<PAGE>
FELLOW SHAREHOLDERS
Over the Fund's fiscal year ended February 28, 1994, the economy strengthened
by virtually every measure. While in the first half of calendar 1993 the
economy grew at less than a 1.5% rate, it surged at over a 5% rate in the
second half. Unemployment dropped steadily in 1993, capacity utilization rose
regularly, and personal income gains were impressive. Based on stronger
spending by consumers on durable goods and housing and by businesses on fixed
equipment, the economy's momentum seems to be carrying over into early 1994,
though the arctic cold snap east of the Rockies and the earthquake in Los
Angeles tended to depress some measures of business activity early in the new
year.
Perceived weakness in the economy through the autumn of 1993 and the Federal
Reserve's aggressively easy monetary policy encouraged a substantial decline
in note and bond yields. Between the end of February 1993 and mid-October, the
yield on the Treasury's benchmark 30-year bond dropped more than one full
percentage point, reaching a low of 5.78%. As it became increasingly apparent
that the economy was entering a phase of stronger growth, interest rates began
to rise, a move which was accelerated by the Fed's dramatic announcement of a
tightening in early February. As a result, short- and intermediate-term
interest rates ended the fiscal year 30 to 75 basis points higher than they
began it, though long-term Treasury bond yields were still a bit lower.
Corporate securities outperformed Treasuries and mortgage-backed issues by a
wide margin over the 12-month period covered in the report. The strengthening
economy and declining rate environment provided a favorable backdrop for
corporates, which had higher income and apprecation than Treasuries and none
of the prepayment risk of mortgage-backed issues. Mortgages, such as Ginnie
Maes, turned in the least favorable returns overall, because homeowners were
refinancing their mortgages to more attractive rates, and the prepayments
created principal losses on these securities. Among investment-grade
corporates, lower-quality issues outperformed higher-quality issues as was to
be expected in an environment where the economy was strengthening.
Interest Rate Levels Chart
[A line graph compares the yields of the 30-Year Treasury Bond, the 5-Year
Treasury Note, and the 1-Year Treasury Bill from 2/28/93 to 2/29/94.]
PERFORMANCE REVIEW
The total return of the New Income Fund for the three months ended February
28, 1994, was modest, but positive, and in line with that of the Lehman
Brothers Aggregate Bond Index, while the average return of Lipper Corporate
Bond Funds was down modestly for the quarter. For the 12-month period, the
returns from all three were positive and close to each other.
Performance Comparison
Periods Ended 2/28/94
3 Months 12 Months
---------------------------------
New Income Fund 0.13% 5.36%
Lehman Brothers
Aggregate Bond Index 0.13 5.40
Lipper Average of Corporate
Bond Funds - A Rated -0.27 5.64
- -----------------------------------------------------------------------------
<PAGE>
CAPITAL GAIN DISTRIBUTION
As you may know, a dividend consisting of a fund's undistributed net gains as
of October 31 must be declared by the end of each calendar year, and a second
distribution is required if the fund has undistributed net gains as of the
close of its fiscal year. Accordingly, your March statement reflects a
long-term gain of $0.07 per share, payable March 31 to shareholders of record
on March 28. This is taxable to you for 1994 and will be reported on Form
1099-DIV mailed in January 1995.
PORTFOLIO STRATEGY
Over the course of the fiscal year, we slightly increased the portfolio's
position in corporate securities, which proved to be beneficial to the Fund's
performance. After starting the year with a small mortgage-backed position of
10%, we cut back to less than 5% as rates declined into October. The position
was decreased to avoid the acceleration in prepayments which would have
resulted in principal losses for the Fund. As rates started to increase in
November, prepayment concerns abated, and we began to rebuild mortgage-backed
holdings, ending the year very close to this sector's weighting in the
Aggregate Index. The position in U.S. Treasury securities, which
underperformed corporates, was reduced over the year, as shown opposite.
The weighted average maturity and weighted average effective duration of the
portfolio as of February 1994 were slightly higher than at the beginning of
the fiscal year. The New Income Fund continues to represent a high-quality
portfolio, with a T. Rowe Price rating equivalent to AA as measured by
Standard & Poor's. While lower-rated, or noninvestment-grade, securities
produced the best returns over the past year, the Fund's policy is to purchase
securities rated investment grade by at least one public rating agency or, if
unrated, of equivalent quality as determined by T. Rowe Price's credit
analysts.
