation
debt and 60% revenue bonds and lease backed debt, compared to 32%
general obligation and 68% revenue backed bonds nationally.
PAGE 17
Total combined debt outstanding of the State, Baltimore
City, and all of the counties, towns, and special districts
within Maryland totaled $10.8 billion as of June 30, 1992. The
State of Maryland had $2.28 billion in general obligation bonds
outstanding as of December 31, 1993 along with an additional $1.3
billion in other tax-supported debt. General obligation debt of
the State of Maryland is rated Aaa by Moody's, AAA by Standard &
Poor's and AAA by Fitch. There is no general debt limit imposed
by the State Constitution or public general laws, but State debt
on a per capita basis or as a percentage of property values has
declined over the last five years. The State Constitution
imposes a 15 year maturity limit on State general obligation
bonds. Although voters approved a constitutional amendment in
1982 permitting the State to borrow up to $100 million in short-
term notes in anticipation of taxes and revenues, the State has
not made use of this authority.
Many agencies and other instrumentalities of the State
government are authorized to borrow money under legislation which
expressly provides that the loan obligations shall not be deemed
to constitute a debt or a pledge of the faith and credit of the
State. The Community Development Administration of the
Department of Housing and Community Development, the Maryland
Stadium Authority, the Board of Trustees of St. Mary's College of
Maryland, the Maryland Environmental Service, the Board of
Regents of the University of Maryland System, the Board of
Regents of Morgan State University, the Maryland Food Center
Authority, and the Maryland Water Quality Financing
Administration have issued and have outstanding bonds of this
type. The principal of and interest on bonds issued by these
bodies are payable solely from various sources, principally fees
generated from use of the facilities, enterprises financed by the
bonds, or other dedicated fees. Total outstanding revenue and
enterprise debt of these State units, the Maryland Transportation
Authority and the Maryland Department of Transportation at June
30, 1993 was $4.88 billion.
Economy. The economy of the State of Maryland generally
demonstrates strong performance relative to the nation; however,
the State did witness the loss of 120,000 jobs during the
recession of 1990 to 1992. Employment levels recovered in 1993
with a gain of 52,000 jobs. Unemployment was 6.5% in 1992,
compared to a national average of 7.4%. The State's population
in 1992 was 4.9 million, with 82% concentrated in the Baltimore-
Washington corridor.
Financial. To a large degree, the risk of the Funds is
dependent upon the financial strength of the State of Maryland
and its localities. Over the long term, Maryland's financial
condition has been strong; however, in fiscal 1992, the State
PAGE 18
experienced unanticipated shortfalls in revenues, as collections
of major taxes fell during the recession. To address this loss,
the governor enacted a series of mid-year reductions in
expenditures, primarily cuts in local aid. The State concluded
fiscal year 1992 with a general fund deficit of $121 million
(1.5% of general fund expenditures).
Balancing the state budget for fiscal year 1993 involved a
variety of additional taxes, including a higher income tax on
upper income households and an expanded sales tax. The
legislature also adopted further cuts in State aid to localities,
but this action was offset by the ability of localities to
increase the local "piggyback" tax from 50 percent to 60 percent
of the State rate. These actions were successful in restoring
the State's financial condition and replenishing reserves. The
State concluded fiscal 1993 with a General Fund balance of $113
million (1.3% of General Fund expenditures). During fiscal 1994
economic conditions improved, allowing the state to meet or
slightly exceed its revenue forecast for major taxes. The fiscal
1995 budget calls for a partial restoration of state aid to
localities cut in prior fiscal years and the elimination of the
extra one percent income tax on upper income households.
Many local Maryland governments also suffered from fiscal
stress and general declines in financial performance during the
recession. Downturns in real estate related receipts, declines in
the growth of income tax revenues, lower cash positions and
reduced interest income have been the common problems. State aid
to local governments was also reduced during that period. Local
governments closed these gaps by increasing property and local
income tax rates, implementing program cuts, and curtailing pay
raises. Certain counties in Maryland are subject to voter
approval limitations on property tax levy increases or on
increases in governmental spending which limits their flexibility
in responding to external changes.
Initiatives to reform existing tax structures in certain
counties were placed on the November 1992 election ballot and
were adopted in November of 1992. These counties are now
assessing the impacts of these restrictions. Future initiatives,
if proposed and adopted, could create pressure on the counties
and other local governments and their ability to raise revenues.
The Funds cannot predict the impact of any such future tax
limitations on debt quality.
Sectors. Certain areas of potential investment
concentration present unique risks. In recent years, 6 to 12% of
tax-exempt debt issued in Maryland was for public or non-profit
hospitals. A significant portion of the Funds' assets may be
invested in health care issues. Since 1983, the hospital
PAGE 19
industry has been under significant pressure to reduce expenses
and shorten length of stay, a phenomenon which has negatively
affected the financial health of many hospitals. While each
hospital bond issue is separately secured by the individual
hospital's revenues, third party reimbursement mechanisms are
common to the group. At the present time Maryland hospitals
operate under a system which reimburses hospitals according to a
State administered set of rates and charges rather than the
Federal Diagnosis Related Group (DRG) system for Medicare
payments. Since 1983, Maryland hospitals, on average over the
trailing three year period, have increased hospital charges at a
level below the national average in terms of Medicare cost
increases, allowing them to continue operating under a Medicare
waiver. Any loss of this waiver in the future may have an
adverse impact upon the credit quality of Maryland hospitals.
The Clinton Administration has developed a proposal for
national health care reform which would dramatically alter the
health care delivery system in the United States. Currently
there are numerous alternative proposals circulating in the
legislative branch, with sponsors hoping to displace or
materially change the President's proposal. There is no way to
predict whether any reform package will be adopted or the
ultimate impact of any such changes upon hospitals in Maryland
and other states.
The Funds may from time to time invest in electric revenue
issues which have exposure to or participate in nuclear power
plants which could affect the issuers' financial performance.
Such risks include delay in construction and operation due to
increased regulation, unexpected outages or plan shutdowns,
increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
The Funds may invest in private activity bond issues for
corporate and non-profit borrowers. These issues sold through
various governmental conduits, are backed solely by the revenues
pledged by the respective borrowing corporations. No
governmental support is implied. This category accounted for
less than 1% of the tax-exempt debt issued in Maryland during
1993.
RISK FACTORS ASSOCIATED WITH A VIRGINIA PORTFOLIO
The Fund's concentration in the debt obligations of one
state carries a higher risk than a portfolio that is
geographically diversified. In addition to State of Virginia
general obligations and state agency issues, the fund will invest
in local bond issues, lease obligations and revenue bonds, the
PAGE 20
credit quality and risk of which will vary according to each
security's own structure and underlying economics.
Debt. The State of Virginia and its local governments
issued $6.9 billion municipal bonds in 1993, approximately 40%
general obligation debt backed by the unlimited taxing power of
the issuer and 60% revenue bonds secured by specific pledged fees
or charges for an enterprise or project. Included within the
revenue bond category are tax-exempt lease obligations that are
subject to annual appropriations of a governmental body to meet
debt service, usually with no implied tax or specific revenue
pledge. Debt issued in 1993 was for a wide variety of public
purposes, including transportation, housing, education, health
care, and industrial development.
As of June 30, 1993 the State of Virginia had $816 million
outstanding general obligation bonds secured by the State's
revenue and taxing power, a modest amount compared to many other
states. Under state law, general obligation debt is limited to
1.15 times the average of the preceding three years' income tax
and sales and use tax collections. The State's outstanding
general obligation debt is well below that limit and over 90% of
the debt service is actually met from revenue producing capital
projects such as universities and toll roads. Debt service
payments on all general obligation bonds represented 1.03% of the
State's Governmental Funds expenditures in fiscal year 1993.
The State also supports $708 million in debt issued by the
Virginia Public Building Authority, the Virginia College Building
Authority, the Virginia Port Authority, and the Innovative
Technology Authority. These bonds are not backed by the full
faith and credit of the State but instead, are subject to annual
appropriations from the State's General Fund.
In addition to the State and public authorities described
above, an additional $6.1 billion bonds have been issued by
special public authorities in Virginia that are not obligations
of the State. These bonds include debt issued by the Virginia
Education Loan Authority, the Virginia Public School Authority,
the Virginia Resources Authority, and the Virginia Housing
Development Authority.
Economy. The State of Virginia has a population of
approximately 6.4 million, making it the twelfth largest state.
Since the 1930s the State's population has grown at a rate
exceeding the national average. Stable to strong economic growth
during the 1980s was led by the northern Virginia area outside of
Washington, D.C. where approximately 25% of the State's
population is concentrated. The next largest metropolitan area
PAGE 21
is the Norfolk-Virginia Beach-Newport News area, followed by the
Richmond-Petersburg area, including the State's capital of
Richmond. The State's economy is broadly based with a large
concentration in service and governmental jobs, followed by
manufacturing. Per capita income exceeds national averages while
unemployment figures have consistently tracked below national
averages.
Financial. To a large degree, the risk of the portfolio is
dependent on the financial strength of the State of Virginia and
its localities. As of June 1, 1994, the State was rated Aaa by
Moody's, AAA by Standard & Poor's and AAA by Fitch. The State's
budget is prepared on a biennial basis. From 1970 through 1992
the State's General Fund showed a positive balance for all of its
two year budgetary periods. The national recession and its
negative effects on State personal income tax collections did,
however, force the State to draw down its General Fund balances
to a deficit of $122 million in 1992. Mid-cycle spending cuts
and improved economic conditions allowed for positive operations
in fiscal 1993, boosting the General Fund balance to the $78
million level (1.7% of revenues). A balanced budget has been
adopted for the 1994-1996 biennium which began on July 1, 1993.
A significant portion of the Fund's assets is
expected to be invested in the debt obligations of local
governments and public authorities with investment grade ratings
of BBB or higher. While local governments in Virginia are
primarily reliant on independent revenue sources, such as
property taxes, they are not immune to budget shortfalls caused
by cutbacks in State aid. Likewise, certain enterprises such as
toll roads or hospitals may be affected by changes in economic
activity.
Sectors. Certain areas of potential investment
concentration present unique risks. In 1993, $763 million of
tax-exempt debt issued in Virginia was for public or non-profit
hospitals. A significant portion of the Fund's assets may be
invested in health care issues. Since 1983 the hospital industry
has been under significant pressure to reduce expenses and
shorten length of stay, a phenomenon which has negatively
affected the financial health of many hospitals. While each
hospital bond issue is separately secured by the individual
hospital's revenues, third party reimbursement sources such as
the federal Medicare and state Medicaid programs or private
insurers are common to all hospitals. To the extent these payors
reduce reimbursement levels, the individual hospitals may be
affected.
The Clinton Administration has developed a proposal for
PAGE 22
national health care reform which would dramatically alter the
health care delivery system in the United States. Currently there
are numerous alternative proposals circulating in the legislative
branch, with sponsors hoping to displace or materially change the
President's proposal. There is no way to predict whether any
reform package will be adopted or the ultimate impact of any such
changes upon hospitals in Virginia and other states.
The Fund may from time to time invest in electric
revenue issues which have exposure to or participate in nuclear
power plants which could affect the issuers' financial
performance. Such risks include delay in construction and
operation due to increased regulation, unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission
surveillance or inadequate rate relief.
The Fund may invest in private activity bond issues
for corporate and non-profit borrowers. These issues sold
through various governmental conduits, are backed solely by the
revenues pledged by the respective borrowing corporations. No
governmental support is implied.
RISK FACTORS ASSOCIATED WITH A NEW JERSEY PORTFOLIO
The Fund's concentration in the debt obligations of one
state carries a higher risk than a portfolio that is
geographically diversified. In addition to State of New Jersey
general obligation bonds, notes and state agency issues, the fund
will invest in local bond issues, lease obligations and revenue
bonds, the credit quality and risk of which will vary according
to each security's own structure and underlying economics.
Debt. The State of New Jersey and its local governments
issued $6.4 billion of municipal bonds in 1993. Of this amount,
approximately 33% was general obligation debt backed by the
unlimited taxing power of the issuer and 67% were revenue bonds
secured by specific pledged fees or charges for an enterprise or
project. Included within the revenue bond sector are tax-exempt
lease obligations that are subject to annual appropriations of a
governmental body, usually with no implied tax or specific
revenue pledge. Debt issued in 1993 was for a wide array of
public purposes, including water and sewer projects, health care,
housing, education, transportation, and pollution control.
The State of New Jersey has approximately $3.6 billion
outstanding general obligation bonds secured by the State's
revenue and taxing power. As of June 1, 1994, its general
obligation bonds were rated Aa1 by Moody's, AA+ by Standard &
Poor's and AA+ by Fitch. In addition to the State's direct debt,
it is obligated for certain lease backed debt issued through the
PAGE 23
Mercer County Improvement Authority, the New Jersey Economic
Development Authority and the New Jersey Building Authority.
Under state law, the obligations of certain local school
districts and county college districts have been supported by
State appropriations. The State has also entered into a "moral
obligation" (as opposed to a legal commitment) to make up debt
service shortfalls for the New Jersey Housing and Mortgage
Finance Agency as well as the South Jersey Port Corporation.
While no assistance has ever been required for the New Jersey
Housing and Mortgage Finance Agency, from time to time, the State
has supported the operations and debt service of the South Jersey
Port Corporation. The related obligations of the State described
in this paragraph total an additional $1.7 billion.
A number of other state-created agencies issue tax-exempt
revenue bonds that are not a debt or liability of the State. The
largest such entities include the New Jersey Turnpike Authority,
the New Jersey Educational Facilities Authority and the New
Jersey Health Care Facilities Financing Authority. Altogether,
sixteen agencies have approximately $10 billion in outstanding
debt.
A significant portion of the portfolio's assets is expected
to be invested in the debt obligations of local governments and
public authorities with investment grade ratings of BBB or
higher. While local governments in New Jersey are primarily
reliant on independent revenue sources, such as property taxes,
they are not immune to budget shortfalls caused by economic
downturns or cutbacks in State aid. Likewise, certain
enterprises such as toll roads or hospitals may be affected by
changes in economic activity. Under the New Jersey Local Budget
Law, the State oversees the budget preparation of local
governments and has certain powers to enforce balanced budgets,
limit short term borrowing and regulate overall debt limits.
Economy. New Jersey is the ninth largest and most densely
populated state with 7.8 million residents, and an average of
1,040 persons per square mile. The economic base is diversified
among manufacturing, construction, services, and agricultural
uses. The average per capita income of $26,969 ranks the State
as the second highest in the United States. Over the long term,
the State's economy has been a strong performer, with
unemployment levels generally below national averages. In 1992,
however, New Jersey's unemployment rose above the national
average to a rate of 8.4% versus 7.4% for the nation. During
1993, employment losses continued as the State lagged the U.S. in
recovery from the recession. The State anticipates a turnaround
in 1994 and 1995 with modest gains in employment.
PAGE 24
Financial. To a large degree, the risk of the portfolio is
dependent on the financial strength of the State of New Jersey
and its localities. Characteristically the State has
demonstrated solid financial performance, but operations
suffered as the State's economy stagnated during the recent
recession. In fiscal 1990 and 1991 New Jersey utilized non-
recurring revenues and expenditure deferrals to achieve balance,
ending with minimal reserves. In fiscal 1992, the general fund
cushion improved to a 5% level, largely due to a one-time
transfer from the pension fund and a large tax increase.
Improved revenue collections in fiscal 1993 allowed the State to
close out the fiscal year with higher reserves. The State's
General Fund balance at year end 1993 was $1.9 billion (a strong
11.4% of revenues.) The fiscal 1994 budget, however, relied on
nearly $1 billion in non-recurring revenue to achieve balance.
Additional budgetary pressures are expected for fiscal 1995 and
beyond, as the new Governor seeks to implement her campaign
promise to reduce state income taxes by 30 percent over the next
three years. The income tax rollbacks, if fully implemented,
would reduce state revenues by $1.5 billion.
Sectors. Certain areas of potential investment
concentration present unique risks. In 1993, 10% of tax-exempt
debt issued in New Jersey was for public or non-profit hospitals.
A significant portion of the Fund's assets may be invested in
health care issues. Since 1983, the hospital industry has been
under significant pressure to reduce expenses and shorten length
of stay, a phenomenon which has negatively affected the financial
health of many hospitals. While each hospital bond issue is
separately secured by the individual hospital's revenues, third
party reimbursement sources such as the federal Medicare and
state Medicaid programs or private insurers are common to all
hospitals. To the extent these payors reduce reimbursement
levels, the individual hospitals may be affected.
On January 1, 1993, the State of New Jersey implemented
legislation that deregulated hospital reimbursements. This
replaced a highly regulated reimbursement system which governed
hospital charges and provided subsidies for uncompensated care
from a statewide pool. Under the new system, hospitals negotiate
their rates directly with private payors. This deregulation has
forced the State's hospitals to adjust to competition in a
market-driven environment. Each hospital's ability to adapt will
be critical to its ongoing financial success.
The Clinton Administration has developed a proposal for
national health care reform which would dramatically alter the
health care delivery system in the United States. Currently
there are numerous alternative proposals circulating in the
legislative branch, with sponsors hoping to displace or
PAGE 25
materially change the President's proposal. There is no way to
predict whether any reform package will be adopted or the
ultimate impact of any such changes upon hospitals in New Jersey
and other states.
The Fund may from time to time invest in electric revenue
issues which have exposure to or participate in nuclear power
plants which could affect the issuers' financial performance.
Such risks include delay in construction and operation due to
increased regulation, unexpected outages or plant shutdowns,
increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
The Fund may invest in private activity bond issues for
corporate and non-profit borrowers. These issues sold through
governmental conduits, such as the New Jersey Economic
Development Authority and various local issuers, are backed
solely by the revenues pledged by the respective borrowing
corporations. No governmental support is implied. This category
accounted for 2% of the tax-exempt debt issued in New Jersey
during 1993. In the past, a number of New Jersey Economic
Development Authority issues have defaulted as a result of
borrower financial difficulties.