Portfolio Diversification Graph
[This is two pie charts. The first one has pieces representing Corporate Bonds
- - 53%, Mortgages - 10%, U.S. Government Bonds - 34%, and Other - 3%, for the
year ended 2/28/93. The second one has pieces representing Corporate Bonds -
68%, Mortgages - 24%, U.S. Government Bonds - 12%, and Other - 6%, for the
year ended 2/28/94.]
OUTLOOK
Fed Chairman Alan Greenspan has made clear his intention to raise short-term
interest rates from what he termed "abnormally low" levels in order to contain
inflation as the economy approaches labor and capital constraints over the
next year or two. As the Fed implements its new policy, short-term interest
rates will climb. While the reaction in the intermediate- and long-term
sectors to the Fed's tightening in February was decidedly negative, the most
recent hike was greeted more constructively by long-term investors. In sharp
contrast to the rise in yields in February, bond yields fell on March 22, the
day the Fed announced that the federal funds rate would be increased another
one-quarter of one percent. Inflation currently does not look threatening,
and, if the Fed's strategy works, bond investors should be reassured by the
attempt to contain inflation. However, commodity prices are moving up, labor
markets could start visibly tightening later this year or early next, and the
global economy is strengthening, so the bond market's nervousness is
understandable.
On balance, we look for a modest upward trend in bond yields from current
levels but expect the path to be choppy, perhaps even turbulent, as inflation
expectations wax and wane.
Respectfully submitted,
SIGNATURE
Charles P. Smith
President
March 28, 1994
<PAGE>
Duration as a Guide to Interest Rate Risk
Starting with this report, we've added a new measure to the statistical tables
that more accurately defines a fund's interest rate sensitivity. Unlike
maturity, which merely indicates when the bond repays principal, "duration"
incorporates the cash flows of all interest and principal payments over the
life of the bond to reflect the recovery of your original investment. Future
payments are discounted to reflect their present value. These payments are
then multiplied by the number of years over which they will be received to
produce a value that is expressed in years, i.e., the duration. Effective
duration is an even better measure of a bond's sensitivity to interest rate
changes because it 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 change in principal value. For example, a bond or bond fund with
a duration of five years would change roughly 5% in price if rates fell or
rose by one percentage point.
..............................................................................
STATISTICAL HIGHLIGHTS
T. ROWE PRICE NEW INCOME FUND / FEBRUARY 28, 1994
Key Statistics
Periods
Dividend Yield* Ended 2/28/94
- ------------------------------------------------------------------------------
3 Months 5.89%
12 Months 5.93
Dividend Per Share
- ---------------------------------------------------
3 Months $0.13
12 Months 0.54
Change in Per-Share Value
- ---------------------------------------------------
3 Months (From $9.31 to $9.12) -$0.19[dagger]
12 Months (From $9.24 to $9.12) -0.12[dagger]
- ------------------------------------------------------------------------------
* Dividends earned and reinvested for the periods indicated are annualized and
divided by the average daily net asset values per share for the same period.
[dagger] Includes the reduction in the share price resulting from a $0.07
capital gain distribution.
Quality Diversification
Percent of Net Assets
TRPA Quality Rating* 2/28/93 11/30/93 2/28/94
- -----------------------------------------------------------------------------
1 47% 41% 40%
2 14 17 17
3 30 30 31
4 & Below 9 12 12
- -----------------------------------------------------------------------------
WEIGHTED AVERAGE 2.0 2.2 2.2
- -----------------------------------------------------------------------------
*On a scale of 1 to 10, with Grade 1 representing highest quality.
Maturity Diversification
Percent of Net Assets
Range 2/28/93 11/30/93 2/28/94
- -----------------------------------------------------------------------------
Short-Term (0 to 1 Year) 5% 6% 10%
Short Intermediate-Term
(1+ to 5 Years) 48 52 45
Long Intermediate-Term
(5+ to 10 Years) 26 18 21
Long-Term
(over 10 Years) 21 24 24
- -----------------------------------------------------------------------------
WEIGHTED AVERAGE
MATURITY (YRS.) 8.7 8.7 8.8
WEIGHTED AVERAGE
EFFECTIVE DURATION (YRS.) 4.2 4.2 4.4
- -----------------------------------------------------------------------------
Sector Diversification*
Percent of Net Assets
2/28/93 11/30/93 2/28/94
- -----------------------------------------------------------------------------
U.S. Governments,
Agencies, &
Agency-Backed 44% 38% 37%
Banking 10 11 12
Industrial 9 9 9
Finance & Credit 6 6 5
Electric Utilities 2 5 5
Investment Dealers 7 5 5
Auto-Backed 1 4 4
Miscellaneous 5 4 3
Petroleum 2 3 3
Telephone 3 2 3
Canadian 3 3 3
- -----------------------------------------------------------------------------
*Sectors representing at least 2% of net assets of 2/28/94.
<PAGE>
Fiscal-Year Performance Comparison Graph
[A line graph compares the 2/28/94 value of a hypothetical $10,000 investment
made ten years earlier in both the New Income Fund and the Lehman Brothers
Aggregate Index. At 2/28/94, the Fund investment would have been worth $26215,
the Lehman Index investment would have been worth $30067.]
Calendar-Year Performance
Periods Ended December 31, 1993
1 Year 5 Years* 10 Years*
----------- ----------- -----------
9.58% 10.15% 10.31%
- ------------------------------------
* Average Annual Compound Total Return
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
Fiscal-Year Performance
Periods Ended February 28, 1994
1 Year 5 Years* 10 Years*
----------- ----------- -----------
5.36% 10.05% 10.12%
- ------------------------------------
* Average Annual Compound Total Return
Income return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
<PAGE>
INVESTMENT RECORD
T. ROWE PRICE NEW INCOME FUND
The table below shows the investment record of one share of the T. Rowe Price
New Income Fund, purchased at the original offering price of $10.00. Over this
time, interest rates have been volatile.
The results shown should not be considered a representation of the dividend
income or capital gain or loss which may be realized from an investment made
in the Fund today.
- ------------------------------------------------------------------------------
With
Dividends
and
Fiscal Net Capital With Capital
Year Asset Income Gain Dividends Gain Total
Ended Value Dividends Distributions/2/ Reinvested Reinvested Return
- ----------- -------- --------- ---------------- ---------- ---------- --------
12/31/73/1/ $ 9.97 - $ 9.97 $ 9.97 -0.30%
1974 9.39 $ 0.66 10.07 10.07 1.00
1975 9.66 0.79 11.27 11.27 11.92
1976 10.23 0.78 12.93 12.93 14.76
1977 10.01 0.77 13.66 13.66 5.65
1978 9.66 0.76 $0.01 14.26 14.29 4.56
1979 9.22 1.18/4/ 15.42 15.44 8.09
1980 8.35 1.13 15.86 15.88 2.86
1981 7.79 1.07 16.95 16.97 6.86
1982 8.46 1.07 21.03 21.07 24.12
2/28/83/3/ 8.56 0.17 21.71 21.75 3.23
1984 8.24 0.95/5/ 23.40 23.44 7.79
1985 8.18 0.94 26.06 26.10 11.34
1986 8.95 0.88 31.64 31.69 21.40
1987 9.17 0.75 35.17 35.23 11.17
1988 8.76 0.76 36.67 36.73 4.27
1989 8.26 0.81 38.02 38.08 3.67
1990 8.37 0.75 42.10 42.16 10.73
1991 8.60 0.70 0.01 47.00 47.12 11.77
1992 8.94 0.67 0.02 52.74 52.97 12.40
1993 9.24 0.57 58.08 58.33 10.12
1994 9.12 0.54 0.07 60.73 61.45 5.36
- ------------------------------------------------------------------------------
TOTAL $16.70 $0.11
- ------------------------------------------------------------------------------
/1/From inception 8/31/73 to 12/31/73.
/2/Includes long-term capital gain of $0.01 on 1/4/78; short-term capital gain
of $0.01 on 12/31/90; short-term capital gain of $0.02 on 12/31/91; and
long-term capital gain of $0.07 on 12/31/93.
/3/Fiscal year-end changed from December 31 to February 28; figures are for
two months from 12/31/82-2/28/83.
/4/Declaration of dividends changed from quarterly to monthly.
/5/Declaration of dividends changed from monthly to daily.