RISK FACTORS ASSOCIATED WITH A GEORGIA PORTFOLIO
The Fund's concentration in the debt obligations of one
state carries a higher risk than a portfolio that is
geographically diversified. In addition to State of Georgia
general obligations and state agency issues, the fund will invest
in local bond issues, lease obligations and revenue bonds, the
credit quality and risk of which will vary according to each
security's own structure and underlying economics.
Debt. The State of Georgia and its local governments issued
$7.5 billion in municipal bonds in 1993, with approximately 34%
general obligation debt backed by the unlimited taxing power of
the issuer and 66% revenue bonds secured by specific pledged fees
or charges for an enterprise or project. This level of debt
issuance is well above the trend of recent years, reflecting a
high volume of debt refunding due to lower interest rates. As of
June 1, 1994, the State was rated Aaa by Moody's, AA+ by Standard
& Poor's and AAA by Fitch.
As of January 31, 1994, the State of Georgia had net direct
obligations of $4 billion. Since 1973, when a Constitutional
Amendment authorizing the issuance of state general obligation
(GO) bonds was implemented, the State has funded most of its
capital needs through the issuance of general obligation (GO)
bonds. Previously, capital requirements were funded through the
PAGE 26
issuance of bonds by ten separate authorities and secured by
lease rental agreements and annual state appropriations. The
State Constitution permits the State to issue bonds for two types
of public purposes: (1) general obligation debt and (2)
guaranteed revenue debt. The Constitution imposes certain debt
limits and controls. GO debt service cannot exceed 10% of total
revenue receipts less refunds of the state treasury. GO bonds
have a maximum maturity of 25 years. Currently, maximum GO debt
service requirements are well below the legal limit and are
estimated at 5.4% of Fiscal Year 1994 treasury receipts. Debt
service payments on all general obligation bonds accounted for
4.83% of budget allotments for fiscal year 1993. Debt levels are
expected to increase in fiscal 1995 due to the planned issuance
of a record amount of G.O. bonds.
In addition to the general obligation and lease backed debt
described above, an additional $257 million bonds have been
issued by the Georgia World Congress Authority and $850 million
bonds have been issued and are outstanding by the Georgia State
Housing Authority, none of which represent direct obligations of
the State.
Economy. The State of Georgia has a population of
approximately 6.5 million, making it the 13th largest state.
Since the 1960s, the State's population has grown at a rate
exceeding the national average, with the growth rate during the
1980s nearly twice that of the entire country. Stable to strong
economic growth during the 1980s was led by the Atlanta
metropolitan statistical area, where approximately 44% of the
State's population is located. This area includes the capital
city of Atlanta, and 18 surrounding counties. The next largest
metropolitan area is the Columbus-Muscogee area followed by the
Macon area.
The State's economy is well diversified. The current labor
force of 3.2 million is largely concentrated in wholesale/retail
trade and service jobs, followed by lesser amounts in
manufacturing and government. Employment gains have
substantially exceeded the region and the U.S. since 1980. The
State's economy should continue to grow, boosted by the upcoming
Summer Olympics and the continued demand for consumer durables.
Georgia's per capita income has steadily improved against the
national average since the 1960s and currently is 91% of the U.S,
ranking it 29th among the states.
Financial. To a large degree, the creditworthiness of the
portfolio is dependent on the financial strength of the State of
Georgia and its localities. During the 1980s, the State's strong
economic performance translated into solid financial performance
and the accumulation of substantial governmental fund balances.
PAGE 27
These peaked at $2.4 billion in fiscal 1988, equal to 24% of
expenditures. During fiscal 1989 to 1991, the State's financial
condition was affected by three years of revenue shortfalls
brought on by recession. During these periods, the Governor
called special legislative sessions to enact sizeable spending
cuts to achieve budget balance. Economic conditions improved in
1992, allowing the State to restore its financial cushion to $2.1
billion or 15% of expenditures. Results for fiscal 1993 showed a
combination of this positive trend.
A significant portion of the portfolio's assets is expected
to be invested in the debt obligations of local governments and
public authorities with investment grade ratings of BBB or
higher. While local governments in Georgia are primarily reliant
on independent revenue sources, such as property taxes, they are
not immune to budget shortfalls caused by cutbacks in State aid.
The Fund may purchase obligations issued by public authorities in
Georgia which are not backed by the full faith and credit of the
State and may or may not be subject to annual appropriations from
the State's General Fund. Likewise, certain enterprises such as
water and sewer systems or hospitals may be affected by changes
in economic activity.
Sectors. Certain areas of potential investment
concentration present unique risks. In 1993, $863 million of
tax-exempt debt issued in Georgia was for public or non-profit
hospitals. A significant portion of the Fund's assets may be
invested in health care issues. Since 1983, the hospital
industry has been under significant pressure to reduce expenses
and shorten length of stay, a phenomenon which has negatively
affected the financial health of many hospitals. While each
hospital bond issue is separately secured by the individual
hospital's revenues, third party reimbursement sources such as
the federal Medicare and state Medicaid programs or private
insurers are common to all hospitals. To the extent these payors
reduce reimbursement levels, the individual hospitals may be
affected.
The Clinton Administration has developed a proposal for
national health care reform which would dramatically alter the
health care delivery system in the United States. Currently
there are numerous alternative proposals circulating in the
legislative branch, with sponsors hoping to displace or
materially change the President's proposal. There is no way to
predict whether any reform package will be adopted or the
ultimate impact of any such changes upon hospitals in Georgia and
other states.
The Fund may from time to time invest in electric revenue
issues which have exposure to or participate in nuclear power
PAGE 28
plants which could affect the issuers' financial performance.
Such risks include delay in construction and operation due to
increased regulation, unexpected outages or plant shutdowns,
increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
The Fund may invest in private activity bond issues for
corporate and non-profit borrowers. These issues sold through
various governmental conduits, are backed solely by the revenues
pledged by the respective borrowing corporations. No
governmental support is implied. This category accounted for
4.3% of the tax-exempt debt issued in Georgia during 1993.
RISK FACTORS ASSOCIATED WITH A FLORIDA PORTFOLIO
The Fund's program of investing primarily in insured, AAA-
rated Florida municipal bonds should significantly lessen the
credit risks which would be associated with a portfolio of
uninsured Florida bonds. Nevertheless, to a certain degree, the
Fund's concentration in securities issued by the State of Florida
and its political subdivisions involves greater risk than a fund
broadly invested in insured bonds across many states and
municipalities. The credit quality of the Fund will depend upon
the continued financial strength of the insurance companies
insuring the bonds purchased by the Fund as well as the State of
Florida and the numerous public bodies, municipalities and other
issuers of debt securities in Florida.
Debt. The State of Florida and its local governments issue
three basic types of debt, with varying degrees of credit risk:
general obligation bonds backed by the unlimited taxing power of
the issuer, revenue bonds secured by specific pledged funds or
charges for a related project, and tax-exempt lease obligations,
supported by annual appropriations from the issuer, usually with
no implied tax or specific revenue pledge. During 1993, $17.9
billion in state and local debt was issued in Florida, with
approximately 17% representing general obligation debt and 83%
representing revenue bonds and lease-backed obligations. Debt
issued in 1993 was for a wide variety of public purposes,
including transportation, housing, education, health care and
industrial development.
As of June 30, 1993, the State of Florida had $5.6 billion
outstanding general obligation bonds secured by the State's full
faith and credit and taxing power. General bonded debt service
accounted for a modest 2% of all governmental expenditures in
fiscal year 1993. An additional $2.8 billion in bonds, issued by
the State and secured by limited state tax and revenue sources
was outstanding as of June 30, 1993. General obligation debt of
PAGE 29
the State of Florida is rated Aa by Moody's, AA by Standard &
Poor's and AA by Fitch as of June 1, 1994. State debt may only
be used to fund capital outlay projects; Florida is not
authorized to issue obligations to fund operations.
Several agencies of the State are also authorized to issue
debt which does not represent a pledge of the state's credit.
The Florida Housing Finance Authority and Florida Board of
Regents are the largest issuers of this type. The principal and
interest on bonds issued by these bodies are payable solely from
specified sources such as mortgage repayments and university
tuition and fees.
Economy. The State of Florida has a population of
approximately 13.2 million, making it the fourth largest state.
Due to a large immigration of residents, the State's population
has grown at a rate exceeding the national average for four
decades. Florida's economy is broadly based with a large
concentration in the service and trade sectors. Tourism is one
of Florida's most important industries. The recent publicized
attacks on tourists in southern Florida may affect the growth of
visitor traffic in 1994.
During most of the 1980's, as Florida's population and
employment base grew, its job growth rate was double that of the
nation. However, beginning in 1988, job grown slowed and
unemployment rates began trending above national levels. During
1992, Florida's unemployment rate was 8.2% versus 7.4% for the
U.S. In 1993, Florida's unemployment rate has fallen back into
line with the national average. Further drops in the
unemployment rate are expected in 1994, as the State has
experienced sharp job growth related to rebuilding after
Hurricane Andrew. State per capita income is 98% of the national
average, well above norms for the Southeast.
Legislative. The State of Florida does not have a personal
income tax. A constitutional amendment would be required in
order to implement such a tax. Although the probability appears
very low, the Fund cannot rule out the possibility that a
personal income tax may be implemented at some time in the
future. If such a tax were to be imposed, there is no assurance
that interest earned on Florida Municipal Obligations would be
exempt from this tax.
Under current Florida law, shares of the Fund will be exempt
from the State's intangible personal property tax to the extent
that on the annual assessment date (January 1) its assets are
solely invested in Florida Municipal Obligations and U.S.
government securities, certain short-term cash investments, or
other exempt securities. There can be no assurance that this
PAGE 30
exemption for Florida securities will be maintained. Also, the
constitutionality of the intangibles tax has been challenged in
court. If the constitutionality of the tax were struck down, the
tax-favored status of Florida bonds versus other investments
would be eliminated.
The Florida Constitution limits the total ad valorem
property tax that may be levied by each county, municipality and
school district to ten mills (1.0% of value). The limit applies
only to taxes levied for operating purposes and excludes taxes
levied for the payment of bonds. This restricts the operating
flexibility of local governments in the State and may result from
time to time in budget deficits for some local units.
Financial. The Florida Constitution and Statutes mandate
that the State budget as a whole, and each separate fund within
the State budget, be kept in balance from currently available
revenues each State fiscal year (July 1 - June 30.) The Governor
and Comptroller are responsible for insuring that sufficient
revenues are collected to meet appropriations and that no deficit
occurs in any State fund.
The State's revenue structure is narrowly based, relying on
the sales and use tax for 69% of its general revenues. This
structure, combined with the effects of the recession and heavy
spending demands, created budget shortfalls in fiscal years 1991
and 1992. Through mid-year spending adjustments and a draw upon
its reserves, the State was able to achieve budget balance for
both fiscal years. The State's finances received a substantial
boost in fiscal 1993 as a result of increased economic activity
associated with rebuilding efforts after Hurricane Andrew, which
hit south Florida on August 24, 1992. At the end of 1993, the
State had reserves of $969 million in the General Revenue Fund
(7.8% of revenues), reflecting an increase of 82% over the prior
year. Much of the increment has been transferred to a special
Hurricane Trust Fund for use in state and local rebuilding
projects. The increased economic activity and resulting higher
state tax revenues from the hurricane rebuilding is expected to
be sustained through 1995.
Many local Florida governments are suffering from fiscal
stress. The lagging reimbursement of hurricane repair costs and
the loss of property tax revenues associated with the storm's
damage has resulted in financial strain for certain localities.
Also, the recession has caused downturns in real estate related
receipts, declines in the growth of local option sales tax
receipts and reduced interest income. Remedies are being
instituted to close these gaps and provide additional revenues.
Tax rates have been increased, programs have been cut and pay
PAGE 31
raises have been curtailed to assist in controlling expenses.
Sectors. Certain areas of potential investment concentration
present unique risks. In recent years, 10-15% of tax-exempt debt
issued in Florida was for public or non-profit hospitals. A
significant portion of the Fund's assets may be invested in
health care issues.
Since 1983, the hospital industry has been under significant
pressure to reduce expenses and shorten length of stay, a
phenomenon which has negatively affected the financial health of
many hospitals. While each hospital bond issue is separately
secured by the individual hospital's revenues, third party
reimbursement sources such as the federal Medicare and state
Medicaid programs or private insurers are common to all
hospitals. To the extent these payors reduce reimbursement
levels, the individual hospitals may be affected. Due to the
high proportion of elderly residents, Florida hospitals tend to
be highly dependent on Medicare. In addition to the regulation
imposed by Medicare, the State also regulates healthcare. A
State board must approve the budgets of all Florida hospitals;
certificates of need are required for all significant capital
expenditures. The primary management objective is cost control.
The inability of some hospitals to achieve adequate cost control
while operating in a competitive environment has led to a number
of hospital bond defaults.
The Clinton Administration has developed a proposal for
national health care reform which would dramatically alter the
health care delivery system in the United States. Currently
there are numerous alternative proposals circulating in the
legislative branch, with sponsors hoping to displace or
materially change the President's proposal. There is no way to
predict whether any reform package will be adopted or the
ultimate impact of any such changes upon hospitals in Florida and
other states.
The Fund may from time to time invest in electric revenue
issues which have exposure to or participate in nuclear power
plants which could affect the issuers' financial performance.
Such risks include delay in construction and operation due to
increased regulation, unexpected outages or plant shutdowns,
increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.
The Fund may invest in private activity bond issues for
corporate and non-profit borrowers. These issues, sold through
various governmental conduits, are backed solely by the revenues
pledged by the respective borrowing corporations. No government
support is implied. This category accounted for only 1% of the
PAGE 32
tax-exempt debt issued in Florida during 1993.
All Funds
Puerto Rico
From time to time the Funds invest in obligations of the
Commonwealth of Puerto Rico and its public corporations which are
exempt from federal, state and city or local income taxes. The
majority of the Commonwealth's debt is issued by ten of the major
public agencies that are responsible for many of the islands'
public functions, such as water, wastewater, highways,
telecommunications, education, and public construction. As of
December 31, 1993, public sector debt issued by the Commonwealth
and its public corporations totaled $15.17 billion.
Since the 1980s, Puerto Rico's economy and financial
operations have paralleled the economic cycles of the United
States. The island's economy, particularly the manufacturing
sector, has experienced substantial gains in employment. Much of
these economic gains are attributable in part to favorable
treatment under Section 936 of the Federal Internal Revenue Code
for United States corporations doing business in Puerto Rico.
Unemployment, while reaching its lowest level in ten years, still
remains high at around 16 percent.
Debt ratios for the Commonwealth are high as it assumes much
of the responsibility for local infrastructure. Sizeable
infrastructure improvements are ongoing to upgrade the island's
water, sewer, and road systems. The Commonwealth's general
obligation debt is secured by a first lien on all available
revenues. The Commonwealth has maintained a fiscal policy which
seeks to correlate the growth in public sector debt to the growth
of the economic base available to service that debt. Between
fiscal years 1989 and 1993, debt increased 22% while gross
product rose 25%. Short term debt remains a modest 7% of total
debt outstanding as of June 30, 1993. The maximum annual debt
service requirement on Commonwealth general obligation debt
totalled 9.6% of governmental revenues for fiscal 1992. This is
well below the 15% limit imposed by the Constitution of Puerto
Rico.
After recording 3 years of positive operating results in the
1989 to 1991 period, the Commonwealth's General Fund moved into a
deficit position, with a $62 million cash deficit for fiscal 1992
and a $140 million deficit for fiscal 1993. The fiscal 1994
budget was balanced with an increase in the "tollgate" tax on
Section 936 companies and improved revenue collections, but the
General Fund is projected to record an ending cash deficit of
$118 million (2.8% of Commonwealth Revenues).
PAGE 33
The Commonwealth's economy remains vulnerable to changes in
oil prices, American trade, foreign policy, and levels of federal
assistance. Per capita income levels, while being the highest in
the Caribbean, lag far behind the United States. In November
1993, the voters of Puerto Rico were asked in a non-binding
referendum to consider the options of statehood, continued
Commonwealth status, or independence. 48.4% of the voters
favored continuation of Commonwealth status, 46.2% were for
statehood, and 4.4% were for independence. The status question
appears to be settled for the time being. Any conversion to
statehood or independence in the future would likely have an
adverse effect on the continuation of the Section 936 federal tax
credit program, which has been the principal stimulus for the
growth in Puerto Rico's manufacturing base.
Two events occurred in 1993 which are likely to have a long-
term impact on Puerto Rico's economy and government finances.
First, federal tax legislation was passed which revised the tax
benefits received by U.S. corporations (Section 936 firms) that
operate manufacturing facilities in Puerto Rico. The legislation
provides these firms with two options: a 5 year phased reduction
of the income based tax credit to 40% of the previously allowable
credit or the conversion to a wage based standard, allowing a tax
credit for the first 60% of qualified compensation paid to
employees as defined in the IRS Code. At present, it is
difficult to forecast what the short and long term effects of the
new limitations to the Section 936 credit will have on the
economy of Puerto Rico. Preliminary econometric studies
conducted by the Commonwealth and private sector economists
project only a slight reduction in average annual real growth
rates.
Second, the U. S. Congress passed the North American Free
Trade Agreement (NAFTA) in 1993. This agreement may have a
negative impact on the textile industry on the island. However,
the opening up of trade with Mexico and Canada is likely to be
positive for the pharmaceutical and High Technology industries.
No estimates have been developed for the employment impacts from
NAFTA.
INVESTMENT PROGRAMS
(Throughout the discussion on Investments, the term "the Fund" is
intended to refer to each of the Funds eligible to invest in the
security or engage in the practice being described.)
Municipal Securities
PAGE 34
All Funds
Subject to the investment objective and program
described in the prospectus and the additional investment
restrictions described in this Statement of Additional
Information, each Fund's portfolio may consist of any combination
of the various types of municipal securities described below or
others that may be developed. The amount of each Fund's assets
invested in any particular type of municipal security can be
expected to vary.