<PAGE>
<TABLE>
STATEMENT OF NET ASSETS (AMOUNTS IN THOUSANDS)
T. ROWE PRICE NEW INCOME FUND / FEBRUARY 28, 1994
Corporate Bonds - 51.7%
<CAPTION>
Face Amount Value
------------- -----------
<S> <C> <C>
BANKING - 12.5%
Banesto Delaware, Gtd. Notes, 8.25%, 7/28/02......................... $ 5,700 $ 5,815
BankAmerica, Sub. Notes, 10.00%, 2/1/03.............................. 9,625 11,530
Banponce Financial, MTN, 5.25%, 1/30/95.............................. 15,000 15,068
Barclays North America Capital, Gtd. Cap. Notes, 10.50%, 12/15/17.... 13,000 15,417
Central Fidelity Banks, 4.38%, 8/7/95................................ 15,000 14,880
Chase Manhattan, Sub. Notes, 7.75%, 11/1/99.......................... 6,500 6,881
Chemical Banking, Notes, 8.70%, 5/15/94.............................. 5,000 5,038
Citicorp, MTN, 5.70%, 2/12/96........................................ 15,000 15,168
Colonial National Bank USA Delaware, Sub. Notes, 7.00%, 8/1/03....... 5,000 4,907
First Chicago, MTN, 5.50%, 4/15/96................................... 5,000 5,031
8.20%, 11/14/96.................................................... 5,000 5,338
First Maryland Bancorp, Sub. Notes, 8.375%, 5/15/02.................. 9,000 9,845
First Security, Sub. Deb., 7.50%, 9/1/02............................. 2,800 2,841
First USA Bank Wilmington, Delaware, 4.55%, 8/23/95.................. 10,000 9,887
4.80%, 9/15/95..................................................... 5,000 4,967
Mercantile Bankshares, Sr. Notes, 6.13%, 7/15/98 (Private Placement). 5,000 5,066
Meridian Bank, Sub. Notes, 6.625%, 3/15/03........................... 6,000 5,913
Napa Valley Bancorp, Sr. Notes, 10.87%, 6/30/95...................... 5,000 5,410
PNC Funding, Sub. Notes, 6.00%, 12/15/94............................. 5,000 5,064
Scotland International, (144a), 8.80%, 1/27/04....................... 5,000 5,646
Society, MTN, 4.755%, 3/11/96........................................ 7,000 6,942
Wells Fargo & Company, MTN, 5.57%, 8/21/95........................... 10,000 10,126
5.61%, 8/18/95..................................................... 5,300 5,370
182,150
BEVERAGES - 1.0%
Coca-Cola Enterprises, Notes, 8.35%, 6/20/95......................... 11,000 11,502
Seagram (Joseph E.) & Sons, Notes, 7.00%, 4/15/08.................... 3,000 2,960
14,462
ELECTRIC UTILITIES - 4.9%
Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23......................... 3,650 3,575
Commonwealth Edison, 1st Mtg. Bonds, 6.50%, 4/15/00.................. 5,000 4,936
7.00%, 7/1/05...................................................... 8,200 8,002
7.50%, 7/1/13...................................................... 7,400 7,438
9.375%, 2/15/00.................................................... 5,000 5,608
Connecticut Light & Power, 1st Mtg. Bonds, 7.50%, 7/1/23............. 5,400 5,394
Consumers Power Company, 1st Mtg. Bonds, 6.375%, 9/15/03............. 5,000 4,714
Cooperative Utility Trust, Equip. Trust Cert., 10.70%, 9/15/17....... 2,500 3,002
Florida Power & Light, MTN, 4.85%, 6/24/96........................... 4,600 4,564
Georgia Power, 1st Mtg. Bonds, 7.625%, 3/1/23........................ 5,750 5,807
7.95%, 2/1/23...................................................... 4,800 5,014
Pacificorp, MTN, 7.12%, 8/15/02...................................... 3,900 4,026
Southern California Edison, 1st Mtg. Bonds, 9.25%, 6/15/21........... 5,000 5,449
Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23............. 3,450 3,502
71,031
FINANCE & CREDIT - 5.1%
Advanta, Notes, 5.125%, 11/15/96..................................... 10,000 9,881
American General Finance, Notes, 8.50%, 8/15/98...................... 5,000 5,460
Associates Corporation of North America, 4.50%, 2/15/96.............. 2,400 2,377
Sr. Notes, 8.625%, 11/15/94........................................ 12,000 12,353
AVCO Financial Services, MTN, 4.33%, 3/3/95.......................... 5,000 4,996
GPA Leasing USA Sub I, Equip. Trust Cert., (144a), 9.125%, 12/2/96... 9,677 9,096
Greyhound Financial, MTN, 5.75%, 7/28/95............................. 9,550 9,661