The term "municipal securities" means obligations
issued by or on behalf of states, territories, and possessions of
the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, as well
as certain other persons and entities, the interest from which is
exempt from federal, state, and/or city or local, if applicable,
income tax. In determining the tax-exempt status of a municipal
security, the Funds rely on the opinion of the issuer's bond
counsel at the time of the issuance of the security. However, it
is possible this opinion could be overturned, and as a result,
the interest received by the Funds from such a security might not
be exempt from federal, state, and/or city or local income tax.
Municipal securities are classified by maturity as notes,
bonds, or adjustable rate securities.
Municipal Notes. Municipal notes generally are used
to provide for short-term operating or capital needs and
generally have maturities of one year or less. Municipal notes
include:
Tax Anticipation Notes. Tax anticipation notes are
issued to finance working capital needs of
municipalities. Generally, they are issued in
anticipation of various seasonal tax revenue, such as
income, property, use and business taxes, and are
payable from these specific future taxes.
Revenue Anticipation Notes. Revenue anticipation
notes
are issued in expectation of receipt of other types of
revenue, such as federal or state revenues available
under the revenue sharing or grant programs.
Bond Anticipation Notes. Bond anticipation notes are
issued to provide interim financing until long-term
financing can be arranged. In most cases, the
long-term bonds then provide the money for the
repayment of the notes.
PAGE 35
Tax-Exempt Commercial Paper. Tax-exempt commercial
paper is a short-term obligation with a stated
maturity of 270 days or less. It is issued by state
and local governments or their agencies to finance
seasonal working capital needs or as short-term
financing in anticipation of longer term financing.
Municipal Bonds. Municipal bonds, which meet longer
term capital needs and generally have maturities of
more than one year when issued, have two principal
classifications: general obligation bonds and revenue
bonds. Two additional categories of potential
purchases are lease revenue bonds and
pre-refunded/escrowed to maturity bonds. Another type
of municipal bond is referred to as an Industrial
Development Bond.
General Obligation Bonds. Issuers of general
obligation bonds include states, counties, cities,
towns, and special districts. The proceeds of these
obligations are used to fund a wide range of public
projects, including construction or improvement of
schools, public buildings, highways and roads, and
general projects not supported by user fees or
specifically identified revenues. The basic security
behind general obligation bonds is the issuer's pledge
of its full faith and credit and taxing power for the
payment of principal and interest. The taxes that can
be levied for the payment of debt service may be
limited or unlimited as to the rate or amount of
special assessments. In many cases voter approval is
required before an issuer may sell this type of bond.
Revenue Bonds. The principal security for a revenue
bond is generally the net revenues derived from a
particular facility, or enterprise, or in some cases,
the proceeds of a special charge or other pledged
revenue source. Revenue bonds are issued to finance a
wide variety of capital projects including: electric,
gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and
universities; and hospitals. Revenue bonds are
sometimes used to finance various privately operated
facilities provided they meet certain tests
established for tax-exempt status.
Although the principal security behind these bonds may
vary, many provide additional security in the form of
a mortgage or debt service reserve fund. Some
authorities provide further security in the form of
PAGE 36
the state's ability (without obligation) to make up
deficiencies in the debt service reserve fund.
Revenue bonds usually do not require prior voter
approval before they may be issued.
Lease Revenue Bonds. Municipal borrowers may also
finance capital improvements or purchases with
tax-exempt leases. The security for a lease is
generally the borrower's pledge to make annual
appropriations for lease payments. The lease payment
is treated as an operating expense subject to
appropriation risk and not a full faith and credit
obligation of the issuer. Lease revenue bonds are
generally considered less secure than a general
obligation or revenue bond and often do not include a
debt service reserve fund. To the extent the Board
determines such securities are illiquid, they will be
subject to the Funds' 15% limit on illiquid securities
(10% limit for the Money Funds). There have also been
certain legal challenges to the use of lease revenue
bonds in various states.
The liquidity of such securities will be determined
based on a variety of factors which may include, among
others: (1) the frequency of trades and quotes for the
obligation; (2) the number of dealers willing to
purchase or sell the security and the number of other
potential buyers; (3) the willingness of dealers to
undertake to make a market in the security; (4) the
nature of the marketplace trades, including, the time
needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer; and
(5) the rating assigned to the obligation by an
established rating agency or T. Rowe Price.
Pre-refunded/Escrowed to Maturity Bonds. Certain
municipal bonds have been refunded with a later bond
issue from the same issuer. The proceeds from the
later issue are used to defease the original issue.
In many cases the original issue cannot be redeemed or
repaid until the first call date or original maturity
date. In these cases, the refunding bond proceeds
typically are used to buy U.S. Treasury securities
that are held in an escrow account until the original
call date or maturity date. The original bonds then
become "pre-refunded" or "escrowed to maturity" and
are considered as high quality investments. While
still tax-exempt, the security is the proceeds of the
escrow account. To the extent permitted by the
Securities and Exchange Commission and the Internal
PAGE 37
Revenue Service, a Fund's investment in such
securities refunded with U.S. Treasury securities
will, for purposes of diversification rules applicable
to the Fund, be considered as an investment in the
U.S. Treasury securities.
Private Activity Bonds. Under current tax law all
municipal debt is divided broadly into two groups:
governmental purpose bonds and private activity bonds.
Governmental purpose bonds are issued to finance
traditional public purpose projects such as public
buildings and roads. Private activity bonds may be
issued by a state or local government or public
authority but principally benefit private users and
are considered taxable unless a specific exemption is
provided.
The tax code currently provides exemptions for certain
private activity bonds such as not-for-profit hospital
bonds, small-issue industrial development revenue
bonds and mortgage subsidy bonds, which may still be
issued as tax-exempt bonds. Some, but not all,
private activity bonds are subject to alternative
minimum tax.
Industrial Development Bonds. Industrial development
bonds are considered Municipal Bonds if the interest
paid is exempt from federal income tax. They are
issued by or on behalf of public authorities to raise
money to finance various privately operated facilities
for business and manufacturing, housing, sports, and
pollution control. These bonds are also used to
finance public facilities such as airports, mass
transit systems, ports, and parking. The payment of
the principal and interest on such bonds is dependent
solely on the ability of the facility's user to meet
its financial obligations and the pledge, if any, of
real and personal property so financed as security for
such payment.
Adjustable Rate Securities. Municipal securities may
be issued with adjustable interest rates that are
reset periodically by pre-determined formulas or
indexes in order to minimize movements in the
principal value of the investment. Such securities
may have long-term maturities, but may be treated as a
short-term investment under certain conditions.
Generally, as interest rates decrease or increase, the
potential for capital appreciation or depreciation on
these securities is less than for fixed-rate
PAGE 38
obligations. These securities may take the following
forms:
Variable Rate Securities. Variable rate instruments
are those whose terms provide for the adjustment of
their interest rates on set dates and which, upon such
adjustment, can reasonably be expected to have a
market value that approximates its par value. Subject
to the provisions of Rule 2a-7 under the Investment
Company Act of 1940 (1940 Act): (1) a variable rate
instrument, the principal amount of which is scheduled
to be paid in 397 days or less, is deemed to have a
maturity equal to the period remaining until the next
readjustment of the interest; (2) a variable rate
instrument which is subject to a demand feature
entitles the purchaser to receive the principal amount
of the underlying security or securities either (i)
upon notice of usually 30 days, or (ii) at specified
intervals not exceeding 397 days and upon no more than
30 days' notice is deemed to have a maturity equal to
the longer of the period remaining until the next
readjustment of the interest rate or the period
remaining until the principal amount can be recovered
through demand; and (3) an instrument that is issued
or guaranteed by the U.S. Government or any agency
thereof which has a variable rate of interest
readjusted no less frequently than every 762 days may
be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest
rate. Should the provisions of Rule 2a-7 change, the
Fund will determine the maturity of these securities
in accordance with the amended provisions of such
Rule.
Floating Rate Securities. Floating rate
instruments are those whose terms provide for the
adjustment of their interest rates whenever a
specified interest rate changes and which, at any
time, can reasonably be expected to have a market
value that approximates its par value. Subject to the
provisions of Rule 2a-7 under the 1940 Act: (1) the
maturity of a floating rate instrument is deemed to be
the period remaining until the date (noted on the face
of the instrument) on which the principal amount must
be paid, or in the case of an instrument called for
redemption, the date on which the redemption payment
must be made and (2) floating rate instruments with
demand features are deemed to have a maturity equal to
the period remaining until the principal amount can be
recovered through demand. Should the provisions of
PAGE 39
Rule 2a-7 change, the Fund will determine the maturity
of these securities in accordance with the amended
provisions of such Rule.
Put Option Bonds. Long-term obligations with
maturities longer than one year may provide purchasers
an optional or mandatory tender of the security at par
value at predetermined intervals, often ranging from
one month to several years (e.g., a 30-year bond with
a five-year tender period). These instruments are
deemed to have a maturity equal to the period
remaining to the put date.
Residual Interest Bonds (Bond Funds only). The Funds
may purchase municipal bond issues that are structured
as two-part, residual interest bond and variable rate
security offerings. The issuer is obligated only to
pay a fixed amount of tax-free income that is to be
divided among the holders of the two securities. The
interest rate for the holders of the variable rate
securities will be determined by an auction process
held approximately every 35 days while the bond
holders will receive all interest paid by the issuer
minus the amount given to the variable rate security
holders and a nominal auction fee. Therefore, the
coupon of the residual interest bonds, and thus the
income received, will move inversely with respect to
short-term, 35 day tax-exempt interest rates. There
is no assurance that the auction will be successful
and that the variable rate security will provide
short-term liquidity. The issuer is not obligated to
provide such liquidity. In general, these securities
offer a significant yield advantage over standard
municipal securities, due to the uncertainty of the
shape of the yield curve (i.e., short-term versus
long-term rates)and consequent income flows. Unlike
many adjustable rate securities, residual interest
bonds are not necessarily expected to trade at par and
in fact present significant market risks. In certain
market environments, residual interest bonds may carry
substantial premiums or be at deep discounts. This is
a relatively new product in the municipal market with
limited liquidity to date.
Participation Interests. The Funds may purchase
from third parties participation interests in all or
part of specific holdings of municipal securities.
The purchase may take different forms: in the case of
short-term securities, the participation may be backed
by a liquidity facility that allows the interest to be
PAGE 40
sold back to the third party (such as a trust, broker
or bank) for a predetermined price of par at stated
intervals. The seller may receive a fee from the
Funds in connection with the arrangement.
In the case of longer-term bonds, the Funds may
purchase interests in a pool of municipal bonds or a
single municipal bond or lease without the right to
sell the interest back to the third party.
The Funds will not purchase participation interests
unless a satisfactory opinion of counsel or ruling of
the Internal Revenue Service has been issued that the
interest earned from the municipal securities on which
the Funds holds participation interests is exempt from
federal, state, and/or city or local income tax to the
Funds. However, there is no guarantee the IRS would
treat such interest income as tax-exempt.
Embedded Interest Rate Swaps and Caps (Bond Funds).
In a fixed-rate, long-term municipal bond with an
interest rate swap attached to it, the bondholder
usually receives the bond's fixed-coupon payment as
well as a variable rate payment that represents the
difference between a fixed rate for the term of the
swap (which is typically shorter than the bond it is
attached to) and a variable rate short-term municipal
index. The bondholder receives excess income when
short-term rates remain below the fixed interest rate
swap rate. If short-term rates rise above the fixed-
income swap rate, the bondholder's income is reduced.
At the end of the interest rate swap term, the bond
reverts to a single fixed-coupon payment. Embedded
interest rate swaps enhance yields, but also increase
interest rate risk.
An embedded interest rate cap allows the bondholder
to receive payments whenever short-term rates rise
above a level established at the time of purchase.
They normally are used to hedge against rising short-
term interest rates.
Both instruments may be volatile and of limited
liquidity and their use may adversely affect a Fund's
total return.
The Funds may invest in other types of derivative
instruments as they become available.
There are, of course, other types of municipal
PAGE 41
securities that are, or may become, available, and the Funds
reserve the right to invest in them.
For the purpose of the Funds' investment restrictions,
the identification of the "issuer" of municipal securities which
are not general obligation bonds is made by the Funds' investment
manager, T. Rowe Price, on the basis of the characteristics of
the obligation as described above, the most significant of which
is the source of funds for the payment of principal and interest
on such securities.
When-Issued Securities
All Funds
New issues of municipal securities are often offered
on a when-issued basis; that is, delivery and payment for the
securities normally takes place 15 to 45 days or more after the
date of the commitment to purchase. The payment obligation and
the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A
Fund will only make a commitment to purchase such securities with
the intention of actually acquiring the securities. However, a
Fund may sell these securities before the settlement date if it
is deemed advisable as a matter of investment strategy. Each
Fund will establish a segregated account in which it will
maintain cash and high-grade marketable debt securities equal in
value to commitments for when-issued securities. Such segregated
securities either will mature or, if necessary, be sold on or
before the settlement date. Securities purchased on a
when-issued basis and the securities held in a Fund's portfolio
are subject to changes in market value based upon the public
perception of the creditworthiness of the issuer and changes in
the level of interest rates (which will generally result in
similar changes in value; i.e., both experiencing appreciation
when interest rates decline and depreciation when interest rates
rise). Therefore, to the extent a Fund remains substantially
fully invested at the same time that it has purchased securities
on a when-issued basis, there will be greater fluctuations in its
net asset value than if it solely set aside cash to pay for
when-issued securities. In the case of the Money Funds, this
could increase the possibility that the market value of a Fund's
assets could vary from $1.00 per share. In addition, there will
be a greater potential for the realization of capital gains,
which are not exempt from federal, state and/or city or local
income tax. When the time comes to pay for when-issued
securities, a Fund will meet its obligations from then-available
cash flow, sale of securities or, although it would not normally
expect to do so, from sale of the when-issued securities
themselves (which may have a value greater or less than the
PAGE 42
payment obligation). The policies described in this paragraph
are not fundamental and may be changed by a Fund upon notice to
its shareholders.
Forwards
Bond Funds
The Funds also may purchase bonds on a when-issued basis
with longer than standard settlement dates, in some cases
exceeding one to two years. In such cases, the Funds must
execute a receipt evidencing the obligation to purchase the bond
on the specified issue date, and must segregate cash internally
to meet that forward commitment. Municipal "forwards" typically
carry a substantial yield premium to compensate the buyer for the
risks associated with a long when-issued period, including:
shifts in market interest rates that could materially impact the
principal value of the bond, deterioration in the credit quality
of the issuer, loss of alternative investment options during the
when-issued period, changes in tax law or issuer actions that
would affect the exempt interest status of the bonds and prevent
delivery, failure of the issuer to complete various steps
required to issue the bonds, and limited liquidity for the buyer
to sell the escrow receipts during the when-issued period. Each
Fund will not invest more than 10% of its total assets in
forwards.
Investment in Taxable Money Market Securities
Although the Funds expect to be invested solely in municipal
securities, it is anticipated that, when it is deemed to be in
the best interests of each Fund's shareholders to do so, the
Funds may also invest a portion of their respective assets on a
temporary basis, in the taxable money market instruments set
forth below. The interest earned on these money market
securities is not exempt from federal, state, and/or city or
local income tax and may be taxable to shareholders as ordinary
income.
U.S. Government Obligations - direct obligations of
the government and its agencies and instrumentalities;
U.S. Government Agency Securities - obligations issued
or guaranteed by U.S. government sponsored enterprises, federal
agencies and international institutions. Some of these
securities are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer; and
the remainder are supported only by the credit of the
instrumentality;
PAGE 43
Bank Obligations - certificates of deposit, bankers'
acceptances, and other short-term obligations of U.S. and
Canadian banks and their foreign branches;
Commercial Paper - paper rated A-2 or better by S&P,
Prime-2 or better by Moody's, or F-2 or better by Fitch or, if
not rated, is issued by a corporation having an outstanding debt
issue rated A or better by Moody's, S&P or Fitch, and, with
respect to the Money Funds, is of equivalent investment quality
as determined by the Board of Trustees; and
Short-Term Corporate Debt Securities - short-term
corporate debt securities rated at least AA by S&P, Moody's or
Fitch.
Determination of Maturity of Money Market Securities
The Money Funds may only purchase securities which at the
time of investment have remaining maturities of 397 calendar days
or less, or with respect to U.S. government securities, have
remaining maturities of 762 calendar days or less. The Bond
Funds may also purchase money-market securities. In determining
the maturity of money market securities, the Funds will follow
the provisions of Rule 2a-7 under the 1940 Act.
PORTFOLIO MANAGEMENT PRACTICES
Futures Contracts (Bond Funds only)
Transactions in Futures
The Fund may enter into interest rate futures contracts
("futures" or "futures contracts"). Interest rate futures
contracts may be used as a hedge against changes in prevailing
levels of interest rates in order to establish more definitely
the effective return on securities held or intended to be
acquired by the Fund. The Fund could sell interest rate futures
as an offset against the effect of expected increases in interest
rates and purchase such futures as an offset against the effect
of expected declines in interest rates. Futures can also be used
as an efficient means of regulating a Fund's exposure to the
market.
The Fund will enter into futures contracts which are traded
on national futures exchanges and are standardized as to maturity
date and underlying financial instrument. A public market exists
in futures contracts covering various taxable fixed income
securities as well as municipal bonds. Futures exchanges and
PAGE 44
trading in the United States are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Although techniques other than the sale and purchase
of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low
cost means of implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.
The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
quality as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy,
options on futures contracts and options traded on a commodities
exchange will be considered "related options." This policy may
be modified by the Board of Trustees without a shareholder vote
and does not limit the percentage of the Fund's assets at risk to
5%.
In accordance with the rules of the State of California, the
Fund will apply the above 5% test without excluding the value of
initial margin and premiums paid for bona fide hedging purposes.
The Fund's use of futures will not result in leverage.
Therefore, to the extent necessary, in instances involving the
purchase of futures contracts or the writing of calls or put
options thereon by the Fund, an amount of cash, U.S. government
securities or other liquid, high-grade debt obligations, equal to
the market value of the futures contracts and options thereon
(less any related margin deposits), will be identified in an
account with the Fund's custodian to cover the position, or
alternative cover (such as owning an offsetting position) will be
employed. Assets used as cover or held in an identified account
cannot be sold while the position in the corresponding option or
future is open, unless they are replaced with similar assets. As
a result, the commitment of a large portion of a Fund's assets to
cover or identified accounts could impede portfolio management or
the Fund's ability to meet redemption requests or other current
obligations.
PAGE 45
If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Fund
would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific
financial instrument (e.g., units of a debt security) 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.
It is possible that the Fund's hedging activities will occur
primarily through the use of municipal bond index futures
contracts since the uniqueness of that index contract should
better correlate with the Fund's portfolio and thereby be more
effective. However, there may be times when it is deemed in the
best interest of shareholders to engage in the use of Treasury
bond futures, and the Fund reserves to right to use Treasury bond
futures at any time. Use of these futures could occur, as an
example, when both the Treasury bond contract and municipal bond
index futures contract are correlating well with municipal bond
prices, but the Treasury bond contract is trading at a more
advantageous price making the hedge less expensive with the
Treasury bond contract than would be obtained with the municipal
bond index futures contract. The Fund's activity in futures
contracts generally will be limited to municipal bond index
futures contracts and Treasury bond and note contracts.
Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or sale
of a futures contract. Upon entering into a futures contract,
and to maintain the Fund's open positions in futures contracts,
the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of
cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as
"initial margin." The margin required for a particular futures
contract is set by the exchange on which the contract is traded,
and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are
customarily purchased and sold on margins that may range upward
from less than 5% of the value of the contract being traded.
PAGE 46
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.
As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
municipal bond index futures on an exchange may be fulfilled at
any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the
purchase of one contract of September municipal bond index
futures on the same exchange. In such instance, the difference
between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
PAGE 47
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.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a futures contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its
futures positions at any time prior to their expiration. The
Fund would do so to reduce exposure represented by long futures
PAGE 48
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.
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 are written 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
PAGE 49
on the futures and also would experience a decline in value in
its underlying instruments. However, while this might occur to a
certain degree, T. Rowe Price believes that over time the value
of the Fund's portfolio will tend to move in the same direction
as the market indices used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it
would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash,
it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying
instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might
have to sell underlying instruments at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price
movements in the futures contracts and the portion of the
portfolio being hedged, the price movements of futures contracts
might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First,
all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors might close
futures contracts through offsetting transactions, which could
distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements
in the securities markets, and as a result the futures market
might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market
might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also
because of the imperfect correlation between price movements in
the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by T.
Rowe Price might not result in a successful hedging transaction
over a very short time period.
Options on Futures Contracts
The Fund might trade in municipal bond index option futures
or similar options on futures developed in the future. In
addition, the Fund may also trade in options on futures contracts
on U.S. government securities and any U.S. government securities
futures index contract which might be developed. In the opinion
PAGE 50
of T. Rowe Price, there is a high degree of correlation in the
interest rate, and price movements of U.S. government securities
and municipal securities. However, the U.S. government
securities market and municipal securities markets are
independent and may not move in tandem at any point in time.
The Fund will purchase put options on futures contracts to
hedge its portfolio of municipal securities against the risk of
rising interest rates, and the consequent decline in the prices
of the municipal securities it owns. The Funds will also write
call options on futures contracts as a hedge against a modest
decline in prices of the municipal securities held in the Fund's
portfolio. If the futures price at expiration of a written call
option is below the exercise price, the Fund will retain the full
amount of the option premium, thereby partially hedging against
any decline that may have occurred in the Fund's holdings of debt
securities. If the futures price when the option is exercised is
above the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the increase of the
value of the securities in the Fund's portfolio which were being
hedged.
Writing a put option on a futures contract serves as a
partial hedge against an increase in the value of securities the
Fund intends to acquire. If the futures price at expiration of
the option is above the exercise price, the Fund will retain the
full amount of the option premium which provides a partial hedge
against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the futures
price when the option is exercised is below the exercise price,
however, the Fund will incur a loss, which may be wholly or
partially offset by the decrease in the price of the securities
the Fund intends to acquire.
Options on futures are similar to options on underlying
instruments except that options on futures give the purchaser the
right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at
any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by
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.
PAGE 51
From time to time a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Fund
and other T. Rowe Price Funds. Such aggregated orders would be
allocated among the Fund and the other T. Rowe Price Funds in a
fair and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Fund seeks to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instrument or contract
and having the same exercise price and expiration date, its
ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that
exchange (or in the class or series of options) would cease to
exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated
trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by
an exchange of special procedures which may interfere with the
timely execution of customers' orders. In the event no such
market exists for a particular contract in which the Fund
maintains a position, in the case of a written option, the Fund
would have to wait to sell the underlying securities or futures
positions until the option expires or is exercised. The Fund
would be required to maintain margin deposits on payments until
the contract is closed. Options on futures are treated for
accounting purposes in the same way as the analogous option on
securities are treated.
In addition, the correlation between movements in the price
PAGE 52
of options on futures contracts and movements in the price of the
securities hedged can only be approximate. This risk is
significantly increased when an option on a U.S. government
securities future or an option on a municipal securities index
future is used to hedge a municipal bond portfolio. Another risk
is that the movements in the price of options on futures
contracts may not move inversely with changes in interest rates.
If the Fund has written a call option on a futures contract and
the value of the call increases by more than the increase in the
value of the securities held as cover, the Fund may realize a
loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the
premium received for writing the call.
The successful use of options on futures contracts requires
special expertise and techniques different from those involved in
portfolio securities transactions. 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 or interest rate trends. During
periods when municipal securities market prices are appreciating,
the Fund may experience poorer overall performance than if it had
not entered into any options on futures contracts.
General Considerations
Transactions by the Fund in options on futures will be
subject to limitations established by each of the exchanges,
boards of trade or other trading facilities governing the maximum
number of options in each class which may be written or purchased
by a single investor or group of investors acting in concert,
regardless of whether the options are written on the same or
different exchanges, boards of trade or other trading facilities
or are held or written in one or more accounts or through one or
more brokers. Thus, the number of contracts which the Fund may
write or purchase may be affected by contracts written or
purchased by other investment advisory clients of T. Rowe Price.
An exchange, board of trade or other trading facility may order
the liquidations of positions found to be in excess of these
limits, and it may impose certain other sanctions.
Additional Futures and Options Contracts
Although the Funds have no current intention of engaging in
futures and options on futures transactions other than those
described above, they reserve 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.
PAGE 53
Federal Tax Treatment of Futures Contracts
Although the Fund invests almost exclusively in securities
which generate income which is exempt from federal income taxes,
the instruments described above are not exempt from such taxes.
Therefore, use of the investment techniques described above could
result in taxable income to shareholders of the Fund.
Generally, the Fund is required, for federal income tax
purposes, to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of
the year as well as those actually realized during the year.
Gain or loss recognized with respect to a futures contract will
generally be 60% long-term capital gain or loss and 40% short-
term capital gain or loss, without regard to the holding period
of the contract.
Futures contracts which are intended to hedge against a
change in the value of securities may be classified as "mixed
straddles," in which case the recognition of losses may be
deferred to a later year. In addition, sales of such futures
contracts on securities may affect the holding period of the
hedged security and, consequently, the nature of the gain or loss
on such security on disposition.
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.
Gains realized on the sale or other disposition of securities,
including futures contracts on securities held for less than
three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be
required to defer the closing out of futures contracts beyond the
time when it would otherwise be advantageous to do so. It is
anticipated that unrealized gains on futures contracts, which
have been open for less than three months as of the end of the
Fund's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities held less than three
months for purposes of the 30% test.
The Fund will distribute to shareholders annually any net
gains which have been recognized for federal income tax purposes
from futures transactions (including unrealized gains at the end
of the Fund's fiscal year). Such distributions will be combined
with distributions of ordinary income or capital gains realized
on the Fund's other investments. Shareholders will be advised of
the nature of the payments. The Fund's ability to enter into
PAGE 54
transactions in options on futures contracts may be limited by
the Internal Revenue Code's requirements for qualification as a
regulated investment company.
Options on Securities
Bond Funds
The Funds have no current intention of investing in
options on securities, although they reserve the right to do so.
Appropriate disclosure would be added to the Funds' prospectus
and Statement of Additional Information when and if the Funds
decide to invest in options.
INVESTMENT RESTRICTIONS
Fundamental policies of the Funds may not be changed without
the approval of the lesser of (1) 67% of a 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 Trusts' Board of 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, a Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money except that the Fund may (i)
borrow for non-leveraging, temporary or emergency
purposes and (ii) engage in reverse repurchase
agreements and make other investments or engage in
other transactions, which may involve a borrowing, in
a manner consistent with the Fund's investment
objective and program, provided that the combination
of (i) and (ii) shall not exceed 33 1/3% of the value
of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) or
such other percentage permitted by law. Any
borrowings which come to exceed this amount will be
reduced in accordance with applicable law. The Fund
may borrow from banks, other Price Funds or other
persons to the extent permitted by applicable law.
(2) Commodities. Purchase or sell physical commodities;
PAGE 55
except that the Fund (other than the Money Funds) may
enter into futures contracts and options thereon;
(3) Industry Concentration. Purchase the securities of
any issuer if, as a result, more than 25% of the
value of the Fund's total assets would be invested in
the securities of issuers having their principal
business activities in the same industry;
(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an interfund
lending program with other Price Funds provided that
no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the
value of the Fund's total assets; (ii) purchase money
market securities and enter into repurchase
agreements; and (iii) acquire publicly-distributed or
privately-placed debt securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer
(California Funds only). 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
(California Funds only). Purchase a security if, as
a result, with respect to 75% of the value of the
Fund's total assets, more than 10% of the outstanding
voting securities of any issuer would be held by the
Fund (other than obligations issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities);
(7) Real Estate. Purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prevent the
Fund from investing in securities or other
instruments backed by real estate or 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;
(9) Taxable Securities. During periods of normal market
conditions, purchase any security if, as a result,
less than 80% of the Fund's income would be exempt
PAGE 56
from federal and, if applicable, state, city or local
income tax. The income included under the 80% test
does not include income from securities subject to
the alternative minimum tax (AMT); or
(10) 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 T. Rowe
Price Fund unless they apply for and receive 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 (1), the Money
Funds have no current intention of engaging in any
borrowing transactions. With respect to investment
restriction (2), the Fund does not consider hybrid
instruments 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.
Industrial development bonds issued by nongovernmental
users are not considered municipal securities for
purposes of this exception.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing. The Fund will not purchase additional
securities when money borrowed exceeds 5% of its
total assets.
(2) Control of Portfolio Companies. Invest in companies
for the purpose of exercising management or control;
PAGE 57
(3) Equity Securities. Purchase any equity security or
security convertible into an equity security provided
that the Fund (other than the Money Funds) may invest
up to 10% of its total assets in equity securities
which pay tax-exempt dividends and which are
otherwise consistent with the Fund's investment
objective and, further provided, that the Money Funds
may invest up to 10% of their total assets in equity
securities of other tax-free open-end money market
funds;
(4) 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 positions would exceed 5% of the
Fund's net asset value.
(5) Illiquid Securities. Purchase illiquid securities
if, as a result, more than 15% (10% for the Money
Funds) of its net assets would be invested in such
securities;
(6) Investment Companies. Purchase securities of open-
end or closed-end investment companies except in
compliance with the Investment Company Act of 1940
and applicable state law provided that, the Money
Funds may only purchase the securities of other tax-
free open-end money market investment companies;
(7) 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;
(8) 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;
(9) Oil and Gas Programs. Purchase participations or
other direct interests or enter into leases with
respect to, oil, gas, or other mineral exploration or
development programs;
(10) Options, Etc. Invest in puts, calls, straddles,
PAGE 58
spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement of
Additional Information;
(11) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain the securities of any
issuer if, those officers and directors of the Fund,
and of its investment manager, who each own
beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially
more than 5% of such securities.
(12) Short Sales. Effect short sales of securities;
(13) Unseasoned Issuers. Purchase a security (other than
obligations issued or guaranteed by the U.S., any
foreign, state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of
the value of the Fund's total assets would be
invested in the securities issuers which at the time
of purchase had been in operation for less than three
years (for this purpose, the period of operation of
any issuer shall include the period of operation of
any predecessor or unconditional guarantor of such
issuer). This restriction does not apply to
securities of pooled investment vehicles or mortgage
or asset-backed securities; or
(14) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net assets
of the Fund would be invested in warrants which are
not listed on the New York Stock Exchange, the
American Stock Exchange, or a recognized foreign
exchange, or more than 5% of the value of the net
assets of the Fund would be invested in warrants
whether or not so listed. For purposes of these
percentage limitations, the warrants will be valued
at the lower of cost or market and warrants acquired
by the Fund in units or attached to securities may be
deemed to be without value.
For purposes of investment restriction (6), the Fund has no
current intention of purchasing the securities of other
investment companies. Duplicate fees could result from any
such purchases.
For purposes of investment restriction (13), the Fund will
not consider industrial development bonds issued by
nongovernmental users as municipal securities.
PAGE 59
RATINGS OF MUNICIPAL DEBT SECURITIES
Moody's Investors Service, Inc.
Aaa - Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge."
Aa - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.
A - Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations.
Baa - Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba-Bonds rated Ba are judged to have speculative elements:
their futures cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.
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-Lowest-rated; extremely poor prospects of ever attaining
investment standing.
Standard & Poor's Corporation
PAGE 60
AAA - This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong.
A - Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, C, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded
on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. BB
indicates the lowest degree of speculation and CC the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
D-In default.
RATINGS OF MUNICIPAL NOTES AND VARIABLE SECURITIES
Moody's Investors Services, Inc.
VMIG-1/MIG-1: the best quality. VMIG-2/MIG-2: high quality,
with margins of protection ample though not so large as in the
preceding group.
VMIG-3/MIG-3: favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in particular,
is likely to be less well established. VMIG-4/MIG-4: adequate
quality but there is specific risk.
Standard & Poor's Corporation
SP-1: very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
PAGE 61
characteristics will be given a plus (+) designation. SP-2:
satisfactory capacity to pay principal and interest.
SP-3: speculative capacity to pay principal and interest.
Fitch Investors Service, Inc.
F-1+: exceptionally strong credit quality, strongest degree of
assurance for timely payment. F-1: very strong credit quality.
F-2: good credit quality, having a satisfactory degree of
assurance for timely payment. F-3: fair credit quality,
assurance for timely payment is adequate but adverse changes
could cause the securities to be rated below investment grade.
F-S: weak credit quality, having characteristics suggesting a
minimal degree of assurance for timely payment.
RATINGS OF COMMERCIAL PAPER
Moody's Investors Service, Inc.
P-1: Superior capacity for repayment. P-2: strong capacity for
repayment.
P-3: acceptable capacity for repayment of short-term promissory
obligations.
Standard & Poor's Corporation
A-1: highest category, degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+)
designation. A-2: satisfactory capacity to pay principal and
interest.
A-3: adequate capacity for timely payment, but are vulnerable to
adverse effects of changes in circumstances than higher rated
issues. B, and C: speculative capacity to pay principal and
interest.
Fitch Investors Service, Inc.
F-1+: exceptionally strong credit quality, strongest degree of
assurance for timely payment. F-1: very strong credit quality.
F-2: good credit quality, having a satisfactory degree of
assurance for timely payment. F-3: fair credit quality,
assurance for timely payment is adequate but adverse changes
could cause the securities to be rated below investment grade.
PAGE 62
F-S: weak credit quality, having characteristics suggesting a
minimal degree of assurance for timely payment.
MANAGEMENT OF THE TRUSTS
The officers and trustees of each Trust 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 trustees who are considered
"interested persons" of T. Rowe Price or the Funds as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are
noted with an asterisk (*). These trustees are referred to as
inside trustees by virtue of their officership, directorship,
and/or employment with T. Rowe Price.
CALVIN W. BURNETT, PH.D., Trustee--President, Coppin State
College; Director, Maryland Chamber of Commerce and Provident
Bank of Maryland; President, Baltimore Area Council-Boy Scouts of
America, Vice President, Board of Directors, The Walters Art
Gallery; Address: 2500 West North Avenue, Baltimore, Maryland
21216
*GEORGE J. COLLINS, Chairman of the Board--President, Managing
Director, and Chief Executive Officer, T. Rowe Price; Director,
Rowe Price-Fleming International, Inc., T. Rowe Price Trust
Company and T. Rowe Price Retirement Plan Services, Inc.;
Chartered Investment Counselor
ANTHONY W. DEERING, Trustee--Director, President, and Chief
Operating Officer, The Rouse Company, real estate developers,
Columbia, Maryland; Advisory Director, Kleinwort, Benson (North
America) Corporation, a registered broker-dealer; Address: 10275
Little Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, Trustee--President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
President, EA Engineering, Inc.; Address: The Legg Mason Tower,
111 South Calvert Street, Suite 2700, Baltimore, Maryland 21202
*+WILLIAM T. REYNOLDS, President and Trustee--Managing Director,
T. Rowe Price
*JAMES S. RIEPE, Vice President and Trustee--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., T. Rowe Price Retirement Plan Services, Inc.; President and
Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rowe
Price-Fleming International, Inc. and Rhone-Paulenc Rorer, Inc.
JOHN G. SCHREIBER, Trustee--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMCI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (1/80-12/90) Executive Vice
PAGE 63
President, JMB Realty Corporation, a national real estate
investment manager and developer; Address: 1115 East Illinois
Road, Lake Forest, Illinois 60045
ANNE MARIE WHITTEMORE, Trustee--Partner, law firm of McGuire,
Woods, Batte & Boothe; formerly, Chairman and Director, Federal
Reserve Bank of Richmond; Director, Owens & Minor, Inc., USF&G
Corporation, Old Dominion University and James River Corporation;
Member, Richmond Bar Association and American Bar Association;
Address: One James Center, 901 East Cary Street, Richmond,
Virginia 23219-4030
++MARY J. MILLER, President--Vice President, T. Rowe Price
JANET G. ALBRIGHT, Vice President--Vice President, T. Rowe Price
PATRICE L. BERCHTENBREITER, Vice President--Vice President, T.
Rowe Price
MICHAEL P. BUCKLEY, Vice President--Vice President, T. Rowe Price
PATRICIA S. DEFORD, Vice President--Vice President, T. Rowe Price
CHARLES B. HILL, Vice President--Assistant Vice President, T.
Rowe Price; formerly (9/86-11/91) managed municipal bonds at
Riggs National Bank, Washington, D.C.
CHARLES O. HOLLAND, Vice President--Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--Managing Director, T. Rowe
Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price
Trust Company; Vice President, Rowe Price-Fleming International,
Inc. and T. Rowe Price Retirement Plan Services, Inc.
KONSTANTINE B. MALLAS, Vice President--Assistant Vice President,
T. Rowe Price
ALAN P. RICHMAN, Vice President--Vice President, T. Rowe Price;
formerly (10/89-6/91) Manager, Public Finance, Credit Local de
France, New York, New York and Public Finance, Takai Bank, New
York, New York
C. STEPHEN WOLFE, II, Vice President--Vice President, T. Rowe
Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
ROGER L. FIERY, Assistant Vice President--Vice President, Rowe
Price-Fleming International, Inc.
LAURA MCAREE, Assistant Vice President--Assistant Vice President,
T. Rowe Price; formerly (4/90-11/90) trader, Boeing Company,
Seattle, Washington and (8/87-3/90) financial analyst, Harvard
Management Company, Boston, Massachusetts
HUGH D. MCGUIRK, Assistant Vice President--Assistant Vice
President, T. Rowe Price; formerly (1987-1989) account marketing
representative, IBM, (summer of 1990) summer associate in capital
markets, Goldman Sachs & Company, and (1991-1993) municipal
underwriter, Alex. Brown & Sons, Inc., Baltimore, Maryland
+++THEODORE E. ROBSON, Assistant Vice President--Employee, T.
PAGE 64
Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T.
Rowe Price Services, Inc.
WILLIAM F. SNIDER, Assistant Vice President--Employee, T. Rowe
Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
+Mr. Reynolds is President and Trustee of the State Tax-Free
Income Trust and Vice President and Trustee of the California
Tax-Free Income Trust.
++Ms. Miller is President of the California Tax-Free Income Trust
and Executive Vice President of the State Tax-Free Income Trust.
+++Mr. Robson is an Assistant Vice President of the State Tax-
Free Income Trust only.
Each Trust's Executive Committee, comprised of
Messrs. Collins, Reynolds, and Riepe, has been authorized by its
Board of 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.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and trustees
of the Funds, as a group, owned less than 1% of the outstanding
shares of each Fund.
As of November 1, 1994, the following shareholder of the New
York Money Fund beneficially owned more than 5% of the
outstanding shares of beneficial interest of the Fund:
Coleman M. Brandt and Grace L. Brandt JT TEN, 330 West 72nd
Street, Apt. 10A, New York, New York 10023-2649.
H. Mark Glasberg and Paula D. Glasberg, Jt. Ten., 205 West
End Avenue, New York, New York 10023-4804.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement with each Trust
relating to its Funds, T. Rowe Price provides each Fund with
discretionary investment services. Specifically, T. Rowe Price
is responsible for supervising and directing the investments of
each Fund in accordance with each Fund's investment objective,
program, and restrictions as provided in its prospectus and this
Statement of Additional Information. T. Rowe Price is also
PAGE 65
responsible for effecting all security transactions on behalf of
each Fund, including the allocation of principal business and
portfolio brokerage and the negotiation of commissions. In
addition to these services, T. Rowe Price provides each Fund with
certain administrative services, including: maintaining each
Trust's existence and records; registering and qualifying each
Fund's shares of beneficial interest under federal and state
laws; monitoring the financial, accounting, and administrative
functions of each Fund; maintaining liaison with the agents
employed by each Trust such as the Funds' custodian and transfer
agent; assisting the Funds in the coordination of such agents'
activities; and permitting T. Rowe Price employees to serve as
officers, trustees, and committee members of the Funds without
cost to the Funds.
The Management Agreements also provide that T. Rowe
Price, its directors, officers, employees, and certain other
persons performing specific functions for the Funds will only be
liable to the Funds for losses resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard
of duty.
Management Fee
Each 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 each 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:
Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets
_____________________________
0.480% First $1 billion
0.450% Next $1 billion
PAGE 66
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter
For the purpose of calculating the Group Fee, the
Price Funds include all the mutual funds distributed by T. Rowe
Price Investment Services, Inc. (excluding T. Rowe Price Spectrum
Fund, Inc. and any institutional or private label mutual funds).
For the purpose of calculating the Daily Price Funds' Group Fee
Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with each Fund's prospectus as of
the close of business on the previous business day on which the
Fund was open for business.
The monthly Fund Fee ("Monthly Fund Fee") is the sum
of the daily Fund Fee accruals ("Daily Fund Fee Accruals") for
each month. The Daily Fund Fee Accrual for any particular day is
computed by multiplying the fraction of one (1) over the number
of calendar days in the year by the individual Fund Fee Rate of
0.10% (0.05% for the Florida Insured Intermediate Fund) and
multiplying this product by the net assets of each Fund for that
day, as determined in accordance with each Fund's prospectus as
of the close of business on the previous business day on which
the Funds were open for business.
The following chart sets forth the total management
fees, if any, paid to T. Rowe Price by the Funds for the fiscal
years ended February 28, 1994, February 28, 1993, and February
29, 1992:
New York Money New York Bond
1994 $77,000 1994 $410,000
1993 56,429 1993 240,464
1992 61,325 1992 150,439
California Money California Bond
1994 $127,000 1994 $575,000
1993 96,485 1993 405,811
1992 161,645 1992 299,260
PAGE 67
Maryland Bond Maryland Short-Term Bond
1994 $3,517,000 1994 $59,000
1993 2,644,367 1993 0+
1992 1,811,754 1992 *
Virginia Bond New Jersey Bond
1994 $532,000 1994 $87,000
1993 168,131 1993 0+
1992 0+ 1992 0+
Florida Tax-Free Georgia Bond
1994 + 1994+
1993 * 1993*
1992 * 1992*
+Due to effect of expense limitation discussed below, the
Florida Tax-Free and Georgia Bond Funds did not pay T.
Rowe Price an investment management fee.
*Prior to commencement of operations.
Limitation on Fund Expenses
All Funds
The Management Agreements between each Fund and T. Rowe
Price provides that each Fund will bear all expenses of its
operations not specifically assumed by T. Rowe Price. However,
in compliance with certain state regulations, T. Rowe Price will
reimburse each Fund for any expenses (excluding interest, taxes,
brokerage, other expenditures which are capitalized in accordance
with generally accepted accounting principles, and extraordinary
expenses) which in any year exceed the limits prescribed by any
state in which that Fund's shares are qualified for sale.
Currently, the State Tax-Free Income Trust has not qualified any
Fund's shares for sale in any state which prescribes such expense
ratio limitations. However, the California Tax-Free Income Trust
is subject to the most restrictive expense limitation imposed by
any state, which is 2.5% of the first $30 million of each Fund's
average daily net assets, 2.0% of the next $70 million of each
Fund's assets, and 1.5% of net assets in excess of $100 million.
For the purpose of determining whether a Fund is entitled to
reimbursement, the expenses of the Fund are calculated on a
monthly basis. If a Fund is entitled to reimbursement, that
PAGE 68
month's management fee will be reduced or postponed, with any
adjustment made after the end of the year.
New York and California Funds
Effective November 1, 1989 for the Bond Funds and March 1,
1990 for the Money Funds, T. Rowe Price agreed to waive its fees
and bear any expenses through February 28, 1994, which would
cause each Fund's ratio of expenses to average net assets to
exceed 0.80%.
Effective November 7, 1990, T. Rowe Price agreed to waive
its fees and bear any expenses through February 28, 1993, to the
extent such fees or expenses would cause the Funds' ratio of
expenses to average net assets to exceed 0.55% for the Money
Funds and 0.60% for the Bond Funds. Effective March 1, 1993, T.
Rowe Price agreed to extend the Money Funds' 0.55% and the Bond
Funds' 0.60% expense limitations for a period of two years
through February 28, 1995. Fees waived or expenses paid or
assumed under each agreement are subject to reimbursement to T.
Rowe Price by the Funds whenever the expense ratio is below 0.55%
for the Money Funds and 0.60% for the Bond Funds; however, no
reimbursement will be made after February 28, 1995 (for the first
agreement) or February 28, 1997 (for the second agreement) or if
it would result in the expense ratio exceeding 0.55% for the
Money Fund and 0.60% for the Bond Funds.
Pursuant to the present expense limitations for the
California Bond and Money Funds, $106,000 and $177,000,
respectively, of management fees were not accrued for the year
ended February 28, 1994 and $412,000 and $532,000 remain
unaccrued from prior periods for the California Bond and Money
Funds, respectively. Pursuant to these present expense
limitations, $146,000 and $170,000 of management fees for the New
York Bond and Money Funds, respectively, were not accrued for the
year ended February 28, 1994 and $444,000 and $640,000 remain
unaccrued from prior periods for the New York Bond and Money
Funds, respectively. Subject to shareholder approval, these
expenses may be reimbursed to T. Rowe Price, provided that the
recapture of fees would not cause the ratio of expenses to
average net assets to exceed the above-mentioned ratios.
Pursuant to a past expense limitation, $38,000 of unaccrued fees
for the California Bond Fund have been permanently waived at
February 28, 1994. Pursuant to a past expense limitation,
$79,000 and $23,000 of unaccrued fees for the New York Bond and
Money Funds, respectively, have been permanently waived at
February 28, 1994.
Maryland Short-Term Tax-Free Bond Fund
PAGE 69
In the interest of limiting the expenses of the Fund during
its initial period of operations, T. Rowe Price has agreed to
waive its fees and bear any expenses through February 28, 1995,
to the extent such fees or expenses would cause the Fund's ratio
of expenses to average net assets to exceed 0.65%. However, any
fees waived or expenses paid or assumed by T. Rowe Price pursuant
to this expense ratio limitation is subject to reimbursement by
the Fund to T. Rowe Price whenever the Fund's expense ratio is
below 0.65%, provided, that no such reimbursement shall be made
to T. Rowe Price after February 28, 1997, and any such
reimbursement shall only be made to the extent that it does not
result in the Fund's aggregate expenses exceeding an expense
ratio limitation of 0.65% The Management Agreement also provide
that one or more additional expense limitation periods (of the
same or different time periods) may be implemented after the
expiration of the current one on February 28, 1995, 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 expense exceeding the additional
expense limitation. Pursuant to its present expense limitation,
$146,000 of management fees were not accrued by the Maryland
Short-Term Fund for the year ended February 28, 1994.
Additionally, $11,000 of unaccrued fees and expenses from the
prior period are subject to future reimbursement.
Virginia Tax-Free and New Jersey Funds
In the interest of limiting the expenses of each Fund during
its initial periods of operations, T. Rowe Price agreed to waive
its fees and bear any expenses through February 28, 1993, to the
extent such fees or expenses would cause each Fund's ratio of
expenses to average net assets to exceed 0.65%. Effective March
1, 1993, T. Rowe Price agreed to extend each Fund's 0.65% expense
limitation for a period of two years through February 28, 1995.
Fees waived or expenses paid or assumed under each agreement are
subject to reimbursement to T. Rowe Price by the Funds whenever a
Fund's expense ratio is below 0.65%; however, no reimbursement
will be made after February 28, 1995 (for the first agreement) or
February 28, 1997 (for the second agreement), or if it would
result in the expense ratio exceeding 0.65%. The Management
Agreement also provides that one or more additional expense
limitation periods (of the same or different levels and time
periods) may be implemented after the expiration of the current
one on February 28, 1995, 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 expense exceeding the additional expense limitation.
Pursuant to the past and present expense limitations, $144,000 of
management fees were not accrued by the New Jersey Fund for the
year ended February 28, 1994. Pursuant to Virginia Bond Fund's
PAGE 70
present expense limitation, $119,000 of management fees were not
accrued by the Fund for the year ended February 28, 1994.
Additionally, $260,000 and $292,000 of unaccrued fees and
expenses for the New Jersey and Virginia Funds, respectively,
from the prior period are subject to reimbursement through
February 28, 1995.
Georgia Fund
In the interest of limiting the expenses of the Fund
during its initial period of operations, T. Rowe Price agreed to
waive its fees and bear any expenses through February 28, 1995,
to the extent such fees or expenses would cause the Fund's ratio
of expenses to average net assets to exceed 0.65%. 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 0.65%; however, no reimbursement will be
made after February 28, 1997, or if it would result in the
expense ratio exceeding 0.65%. The Management Agreement also
provides that one or more additional expense limitation periods
(of the same or different levels and time periods) may be
implemented after the expiration of the current one on February
28, 1995, 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 expense
exceeding the additional expense limitation. Pursuant to the
present expense limitations, $56,000 of management fees for the
Georgia Bond Fund were not accrued for the 11 months ended
February 28, 1994, and $63,000 of other Fund expenses for the
Georgia Bond Fund were borne by T. Rowe Price and are subject to
future reimbursement.
Florida Fund
In the interest of limiting the expenses of the Fund
during its initial period of operations, T. Rowe Price agreed to
waive its fees and bear any expenses through February 28, 1995,
to the extent such fees or expenses would cause the Fund's ratio
of expenses to average net assets to exceed 0.60%. 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 0.60%; however, no reimbursement will be
made after February 28, 1997, or if it would result in the
expense ratio exceeding 0.60%. The Management Agreement also
provides that one or more additional expense limitation periods
(of the same or different levels and time periods) may be
implemented after the expiration of the current one on February
28, 1995, 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 expense
PAGE 71
exceeding the additional expense limitation. Pursuant to the
present expense limitation, $77,000 of management fees for the
Florida Insured Fund were not accrued for the 11 months ended
February 28, 1994, and $53,000 of other Fund expenses for the
Florida Insured Fund were borne by T. Rowe Price and are subject
to future reimbursement.
Virginia Short-Term Bond Fund
In the interest of limiting the expenses of the Fund
during its initial period of operations, T. Rowe Price has agreed
to waive its fees and bear any expenses through February 28,
1996, to the extent such fees or expenses would cause the Fund's
ratio of expenses to average net assets to exceed 0.65%.
However, any fees waived or expenses paid or assumed by T. Rowe
Price pursuant to this expense ratio limitation is subject to
reimbursement by the Fund to T. Rowe Price whenever the Fund's
expense ratio is below 0.65%, provided, that no such
reimbursement shall be made to T. Rowe Price after February 28,
1998, and any such reimbursement shall only be made to the extent
that it does not result in the Fund's aggregate expenses
exceeding an expense ratio limitation of 0.65%
DISTRIBUTOR FOR THE TRUSTS
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
distributor of each Trust. 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 shares of beneficial interest pertaining to each
Fund is continuous.
Investment Services is located at the same address as
the Trusts and T. Rowe Price Associates -- 100 East Pratt Street,
Baltimore, Maryland 21202.
Investment Services serves as distributor to the
Trusts pursuant to an Underwriting Agreement ("Underwriting
Agreement"), which provides that each Fund will pay all fees and
expenses in connection with: registering and qualifying its
shares under the various state "blue sky" laws; preparing,
setting in type, printing, and mailing its prospectuses and
reports to shareholders; and issuing its shares, including
expenses of confirming purchase orders.
The Underwriting Agreement provides that Investment
Services will pay all fees and expenses in connection with:
printing and distributing prospectuses and reports for use in
PAGE 72
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 Funds.
Investment Services' expenses are paid by T. Rowe Price.
Investment Services acts as the agent of the Trusts
in connection with the sale of the Funds' shares in all states in
which the shares are qualified and in which Investment Services
is qualified as a broker-dealer. Under the Underwriting
Agreement, Investment Services accepts orders for Fund shares at
net asset value. No sales charges are paid by investors or the
Funds.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is
the custodian for each Fund's securities and cash, but it does
not participate in the Funds' investment decisions. Each Trust,
on behalf of the Funds, has authorized the Bank to deposit
certain portfolio securities in central depository systems as
allowed by Federal law. In addition, the Funds are authorized to
maintain certain of its securities, in particular variable rate
demand notes, in uncertificated form in the proprietary deposit
systems of various dealers in municipal securities. The Bank's
main office is 225 Franklin Street, Boston, Massachusetts 02110.
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 any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten 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 five days; or the
security is subject to internal trading restrictions. In
addition, employees are prohibited from engaging in 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 73
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. The
Fund's purchases and sales of portfolio securities are normally
done on a principal basis and do not involve the payment of a
commission although they may involve the designation of selling
concessions. That part of the discussion below relating solely
to brokerage commissions would not normally apply to the Funds.
However, it is included because T. Rowe Price does manage a
significant number of common stock portfolios which do engage in
agency transactions and pay commissions and because some research
and services resulting from the payment of such commissions may
benefit the Fund.
How Brokers and Dealers are Selected
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.
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 brokerage and research services in connection with
such designations in fixed price underwritings.
How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine
what levels of commission rates are reasonable in the marketplace
for transactions executed on behalf of the Fund. In evaluating
the reasonableness of commission rates, T. Rowe Price considers:
(a) historical commission rates, both before and since rates have
PAGE 74
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.
Description of Research Services Received from Brokers and
Dealers
T. Rowe Price receives a wide range of research services
from brokers and dealers. These services include information on
the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law
interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement
analysis, performance analysis and analysis of corporate
responsibility issues. These services provide both domestic and
international perspective. Research services are received
primarily in the form of written reports, computer generated
services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form
of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some
cases, research services are generated by third parties but are
provided to T. Rowe Price by or through broker-dealers.
Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price 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
PAGE 75
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,
PAGE 76
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers or dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any
firm may be less than the suggested allocations but can, and
often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations described above.
In no case is a broker or dealer excluded from receiving business
from T. Rowe Price because it has not been identified as
providing research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is
consistently applied to all its fully discretionary accounts,
which represent a substantial majority of all assets under
management. Research services furnished by brokers or dealers
through which T. Rowe Price effects securities transactions may
be used in servicing all accounts (including non-Fund accounts)
managed by T. Rowe Price. Conversely, research services received
from brokers or dealers which execute transactions for the Fund
are not necessarily used by T. Rowe Price exclusively in
connection with the management of the Fund.
From time to time, orders for clients may be placed
through a computerized transaction network. The Fund does not
allocate business to any broker-dealer on the basis of its sales
of the Fund's shares. However, this does not mean that broker-
dealers who purchase Fund shares for their clients will not
receive business from the Fund.
Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Fund. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling 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
PAGE 77
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.
To the extent possible, T. Rowe Price intends to
recapture solicitation fees paid in connection with tender offers
through T. Rowe Price Investment Services, Inc., the Fund's
distributor. At the present time, T. Rowe Price does not
recapture commissions or underwriting discounts or selling group
concessions in connection with taxable securities acquired in
underwritten offerings. T. Rowe Price does, however, attempt to
negotiate elimination of all or a portion of the selling-group
concession or underwriting discount when purchasing tax-exempt
municipal securities on behalf of its clients in underwritten
offerings.
Other
The Funds engaged in portfolio transactions involving
broker-dealers in the following amounts for the fiscal years
ended February 28, 1994, February 28, 1993, and February 29,
1992:
1994 1993 1992
New York Tax-Free
Money Fund $314,975,000 $347,427,000 $299,660,921
New York Tax-Free
Bond Fund 443,455,000 190,586,907 164,550,541
California Tax-Free
Money Fund 142,908,000 500,683,740 397,543,189
California Tax-Free
Bond Fund 544,865,000 348,247,460 322,295,244
Maryland Tax-Free
Bond Fund 815,516,000 743,400,957 626,731,719
Maryland Short-Term
Tax-Free Bond 232,994,000 34,180,169+ **
Virginia Tax-Free
Bond Fund 477,407,000 325,426,540 153,467,552++
New Jersey Tax-Free
Bond Fund 201,915,000 164,425,076 59,350,772++
Georgia Tax-Free
Bond Fund 112,606,000* ** **
PAGE 78
Florida Insured
Intermediate
Tax-Free Fund 142,908,000* ** **
The following amounts consisted of principal transactions
as to which the Funds have no knowledge of the profits or losses
realized by the respective broker-dealers for the fiscal years
ended February 28, 1994, February 28, 1993, and February 29,
1992:
1994 1993 1992
New York Tax-Free
Money Fund $314,975,000 $343,371,806 $299,660,921
New York Tax-Free
Bond Fund 413,748,000 176,478,095 160,348,191
California Tax-Free
Money Fund 340,724,000 500,683,740 397,543,189
California Tax-Free
Bond Fund 492,219,000 335,622,104 321,362,444
Maryland Tax-Free
Bond Fund 667,535,000 691,453,707 625,978,367
Maryland Short-Term
Tax-Free Bond Fund 221,759,000 33,681,314+ **
Virginia Tax-Free
Bond Fund 430,706,000 318,014,247 151,864,022++
New Jersey Tax-Free
Bond Fund 192,008,000 162,241,723 58,359,257++
Georgia Tax-Free
Bond Fund 108,245,000 * ****
Florida Insured
Intermediate
Tax-Free Fund 136,112,000 * ****
The following amounts involved trades with brokers
acting as agents or underwriters for the fiscal years ended
February 28, 1994, February 28, 1993, and February 29, 1992:
1994 1993 1992
New York Tax-Free
Money Fund $ 0 $4,055,019 $ 0
New York Tax-Free
Bond Fund 29,707,000 14,108,812 4,202,350
California Tax-Free
Money Fund 0 0 0
California Tax-Free
Bond Fund 52,646,000 12,625,356 932,800
Maryland Tax-Free
Bond Fund 147,981,000 51,947,250 736,464
PAGE 79
Maryland Short-Term
Tax-Free Bond Fund 11,235,000 498,855+ **
Virginia Tax-Free
Bond Fund 46,702,000 7,412,293 1,603,530++
New Jersey Tax-Free
Bond Fund 9,907,000 2,183,353 991,515++
Georgia Tax-Free
Bond Fund 4,360,000* ** **
Florida Insured
Intermediate
Tax-Free Fund 6,796,000* ** **
The following amounts involved trades with brokers
acting as agents or underwriters, in which such brokers received
total commissions, including discounts received in connection
with underwritings for the fiscal years ended February 28, 1994,
February 28, 1993, and February 29, 1992:
1994 1993 1992
New York Tax-Free Money Fund $ 0 $ 8,938 $ 0
New York Tax-Free Bond Fund 150,000 99,728 31,662
California Tax-Free Money Fund 0 0 0
California Tax-Free Bond Fund 323,000 88,219 14,089
Maryland Tax-Free Bond Fund 990,000 271,901 16,887
Maryland Short-Term Tax-Free 55,000 2,500 + **
Bond Fund
Virginia Tax-Free Bond Fund 332,000 50,088 14,002++
New Jersey Tax-Free Bond Fund 70,000 17,700 7,500++
Georgia Tax-Free Bond Fund 25,000 * ** **
Florida Insured Intermediate 64,000 ** **
Tax-Free Fund
*For the 11-month fiscal period ended February 28, 1994.
**Prior to commencement of operations.
+For the one-month fiscal period ended February 28, 1993.
++For the 10-month fiscal period ended February 29, 1992.
Of all such portfolio transactions, none were placed
with firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Funds, or in some cases, to the Funds.
The portfolio turnover rates of the Funds for the
fiscal years ended February 28, 1994, February 28, 1993, and
February 29, 1992, have been as follows:
1994 1993 1992
New York Tax-Free Money Fund N/A N/A N/A
PAGE 80
New York Tax-Free Bond Fund 84.9% 41.5% 48.7%
California Tax-Free Money Fund N/A N/A N/A
California Tax-Free Bond Fund 73.4% 57.5% 80.3%
Maryland Tax-Free Bond Fund 24.3% 22.3% 21.9%
Maryland Short-Term 20.5% 96.9%+ **
Tax-Free Bond Fund
Virginia Tax-Free Bond Fund 61.8% 68.5% 76.3%++
New Jersey Tax-Free Bond Fund 68.8% 103.3% 152.2%++
Georgia Tax-Free Bond Fund 154.8%* ** **
Florida Insured Intermediate 70.6%* ** **
Tax-Free Fund
*Figure is annualized and is for the 11-month fiscal period ended
February 28, 1994.
**Prior to commencement of operations.
+Figure is annualized and is for the one-month fiscal period
ended February 28, 1993.
++Figure is annualized and is for the 10-month fiscal period
ended February 29, 1992.
PRICING OF SECURITIES BEING OFFERED
Fixed income 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
using a bid-side valuation 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.
Except with respect to certain securities held by the
Money Funds, 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
bid-side money market yields. Securities originally purchased by
the Money Funds with remaining maturities of 60 days or less are
valued at amortized cost. In addition, securities purchased by
the Money Funds with maturities in excess of 60 days, but which
currently have maturities of 60 days or less, are valued at their
amortized cost for the 60 days prior to maturity--such
amortization being based on the fair value of the securities on
the 61st day prior to maturity.
For the Bond Funds, there are a number of pricing
services available, and the Boards of Trustees, on the basis of
ongoing evaluation of these services, may use or may discontinue
the use of any pricing service in whole or in part.
Assets and liabilities for which the above valuation
PAGE 81
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 officers of the Funds, as authorized by
its Board of Trustees.
Maintenance of New York and California Money Funds' Net Asset
Value Per Share at $1.00
It is the policy of the Funds to attempt to maintain a net
asset value of $1.00 per share by rounding to the nearest one
cent. This method of valuation is commonly referred to as "penny
rounding" and is permitted by Rule 2a-7 under the Investment
Company Act of 1940. Under Rule 2a-7:
(a) The Board of Trustees of each Fund must undertake to
assure, to the extent reasonably practical taking
into account current market conditions affecting a
Fund's investment objectives, that a Fund's net
asset value will not deviate from $1.00 per share;
(b) Each Fund must (i) maintain a dollar-weighted
average portfolio maturity appropriate to its
objective of maintaining a stable price per share,
(ii) not purchase any instrument with a remaining
maturity greater than 397 days (in the case of U.S.
government securities greater than 762 days), and
(iii) maintain a dollar-weighted average portfolio
maturity of 90 days or less;
(c) Each Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to
those U.S. dollar-denominated instruments which a
Fund's Board of Trustees determines present minimal
credit risks, and which are eligible securities as
defined by Rule 2a-7. Eligible securities are
generally securities which have been rated (or whose
issuer has been rated or whose issuer has comparable
securities rated) in or of the two highest rating
categories by nationally recognized statistical
rating organizations or, in the case of any
instrument that is not so rated, is of comparable
quality as determined by procedures adopted by the
Funds' Boards of Trustees; and
(d) Each Board of Trustees must determine that (i) it is
in the best interest of a Fund and its shareholders
to maintain a stable price per share under the penny
rounding method; and (ii) a Fund will continue to
use the penny rounding method only so long as each
Board of Trustees believes that it fairly reflects
PAGE 82
the market based net asset value per share.
Although the Funds believe that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do so
on a continuous basis. If a Fund's net asset value per share
declined, or was expected to decline, below $1.00 (rounded to the
nearest one cent), the Board of Trustees of a Fund might
temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of
such reduction or suspension of dividends, an investor would
receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor
receiving no dividend for the period during which he holds his
shares and in his receiving, upon redemption, a price per share
lower than that which he paid. On the other hand, if a Fund's
net asset value per share were to increase, or were anticipated
to increase above $1.00 (rounded to the nearest one cent), the
Board of Trustees of a Fund might supplement dividends in an
effort to maintain the net asset value at $1.00 per share.
NET ASSET VALUE PER SHARE
The purchase and redemption price of each Fund's
shares is equal to that Fund's net asset value per share (or
share price). Each 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 a 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 each Fund is calculated as of the close of trading on
the New York Stock Exchange ("NYSE") every day the NYSE is open
for trading. The NYSE is closed on the following days: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering,
sale, redemption and repurchase of shares) for a 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 a Fund of securities
owned by it is not reasonably practicable or it is not reasonably
practicable for a Fund fairly to determine the value of its net
assets, or (d) during which a governmental body having
jurisdiction over the Funds may by order permit such a suspension
for the protection of the Funds' shareholders; provided that
applicable rules and regulations of the Securities and Exchange
PAGE 83
Commission (or any succeeding governmental authority) shall
govern as to whether the conditions prescribed in (b), (c), or
(d) exist.
DIVIDENDS
Unless you elect otherwise, each Fund's annual
capital gain distribution, 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.
TAX STATUS
Each Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended ("Code").
Dividends and distributions paid by the Funds are not
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 Funds must declare dividends equal
to at least 90% of net tax-exempt income (as of its tax year-end)
to permit the pass-through of tax-exempt income to shareholders,
98% of capital gains (as of October 31) in order to avoid a
federal excise tax and 100% of capital gains (as of its tax
year-end) to avoid federal income tax.
At the time of your purchase, each Fund's net asset
value may reflect undistributed capital gains or net unrealized
appreciation of securities held by the Funds. A subsequent
distribution to you of such amounts, although constituting a
return of your investment, would be taxable as a capital gain
distribution. For federal income tax purposes, the Funds are
permitted to carry forward its net realized capital losses, if
any, for eight years and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or
distribute such gains. On May 31, 1994, the books of each Fund
indicated that the Fund's aggregate net assets included:
PAGE 84
Realized Capital Unrealized
Gains/(Losses) Appreciation
________________ ____________
New York Tax-Money Fund $ (700) $ (25,362)
New York Tax-Free Bond Fund (2,140,744) 4,207,155
California Tax-Free Money Fund (45,949) (18,084)
California Tax-Free Bond Fund (1,706,846) 2,618,873
Maryland Tax-Free Bond Fund (2,648,900) 20,607,598
Maryland Short-Term Tax-Free
Bond Fund (255,012) (313,059)
Virginia Tax-Free Bond Fund (2,768,447) 1,018,385
New Jersey Tax-Free Bond Fund (1,187,646) 465,803
Georgia Tax-Free Bond Fund (738,995) (340,660)
Florida Insured Intermediate (310,765) (481,591)
Tax-Free Fund
If, in any taxable year, a 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 or tax-exempt
dividends).
Each year, the Funds will mail you information on the
tax status of dividends and distributions. The Funds anticipate
that substantially all of its dividends to be paid will be exempt
from federal, state, and/or city or local income taxes. However,
due to seasonal variations in the supply of short-term
investments, there may be periods when it would not be unusual
for up to 10% of the dividends of a Fund to be derived from out
of state securities. Any such dividends would be subject to
state and local income taxes (if any). If any portion of a
Fund's dividends is not exempt from federal income taxes, you
will receive a Form 1099 stating the taxable portion. The Funds
will also advise you of the percentage of your dividends, if any,
which should be included in the computation of alternative
minimum tax.
Because the interest on municipal securities is tax
exempt, any interest on money you borrow that is directly or
indirectly used to purchase shares of a Fund is not deductible.
(See Section 265(a)(2) of the Internal Revenue Code.) Further,
entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by
industrial development bonds should consult their tax advisers
PAGE 85
before purchasing shares of a Fund. The income from such bonds
may not be tax exempt for such substantial users.
Georgia Tax-Free Bond Fund
Investments in the Fund are subject to the Georgia
intangible personal property tax. Because the Fund is a series
of the T. Rowe Price State Tax-Free Income Trust, a Massachusetts
business trust, investments in the Fund are taxed at a lower rate
than would be applied if the Fund were organized as a
corporation.
Florida Insured Intermediate Tax-Free Fund
Although Florida does not have a state income tax, it
does impose an intangible personal property tax (intangibles tax)
on assets, including shares of mutual funds. This tax is based
on the net asset value of shares owned on January 1.
Under Florida law, shares of the Fund will be exempt from
the intangibles tax to the extent that, on January 1, the Fund's
assets are solely invested in certain exempt Florida securities,
U.S. government securities, certain short-term cash investments,
or other exempt securities. If, on January 1, the Fund's assets
are invested in these tax-exempt securities and other non-tax-
exempt securities, only that portion of a share's net asset value
represented by U.S. government securities will be exempt from the
intangibles tax. Because the Fund will make every effort to have
its portfolio invested exclusively in exempt Florida municipal
obligations (and other qualifying investments) on January 1,
shares of the Fund should be exempt from the intangibles tax.
However, under certain circumstances, the Fund may invest in
securities other than Florida municipal obligations and there can
be no guarantee that such non-exempt investments would not be in
the Fund's portfolio on January 1. In such cases, all or a
portion of the value of the Fund's shares may be subject to the
intangibles tax, and a portion of the Fund's income may be
subject to federal income taxes.
YIELD INFORMATION
Bond Funds
From time to time, the Funds may advertise a yield figure
calculated in the following manner:
An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with
regulations of the Securities and Exchange Commission. The
income factors are then totalled for all securities in the
PAGE 86
portfolio. Next, expenses of each Fund for the period net of
expected reimbursements are deducted from the income to arrive at
net income, which is then converted to a per-share amount by
dividing net income by the average number of shares outstanding
during the period. The net income per share is divided by the
net asset value on the last day of the period to produce a
monthly yield which is then annualized. A taxable equivalent
yield is calculated by dividing this yield by one minus the sum
of the effective federal, state, and/or city or local income tax
rates. Quoted yield factors are for comparison purposes only,
and are not intended to indicate future performance or forecast
the dividend per share of each Fund.
The yield of each Fund calculated under the above-described
method for the month ended May 31, 1994, was as follows:
New York Tax-Free Bond Fund 5.31%
California Tax-Free Bond Fund 5.39%
Maryland Tax-Free Bond Fund 5.37%
Maryland Short-Term Tax-Free Bond Fund 3.56%
Virginia Tax-Free Bond Fund 5.47%
New Jersey Tax-Free Bond Fund 5.48%
Georgia Tax-Free Bond Fund 5.27%
Florida Insured Intermediate 4.32%
Tax-Free Fund
The tax equivalent yields (assuming a federal tax bracket of
31.0%) for each Fund for the same period were as follows:
New York Tax-Free Bond Fund+ 8.74%
California Tax-Free Bond Fund++ 8.68%
Maryland Tax-Free Bond Fund+++ 8.55%
Maryland Short-Term Tax-Free 5.67%
Bond Fund+++
Virginia Tax-Free Bond Fund* 8.41%
New Jersey Tax-Free Bond Fund** 8.51%
Georgia Tax-Free Bond Fund*** 8.13%
Florida Insured Intermediate 6.46%
Tax-Free Fund****
+ Assumes a state tax bracket of 7.59% and a local tax bracket
of 4.4%
++ Assumes a state tax bracket of 10.0%.
+++ Assumes a state tax bracket of 6.0% and a local tax bracket
of 3.0%.
* Assumes a state tax bracket of 5.75%.
** Assumes a state tax bracket of 6.65%.
*** Assumes a state tax bracket of 6.0%.
**** Assumes an intangible tax rate of 0.2%.
PAGE 87
The tax equivalent yields (assuming a federal tax bracket of
28.0%) for each Fund for the same period were as follows:
New York Tax-Free Bond Fund+ 8.38%
California Tax-Free Bond Fund++ 8.25%
Maryland Tax-Free Bond Fund+++ 8.11%
Maryland Short-Term Tax-Free Bond Fund+++ 5.37%
Virginia Tax-Free Bond Fund* 8.06%
New Jersey Tax-Free Bond Fund** 8.11%
Georgia Tax-Free Bond Fund*** 7.79%
Florida Insured Intermediate 6.20%
Tax-Free Fund****
+ Assumes a state tax bracket of 7.59% and a local tax bracket
of 4.4%
++ Assumes a state tax bracket of 9.3%.
+++ Assumes a state tax bracket of 5.0% and a local tax bracket
of 3.0%.
* Assumes a state tax bracket of 5.75%.
** Assumes a state tax bracket of 6.18%.
*** Assumes a state tax bracket of 6.0%.
**** Assumes an intangible tax rate of 0.2%.
New York Money and California Money Funds
Each Fund's current and historical yield for a period is
calculated by dividing the net change in value of an account
(including all dividends accrued and dividends reinvested in
additional shares) by the account value at the beginning of the
period to obtain the base period return. This base period return
is divided by the number of days in the period then multiplied by
365 to arrive at the annualized yield for that period. Each
Fund's annualized compound yield for such period is compounded by
dividing the base period return by the number of days in the
period, and compounding that figure over 365 days.
The Money Funds' current yield and compound yield for the
seven days ended May 31, 1994 were:
Current Compound
Yield Yield
_______ ________
New York Tax-Free Money Fund 2.17% 2.20%
California Tax-Free Money Fund 2.20% 2.23%
From time to time, a Fund may also illustrate the effect of
tax equivalent yields using information such as that set forth
below:
PAGE 88
TAX-EXEMPT VS. TAXABLE YIELDS
New York Funds
_________________________________________________________________
Your Taxable Income (1994)* Tax Rates
Joint Return Single Return Combined
Federal+State Local# Mar-
ginal**
_________________________________________________________________
$25,001- $38,000 $12,501- $22,750 15.0 7.59 4.4 25.2
38,001- 91,850 22,751- 55,100 28.0 7.59 4.4 36.6
91,851- 140,000 55,101- 115,000 31.0 7.59 4.5 39.3
140,001- 250,000 115,001- 250,000 36.0 7.59 4.5 43.7
250,001 and above 250,001 and above 39.6 7.59 4.5 46.9
_________________________________________________________________
A Tax-Exempt Yield Of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
4.01 5.35 6.68 8.02 9.36 10.70 12.03 13.37
4.73 6.31 7.89 9.46 11.04 12.62 14.20 15.77
4.94 6.59 8.24 9.88 11.53 13.18 14.83 16.47
5.33 7.10 8.88 10.66 12.43 14.21 15.99 17.76
5.65 7.53 9.42 11.30 13.18 15.07 16.95 18.83
* Net amount subject to federal income tax after deductions and
exemptions.
# Tax rates are for New York City Residents.
** Combined marginal rate assumes the deduction of state and
local income taxes on the federal
return.
+ Marginal rates may vary depending on family size and nature
and amount of itemized deductions.
California Funds
_________________________________________________________________
Your Taxable Income (1994)* Marginal Tax Rates
Joint Return Single Return Combined
Federal+ State Mar-
ginal**
_________________________________________________________________
$34,907- $38,000 $17,453- $22,750 15.0 6.0 20.1
38,001- 48,456 22,751- 24,228 28.0 6.0 32.3
48,457- 61,240 24,229- 30,620 28.0 8.0 33.8
PAGE 89
61,241- 91,850 30,621- 55,100 28.0 9.3 34.7
91,851- 140,000 55,101- 106,190 31.0 9.3 37.4
106,191- 115,000 31.0 10.0 37.9
140,001- 212,380 36.0 9.3 42.0
_________________________________________________________________
A Tax-Exempt Yield Of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
3.75 5.01 6.26 7.51 8.76 10.01 11.26 12.52
4.43 5.91 7.39 8.86 10.34 11.82 13.29 14.77
4.53 6.04 7.55 9.06 10.57 12.08 13.60 15.11
4.59 6.13 7.66 9.19 10.72 12.25 13.78 15.31
4.79 6.39 7.99 9.58 11.18 12.78 14.38 15.97
4.83 6.44 8.05 9.66 11.27 12.88 14.49 16.10
5.17 6.90 8.62 10.34 12.07 13.79 15.52 17.24
5.21 6.94 8.68 10.42 12.15 13.89 15.63 17.36
5.26 7.02 8.77 10.53 12.28 14.04 15.79 17.54
5.51 7.35 9.19 11.03 12.87 14.71 16.54 18.38
5.58 7.43 9.29 11.15 13.01 14.87 16.73 18.59
* Net amount subject to federal income tax after deductions and
exemptions.
** Combined marginal rate assumes the deduction of state
income taxes on the federal return.
+ Marginal rates may vary depending on family size and nature
and amount of itemized deductions.
PAGE 90
Maryland Funds
_________________________________________________________________
Your Taxable Income (1994)* Marginal Tax Rates
Joint Return Single Return Combined
Federal+State Local# Mar-
ginal**
_________________________________________________________________
$38,001- $91,850 $22,751- $55,100 28.0 5.0 3.0 33.8
91,851- 140,000 55,101- 100,000 31.0 5.0 3.0 36.5
100,001- 115,000 31.0 6.0 3.0 37.2
140,001- 150,000 36.0 5.0 3.0 41.1
150,001- 250,000 115,001- 250,000 36.0 6.0 3.0 41.8
250,001 and above 250,001 and above 39.6 6.0 3.0 45.0
_________________________________________________________________
A Tax-Exempt Yield Of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
4.53 6.04 7.55 9.06 10.57 12.08 13.60 15.11
4.72 6.30 7.87 9.45 11.02 12.60 14.17 15.75
4.78 6.37 7.96 9.55 11.15 12.74 14.33 15.92
5.09 6.79 8.49 10.19 11.88 13.58 15.28 16.98
5.15 6.87 8.59 10.31 12.03 13.75 15.46 17.18
5.45 7.27 9.09 10.91 12.73 14.55 16.36 18.18
* Net amount subject to federal income tax after deductions and
exemptions.
# Assumes a local tax rate equal to 60% of the state rate for
residents in the 5% state bracket; assumes a local rate equal
to 50% of the state rate for residents in the 6% state
bracket.
** Combined marginal rate assumes the deduction of state and
local income taxes on the federal return.
+ Marginal rates may vary depending on family size and nature
and amount of itemized deductions.
PAGE 91
New Jersey Fund
_________________________________________________________________
Your Taxable Income (1994)* Tax Rates
Joint Return Single Return Combined
Federal+ State Mar-
ginal**
_________________________________________________________________
$ 0- $20,000 $ 0- $20,000 15.00 1.90 16.60
20,001- 50,000 20,001- 22,750 15.00 2.38 17.00
22,751- 35,000 28.00 2.38 29.70
50,001- 70,000 28.00 3.33 30.40
70,001- 80,000 35,001- 40,000 28.00 4.75 31.40
80,001- 89,150 40,001- 55,100 28.00 6.18 32.40
89,150- 140,000 55,101- 75,000 31.00 6.18 35.30
75,001- 115,000 31.00 6.65 35.60
140,001- 150,000 36.00 6.18 40.00
150,001- 250,000 115,001- 250,000 36.00 6.65 40.30
250,001 and above 250,001 and above 39.60 6.65 43.60
_________________________________________________________________
A Tax-Exempt Yield Of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
3.60 4.80 6.00 7.19 8.39 9.59 10.79 11.99
3.61 4.82 6.02 7.23 8.43 9.64 10.84 12.05
4.27 5.69 7.11 8.53 9.96 11.38 12.80 14.22
4.31 5.75 7.18 8.62 10.06 11.49 12.93 14.37
4.37 5.83 7.29 8.75 10.20 11.66 13.12 14.58
4.44 5.92 7.40 8.88 10.36 11.83 13.31 14.79
4.64 6.18 7.73 9.27 10.82 12.36 13.91 15.46
4.66 6.21 7.76 9.32 10.87 12.42 13.98 15.53
5.00 6.67 8.33 10.00 11.67 13.33 15.00 16.67
5.03 6.70 8.38 10.05 11.73 13.40 15.08 16.75
5.32 7.09 8.87 10.64 12.41 14.18 15.96 17.73
* Net amount subject to federal income tax after deductions and
exemptions.
** Combined marginal rate assumes the deduction of state income
taxes on the federal return.
+ Marginal rates may vary depending on family size and nature
and amount of itemized deductions.
PAGE 92
Virginia Fund
_________________________________________________________________
Your Taxable Income (1994)* Marginal Tax Rates
Joint Return Single Return Combined
Federal+ State Mar-
ginal**
_________________________________________________________________
$38,001- $91,850 $22,751- $55,100 28.0 5.75 32.1
91,851- 140,000 55,101- 115,000 31.0 5.75 35.0
140,001- 250,000 115,001- 250,000 36.0 5.75 39.7
250,001 and above 250,001 and above 39.6 5.75 43.1
_________________________________________________________________
A Tax-Exempt Yield Of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
4.42 5.89 7.36 8.84 10.31 11.78 13.25 14.73
4.62 6.15 7.69 9.23 10.77 12.3 13.85 15.38
4.98 6.63 8.29 9.95 11.61 13.7 14.93 16.58
5.27 7.03 8.79 10.54 12.30 14.06 15.82 17.57
* Net amount subject to federal income tax after deductions and
exemptions.
** Combined marginal rate assumes the deduction of state income
taxes on the federal return.
+ Marginal rates may vary depending on family size and nature
and amount of itemized deductions.
PAGE 93
Georgia Tax-Free Bond Fund
_________________________________________________________________
Your Taxable Income (1994)* Tax Rates
Joint Return Single Return Combined
Federal State Mar-
ginal**
_________________________________________________________________
$38,001- $91,850 $22,751- $55,100 28.0 6.00 32.3
91,851- 140,000 55,101- 115,000 31.0 6.00 35.1
140,001- 250,000 115,001- 250,000 36.0 6.00 39.8
250,001 and above 250,001 and above 39.6 6.00 43.2
_________________________________________________________________
A Tax-Exempt Yield Of:
3% 4% 5% 6% 7% 8% 9% 10%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
4.43 5.91 7.39 8.86 10.34 11.82 13.29 14.77
4.62 6.16 7.70 9.24 10.79 12.3 13.87 15.41
4.98 6.64 8.31 9.97 11.63 13.9 14.95 16.61
5.28 7/04 8.80 10.56 12.32 14.0 15.85 17.61
_________________________________________________________________
* Net amount subject to federal income tax after deductions and
exemptions.
** Combined marginal rate assumes the deduction of state income
taxes on the federal return.
+ Marginal rates may vary depending on family size and nature
and amount of itemized deductions.
PAGE 94
Florida Fund
EFFECTIVE YIELD FACTORING IN INTANGIBLES TAX
_________________________________________________________________
Your Taxable Income (1994)*
Joint Return Single Return Federal Intangible
Tax Rate+ Tax Rate
_________________________________________________________________
$ 38,001- $ 91,850 $ 22,751- $ 55,100
And Your Intangible Assets on 1/1/95 Total:
40,000 or less 20,000 or less 28 N/A
40,001- 200,000 20,001- 100,000 28 0.1
200,001 and above 100,001 and above 28 0.2
_________________________________________________________________
$ 91,851- $140,000 $ 55,101- $115,000
And Your Intangible Assets on 1/1/95 Total:
40,000 or less 20,000 or less 31 N/A
40,001- 200,000 20,001- 100,000 31 0.1
200,001 and above 100,001 and above 31 0.2
_________________________________________________________________
$140,001- $250,000 $115,001- $250,000
And Your Intangible Assets on 1/1/95 Total:
40,000 or less 20,000 or less 36 N/A
40,001- 200,000 20,001- 100,000 36 0.1
200,001 and above 100,001 and above 36 0.2
_________________________________________________________________
$250,001 and above+ $250,001 and above+
And Your Intangible Assets on 1/1/95 Total:
40,000 or less 20,000 or less 39.6 N/A
40,001- 200,000 20,001- 100,000 39.6 0.1
200,001 and above 100,001 and above 39.6 0.2
_________________________________________________________________
A Tax-Exempt Yield Of (#):
3% 4% 5% 6% 7% 8% 9% 10% 11%
Is Equivalent to a Taxable Yield of:
_________________________________________________________________
4.17 5.56 6.94 8.33 9.72 11.11 12.50 13.89 15.28
4.27 5.66 7.04 8.43 9.82 11.21 12.60 13.99 15.38
4.37 5.76 7.14 8.53 9.92 11.31 12.70 14.09 15.48
_________________________________________________________________
4.35 5.80 7.25 8.70 10.14 11.59 13.04 14.49 15.94
4.45 5.90 7.35 8.80 10.24 11.69 13.14 14.59 16.04
4.55 6.00 7.45 8.90 10.34 11.79 13.24 14.69 16.14
_________________________________________________________________
PAGE 95
4.69 6.25 7.81 9.38 10.94 12.50 14.06 15.63 17.19
4.79 6.35 7.91 9.48 11.04 12.60 14.16 15.73 17.29
4.89 6.45 8.01 9.58 11.14 12.70 14.26 15.83 17.39
________________________________________________________________
4.97 6.62 8.28 9.93 11.59 13.25 14.90 16.56 18.21
5.07 6.72 8.38 10.03 11.69 13.35 15.00 16.66 18.31
5.17 6.82 8.48 10.13 11.79 13.45 15.10 16.76 18.41
_________________________________________________________________
* Net amount subject to federal income tax after deductions
and exemptions.
# Assumes 100% exemption from federal income and Florida
intangible property taxes.
+ Federal rates may vary depending on family size and
nature and amount of itemized deductions.
PAGE 96
INVESTMENT PERFORMANCE
Total Return Performance
Each 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 each Fund. Total return is
calculated as the percentage change between the beginning value
of a static account in each Fund and the ending value of that
account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of each Fund.
Each average annual compound rate of return is derived from the
cumulative performance of each Fund over the time period
specified. The annual compound rate of return for each Fund over
any other period of time will vary from the average.
Cumulative Performance Percentage Change
Since
1 Year 5 Years Inception
Inception Ended Ended Date through
Date 2/28/94 2/28/94 2/28/94
_________________ ___________________
New York Tax-Free
Bond Fund 8/28/86 6.31%+ 57.08% 76.97%++
California Tax-Free
Bond Fund 9/15/86 5.37%+++ 53.58% 66.45%++++
Maryland Tax-Free Bond Fund 3/31/87 5.93%* 54.66% 61.78%**
Maryland Short-Term Tax-Free
Bond Fund 1/29/93 3.49%*** N/A 5.22%****
Virginia Tax-Free Bond Fund 4/30/91 5.99%! N/A 30.77%!!
New Jersey Tax-Free
Bond Fund 4/30/91 5.97%!!! N/A 33.32%!!!!
Florida Insured Intermediate 3/31/93 N/A N/A 6.84%#
Bond Fund
Georgia Tax-Free Bond Fund 3/31/93 N/A N/A 8.45%##
PAGE 97
Average Annual Compound Rates of Return
Since
1 Year 5 Years Inception
Inception Ended Ended Date through
Date 2/28/94 2/28/94 2/28/94
________________ ___________________
New York Tax-Free Bond Fund 8/28/86 6.31%+ 9.45% 7.90%++
California Tax-Free
Bond Fund 9/15/86 5.37%+++ 8.96% 7.08%++++
Maryland Tax-Free Bond Fund 3/31/87 5.93%* 9.11% 7.20%**
Maryland Short-Term Tax-Free
Bond Fund 1/29/93 3.49%*** N/A 4.81%****
Virginia Tax-Free Bond Fund 4/30/91 5.99%! N/A 9.93%!!
New Jersey Tax-Free
Bond Fund 4/30/91 5.97%!!! N/A 10.68%!!!!
Florida Insured Intermediate
Bond Fund 3/31/93 N/A N/A 6.84%#
Georgia Tax-Free Bond Fund 3/31/93 N/A N/A 8.45%##
+ If you invested $1,000 on 2/28/93, the total return of the
New York Bond Fund on 2/28/94 would be $63.10 ($1,000 x
.0631).
++ Assumes purchase of one share of the New York Bond Fund at
the inception price of $10.00 on 8/25/86.
+++ If you invested $1,000 on 2/28/93, the total return of the
California Bond Fund on 2/28/94 would be $1,053.70 ($1,000
x .0537).
++++ Assumes purchase of one share of the California Bond Fund
at the inception price of $10.00 on 9/11/86.
* If you invested $1,000 on 2/28/93, the total return of the
Maryland Bond Fund on 2/28/94 would be $59.30 ($1,000 x
.0593).
** Assumes purchase of one share of the Maryland Bond Fund at
the inception price of $10.00 on 3/31/87.
*** If you invested $1,000 at the 2/28/93, the total return of
the Maryland Short-Term Fund on 2/28/94 would be $34.90
($1,000 x .0349).
**** Assumes purchase of one share of the Maryland Short-Term
Fund at the inception price of $5.00 on 1/29/93.
! If you invested $1,000 on 2/28/93, the total return of the
Virginia Bond Fund on 2/28/94 would be $59.90 ($1,000 x
.0599).
!! Assumes purchase of one share of the Virginia Bond Fund at
the inception price of $10.00 on 4/30/91.
!!! If you invested $1,000 on 2/28/93, the total return of the
New Jersey Bond Fund on 2/28/94 would be $1,059.70 ($1,000
x 1.0597).
!!!! Assumes purchase of one share of the New Jersey Bond Fund
at the inception price of $10.00 on 4/30/91.
PAGE 98
# If you invested $1,000 at inception, the annualized total
return of the Florida Insured Fund on 2/28/94 would be
$68.40 ($1,000 x .0684). Assumes purchase of one share of
the Florida Insured Fund at the inception price of $10.00
on 3/31/93.
## If you invested $1,000 at inception, the annualized total
return of the Georgia Bond Fund on 2/28/94 would be $84.50
($1,000 x .0845). Assumes purchase of one share of the
Georgia Bond Fund at the inception price of $10.00 on
3/31/93.
From time to time, in reports and promotional
literature, each Fund's performance will be compared to any one
or combination of the following: (1) indices of broad groups of
managed and unmanaged securities considered to be representative
of or similar to Fund portfolio holdings, (2) other mutual funds,
or (3) other measures of performance set forth in publications
such as:
Bond Buyer 20 - an estimation of the yield which would be offered
on 20-year general obligation bonds with a composite rating of
approximately "A." Published weekly by The Bond Buyer, a trade
paper of the municipal securities industry;
Donoghue's Tax-Exempt Money Fund Avg. - an average of municipal
money market funds as reported in Donoghue's Money Fund Report,
which tracks the performance of all money market mutual funds;
Lipper Analytical Services, Inc. - a widely used independent
research firm which ranks mutual funds by overall performance,
investment objectives, and assets;
Lipper General Purpose Municipal Bond Avg. - an average of
municipal mutual funds which invest 60% or more of their assets
in the top four tax-exempt credit ratings;
Lipper High-Yield Municipal Bond Avg. - an average of municipal
mutual funds which may utilize lower rated bonds for 50% of their
portfolio;
Lipper Intermediate Municipal Avg. - an average of municipal
mutual funds which restrict their holdings to bonds with
maturities between 5 and 10 years;
Lipper Short Municipal Debt Avg. - an average of municipal funds
that invest in municipal debt issues with dollar-weighted average
maturities of less than five years;
Lipper State Municipal Bond Funds Average - an average of
municipal mutual funds which limit at least 80% of their
investments to those securities which are exempt from taxation of
PAGE 99
state and/or city income taxation;
Morningstar, Inc. - a widely used independent research firm which
rates mutual funds by overall performance, investment objectives,
and assets;
Prime General Obligations - bonds with maturities from 1-30 years
which are secured by the full faith and credit of issuers with
taxing power; and
Shearson Lehman/American Express Municipal Bond Index - a
composite measure of the total return performance of the
municipal bond market. Based upon approximately 1500 bonds.
New York and California Funds only
Donoghue's Tax-Exempt State Money Fund Average - an average of
municipal money market funds which concentrate their investments
in securities which are exempt from state and/or city income
taxes, as reported in Donoghue's Money Fund Report, which tracks
the performance of all money market mutual funds; and
Lipper State Short-Term Municipal Funds Average - an average of
municipal mutual funds concentrating their investments in
securities which are exempt from state and/or city income taxes.
This average is compiled from the Lipper Short-Term Municipal
Bond Funds average which restricts inclusion to those funds with
an average weighted maturity of no more than 90 days. Most funds
restrict their longest maturity to one year.
All Funds
Indices prepared by the research departments of such
a financial organizations as Merrill Lynch, Pierce, Fenner &
Smith, Inc., will be used, as well as information provided by the
Federal Reserve Board.
Information reported in the Bank Rate Monitor, an
independent publication which tracks the performance of certain
bank products, such as money market deposit accounts and
certificates of deposit, will also be used. Bank Certificates of
Deposit differ from mutual funds in several ways: the interest
rate established by the sponsoring bank is fixed for the term of
a CD; there are penalties for early withdrawal from CDs; and the
principal on a CD is insured.
Performance rankings and ratings reported
periodically in national financial publications such as MONEY,
FORBES, BUSINESS WEEK, and BARRON'S may also be used.
PAGE 100
Other Features and Benefits
The Funds are members of the T. Rowe Price Family of Funds
and may help investors achieve various long-term investment
goals, such as saving for a down payment on a home or paying
college costs. To explain how the Funds could be used to assist
investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared
by T. Rowe Price Associates, Inc. and/or T. Rowe Price Investment
Services, Inc. may be made available. These currently include:
the Asset Mix Worksheet which is designed to show shareholders
how to reduce their investment risk by developing a diversified
investment plan, the College Planning Guide which discusses
various aspects of financial planning to meet college expenses
and assists parents in projecting the costs of a college
education for their children. Tax Considerations for Investors
discusses the tax advantages of annuities and municipal bonds and
how to assess whether they are suitable for your portfolio,
reviews pros and cons of placing assets in a gift to minors
account and summarizes the benefits and types of tax-deferred
retirement plans currently available. From time to time, other
worksheets and guides may be made available as well. Of course,
an investment in a Fund cannot guarantee that such goals will be
met.
From time to time, Insights, a T. Rowe Price publication
of reports on specific investment topics and strategies, may be
included in each Fund's fulfillment kit. Such reports may
include information concerning: calculating taxable gains and
losses on mutual fund transactions, coping with stock market
volatility, benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.
Other Publications
From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.
No-Load Versus Load and 12b-1 Funds
PAGE 101
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 Funds are no-load funds which impose no sales charges
or 12b-1 fees. No-load funds are generally sold directly to the
public without the use of commissioned sales representatives.
This means that 100% of your purchase is invested for you.
The examples in the attached table show the impact on
investment performance of the most common types of sales charges.
For each example the investor has $10,000 to invest and each fund
performs at a compound annual rate of 6% per year (net of fund
expenses, including management fees) for ten years. The "Total
After 10 Years" shows the amount the investor would receive from
the fund after ten years. Net charges are the total sales fee(s)
paid by the investor or charged to the fund's assets. Figures
for total return are net of each Fund's expenses including
management fees.
The table is for illustrative purposes and is not intended
to reflect the anticipated performance of the Funds.
If a $10,000 investment produced a 6% annual total return
for ten years in a mutual fund that has . . .
A Sales A 1.00%
Charge 12b-1
No A of 2% A Plan
Sales Redemp- With a Sales Distri-
Charge tion Fee 1% Redemp- Charge bution
"No-Load" of 1% tion Fee of 8.5% Fee
_________ ________ __________ _______ _______
Original
Investment $10,000 $10,000 $10,000 $10,000 $10,000
(Sales Charge) N/C 2 N/C (200) (850) N/C
_______ _______ _______ _______ _______
Amount Credited
PAGE 102
to Account $10,000 $10,000 $ 9,800 $ 9,150 $10,000
Compounded at 6%
For Ten Years $17,908 $17,908 $17,550 $16,386 $16,196
Less Redemption Fee N/C (179) (176) N/C N/C
_______ _______ _______ _______ _______
Total After
10 Years $17,908 $17,729 $17,374 $16,386 $16,196
Net Charges $0 ($179) ($376) ($850)($1,332)
1 Figures have been rounded
2 N/C - No charge
3 Net of 12b-1 plan distribution charges
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of the Funds, 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 a 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.
ORGANIZATION OF THE TRUSTS
For tax and business reasons, the Trusts were organized in 1986
as Massachusetts Business Trusts. The State Tax-Free Income
Trust and California Tax-Free Income Trust are registered with
the Securities and Exchange Commission under the Investment
Company Act of 1940 as, respectively, a non-diversified and
diversified, open-end investment company, commonly known as a
"mutual fund."
The Declaration of Trust permits the Board of Trustees to issue
an unlimited number of full and fractional shares of beneficial
interest of a single class without par value. Currently, the
State Tax-Free Income Trust consists of nine series (i.e., the
New York Tax-Free Bond Fund, the New York Tax-Free Money Fund,
the Maryland Tax-Free Bond Fund, the Maryland Short-Term Tax-Free
Bond Fund, the Virginia Tax-Free Bond Fund, Virginia Short-Term
Tax-Free Bond Fund the New Jersey Tax-Free Bond Fund, the Georgia
PAGE 103
Tax-Free Bond Fund, and the Florida Insured Intermediate Tax-Free
Fund), and the California Tax-Free Income Trust consists of two
series (i.e., the Bond Fund and the Money Fund) each of which
represents a separate class of each Trust's shares and has
different objectives and investment policies. The Declaration of
Trust also provides that the Board of Trustees may issue
additional series of shares. Each share of each Fund represents
an equal proportionate beneficial interest in that Fund, with
each other share, and is entitled to such dividends and
distributions of income belonging to that fund as are declared by
the Trustees. In the event of the liquidation of a Fund, each
share is entitled to a pro rata share of the net assets of that
Fund.
Shareholders of each Fund are entitled to one vote for each full
share held (and fractional votes for fractional shares held)
irrespective of the relative net asset values of the Funds' share
and will vote in the election of or removal of trustees (to the
extent hereinafter provided); however, on matters affecting an
individual Fund, a separate vote of that Fund is required.
Shareholders of a Fund are not entitled to vote on any matter
which does not affect that Fund and which requires a separate
vote of the other Funds. 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 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 each Trust, in which event the
holders of the remaining shares will be unable to elect any
person as a trustee.
Shares have no preemptive or conversion rights; the right of
redemption and the privilege of exchange are described in the
prospectus. Shares are fully paid and nonassessable, except as
set forth below. The Trusts 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 each Trust, or (ii) upon
liquidation and distribution of the assets of each Trust, if
approved by the vote of the holders of a majority of the
outstanding shares of each Trust. If not so terminated, each
Trust will continue indefinitely.
PAGE 104
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
each Trust. However, the Declarations of Trust disclaims
shareholder liability for acts or obligations of the Trusts and
requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by
the Trusts or a Trustee. The Declarations of Trust provides for
indemnification from Trust property for all losses and expenses
of any shareholder held personally liable for the obligations of
the Trusts. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to
circumstances in which each Trust itself would be unable to meet
its obligations, a possibility which Price Associates believes is
remote. Upon payment of any liability incurred by a Fund, the
shareholders of the Fund paying such liability will be entitled
to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of each Fund in such a
way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
FEDERAL AND STATE REGISTRATION OF SHARES
Each Fund's shares are registered for sale under the Securities
Act of 1933 and each Fund or their shares are registered under
the laws of all states which require registration, as well as the
District of Columbia and Puerto Rico.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, L.L.P. whose address is 919
Third Avenue, New York, New York 10022, is legal counsel to the
Funds.
INDEPENDENT ACCOUNTANTS
Georgia Fund
Price Waterhouse, LLP, 7 St. Paul Street, Suite 1700, Baltimore,
Maryland 21202, are independent accountants to the Fund. The
financial statements of the Georgia Fund for the fiscal year
ended February 28, 1994 and the report of independent accountants
are included in the Fund's Annual Report for the fiscal year
ended February 28, 1994 on page 14. Also included are the
unaudited financial statements of the Fund dated August 31, 1994,
on pages 4-10. A copy of the Annual and Semi-Annual Reports
accompanies this Statement of Additional Information.
PAGE 105
The following financial statements and the report of independent
accountants appearing in the Annual Report for the fiscal year
ended February 28, 1994, and the unaudited financial statements
for the Fund's Semi-Annual Report dated August 31, 1994, are
incorporated into this Statement of Additional Information by
reference:
All Funds except Georgia Fund
Coopers & Lybrand, L.L.P., 217 East Redwood Street, Baltimore,
Maryland 21202, are independent accountants to the Trusts. The
financial statements of the New York, California, Maryland,
Virginia Tax-Free Bond, New Jersey, and Florida Funds for the
fiscal year ended February 28, 1994 and the report of independent
accountants, are included in each Fund's Annual Report for the
fiscal year ended February 28, 1994 on pages 7-19, 8-19, 9-26, 6-
14, 7-15, and 6-15, respectively. Also included are the
unaudited financial statements of the Funds dated August 31,
1994, on pages 5-15, 5-15, 9-22, 4-11, 5-11, 4-11, respectively.
A copy of each Annual and Semi-Annual Report accompanies this
Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in
each Annual Report for the fiscal year ended February 28, 1994,
and the unaudited financial statements for the Funds' Semi-Annual
Report dated August 31, 1994, are incorporated into this
Statement of Additional Information by reference:
New York
Funds' Annual
Report Page
____________
Report of Independent Accountants 19
Portfolio of Investments,
February 28, 1994 7-11
Statement of Assets and Liabilities,
February 28, 1994 12
Statement of Operations, year ended
February 28, 1994 13
Statement of Changes in Net Assets,
years ended February 28, 1994 14
and February 28, 1993
Notes to Financial Statements,
February 28, 1994 15-16
Financial Highlights 17-18
PAGE 106
New York
Funds' Semi-Annual
Report Page
____________
Statement of Net Assets,
August 31, 1994 (Unaudited) 5-10
Statement of Operations, six months ended
August 31, 1994 (Unaudited) 11
Statement of Changes in Net Assets,
six months ended August 31, 1994
and year ended February 28, 1994 (Unaudited) 12
Notes to Financial Statements,
August 31, 1994 (Unaudited) 13-14
Financial Highlights 14-15
PAGE 107
California
Funds' Annual
Report Page
_____________
Report of Independent Accountants 19
Portfolio of Investments
February 28, 1994 8-12
Statement of Assets and Liabilities,
February 28, 1994 13
Statement of Operations,
year ended February 28, 1994 14
Statement of Changes in Net Assets,
years ended February 28, 1994
and February 28, 1993 15
Notes to Financial Statements,
February 28, 1994 16-17
Financial Highlights 18
California
Funds' Semi-Annual
Report Page
____________
Statement of Net Assets,
August 31, 1994 (Unaudited) 5-10
Statement of Operations, six months ended
August 31, 1994 (Unaudited) 11
Statement of Changes in Net Assets,
six months ended August 31, 1994
and year ended February 28, 1994 (Unaudited) 12
Notes to Financial Statements,
August 31, 1994 (Unaudited) 13-14
Financial Highlights 14-15
PAGE 108
Maryland
Fund's Annual
Report Page
__________________
Report of Independent Accountants 26
Statement of Net Assets,
February 28, 1994 9-16
Statement of Operations,
year ended February 28, 1994 20
Statement of Changes in Net Assets,
years ended February 28, 1994 and
February 28, 1993 21
Notes to Financial Statements,
February 28, 1994 22-23
Financial Highlights 24
Maryland
Funds' Semi-Annual
Report Page
____________
Statement of Net Assets,
August 31, 1994 (Unaudited) 9-16
Statement of Operations, six months ended
August 31, 1994 (Unaudited) 17
Statement of Changes in Net Assets,
six months ended August 31, 1994
and year ended February 28, 1994 (Unaudited) 18
Notes to Financial Statements,
August 31, 1994 (Unaudited) 19-20
Financial Highlights 21-22
PAGE 109
Virginia
Fund's Annual
Report Page
_____________
Report of Independent Accountants 14
Portfolio of Investments,
February 28, 1994 6-8
Statement of Assets and Liabilities,
February 28, 1994 9
Statement of Operations,
year ended February 28, 1994 10
Statement of Changes in Net Assets,
years ended February 28, 1994 and
February 28, 1993 11
Notes to Financial Statements,
February 28, 1994 11-12
Financial Highlights 13
Virginia
Funds'Semi-Annual
Report Page
____________
Statement of Net Assets,
August 31, 1994 (Unaudited) 4-6
Statement of Operations, six months ended
August 31, 1994 (Unaudited) 7
Statement of Changes in Net Assets,
six months ended August 31, 1994
and year ended February 28, 1994 (Unaudited) 8
Notes to Financial Statements,
August 31, 1994 (Unaudited) 9-10
Financial Highlights 11
PAGE 110
New Jersey
Fund's Annual
Report Page
___________
Report of Independent Accountants 15
Portfolio of Investments,
February 28, 1994 7-9
Statement of Assets and Liabilities,
February 28, 1994 10
Statement of Operations,
year ended February 28, 1994 11
Statement of Changes in Net Assets,
years ended February 28, 1994 and
February 28, 1993 12
Notes to Financial Statements,
February 28, 1994 12-13
Financial Highlights 14
New Jersey
Funds' Semi-Annual
Report Page
____________
Statement of Net Assets,
August 31, 1994 (Unaudited) 5-7
Statement of Operations, six months ended
August 31, 1994 (Unaudited) 8
Statement of Changes in Net Assets,
six months ended August 31, 1994
and year ended February 28, 1994 (Unaudited) 9
Notes to Financial Statements,
August 31, 1994 (Unaudited) 11
Financial Highlights 11
PAGE 111
Florida
Fund's Annual
Report Page
_____________
Report of Independent Accountants 15
Portfolio of Investments,
February 28, 1994 6-8
Statement of Assets and Liabilities,
February 28, 1994 9
Statement of Operations,
year ended February 28, 1994 16
Statement of Changes in Net Assets,
year ended February 28, 1994 11
Notes to Financial Statements,
February 28, 1994 12-13
Financial Highlights 14
Florida
Funds' Semi-Annual
Report Page
____________
Portfolio of Investments,
August 31, 1994 (Unaudited) 4-5
Statement of Assets and Liabilities,
August 31, 1994 (Unaudited) 6
Statement of Operations, six months ended
August 31, 1994 (Unaudited) 7
Statement of Changes in Net Assets,
six months ended August 31, 1994
and year ended February 28, 1994 (Unaudited) 8
Notes to Financial Statements,
August 31, 1994 (Unaudited) 9-10
Financial Highlights 11
PAGE 112
Georgia
Fund's Annual
Report Page
___________
Report of Independent Accountants 14
Portfolio of Investments,
February 28, 1994 6-7
Statement of Assets and Liabilities,
February 28, 1994 8
Statement of Operations,
year ended February 28, 1994 9
Statement of Changes in Net Assets,
year ended February 28, 1994 10
Notes to Financial Statements,
February 28, 1994 11-12
Financial Highlights 13
Georgia
Funds' Semi-Annual
Report Page
____________
Statement of Net Assets,
August 31, 1994 (Unaudited) 4-5
Statement of Operations, six months ended
August 31, 1994 (Unaudited) 6
Statement of Changes in Net Assets,
six months ended August 31, 1994
and year ended February 28, 1994 (Unaudited) 7
Notes to Financial Statements,
August 31, 1994 (Unaudited) 8-9
Financial Highlights 10