6.95%, 5/19/95..................................................... 10,000 10,255
Transamerica Finance Group, Sr. Sub. Notes, 8.30%, 5/1/95............ 10,000 10,398
74,477
GAS & GAS TRANSMISSION - 0.9%
Southern California Gas, MTN, 4.69%, 6/16/95......................... 13,000 12,999
INDUSTRIALS - 9.4%
Alcan Aluminum Ltd., Sinking Fund Deb., 9.625%, 7/15/19.............. 8,000 9,200
Chrysler Financial, MTN, 4.62%, 10/13/95............................. 10,000 9,863
Clark Equipment, MTN, 5.57%, 6/11/96................................. 5,000 5,003
Clorox, Notes, 8.80%, 7/15/01........................................ 5,000 5,623
Deere & Company, MTN, 8.47%, 3/18/96................................. 9,000 9,569
Ford Holdings, Gtd. Notes, 9.25%, 3/1/00............................. 5,000 5,693
Ford Motor Credit, MTN, 9.70%, 6/2/95................................ 5,000 5,306
General Motors Acceptance Corporation, MTN, 6.00%, 1/30/95........... 15,000 15,180
IBM Credit, MTN, 4.70%, 8/1/95....................................... 31,000 30,988
Kimberly-Clark, Notes, 8.625%, 5/1/01................................ 9,800 11,002
MCA Funding, MTN, 4.88%, 5/20/96..................................... 5,000 4,944
Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98................... 7,000 7,027
United Technologies, Deb., 8.875%, 11/15/19.......................... 4,340 4,963
Weyerhaeuser, Notes, 9.05%, 2/1/03................................... 10,600 12,041
136,402
INVESTMENT DEALERS - 5.0%
Dean Witter Discover, Notes, 6.00%, 3/1/98........................... 5,000 5,018
Goldman Sachs Group, L.P., Notes, (144a), 7.80%, 7/15/02............. 10,000 10,444
Merrill Lynch & Company, Notes, 8.375%, 5/1/94....................... 10,000 10,066
PaineWebber Group, MTN, 7.07%, 8/11/97............................... 8,000 8,270
Notes, 7.625%, 2/15/14............................................. 5,000 4,853
Sr. Notes, 9.25%, 12/15/01......................................... 5,000 5,581
Salomon, MTN, 5.50%, 1/19/95......................................... 14,500 14,603
7.50%, 6/15/99..................................................... 6,000 6,201
Shearson Lehman Brothers, Sr. Sub. Notes, 6.00%, 12/30/94............ 7,800 7,876
72,912
MISCELLANEOUS - 4.2%
Capital Cities/ABC, Notes, 8.75%, 8/15/21............................ 11,500 13,284
8.875%, 12/15/00................................................... 10,000 11,334
Dow Jones & Company, Notes, 8.40%, 12/1/94........................... 10,000 10,294
ITT, Notes, 8.375%, 3/15/96.......................................... 5,000 5,302
Kaiser Foundation Health Plan, Notes, 9.00%, 11/1/01................. 10,325 11,785
McDonalds, MTN, 8.875%, 2/18/97...................................... 4,000 4,368
Waste Management, Deb., 7.875%, 8/15/96.............................. 5,000 5,289
61,656
PETROLEUM - 3.1%
Atlantic Richfield, Deb., 8.50%, 4/1/12.............................. 6,650 7,459
BP America, Gtd. Notes, 8.50%, 4/15/01............................... 5,000 5,516
Mobil, Deb., 7.625%, 2/23/33......................................... 9,250 9,431
Texaco Capital, Deb., 7.875%, 5/1/95................................. 10,000 10,360
8.65%, 1/30/98..................................................... 11,000 12,071
44,837
RAILROADS - 0.4%
Consolidated Rail, Deb., 9.75%, 6/15/20.............................. 5,000 6,338
RETAIL - 1.5%
Dayton Hudson, Notes, 7.875%, 6/15/23................................ 5,000 4,905
9.40%, 2/15/01..................................................... 5,620 6,447
Sears, Roebuck & Company, MTN, 6.65%, 4/17/95........................ 4,500 4,597
The May Department Stores, Deb., 9.875%, 12/1/02..................... 5,000 6,047
21,996
SAVINGS & LOAN - 0.7%
World Savings & Loan Assn., MTN, 4.875%, 3/1/96...................... 10,150 10,117
TELEPHONE - 3.0%
AT&T Capital, MTN, 6.87%, 10/23/95................................... 5,000 5,160
AT&T Company, Deb., 8.125%, 7/15/24.................................. 5,000 5,367
Bellsouth Telecom, 7.875%, 8/1/32.................................... 6,400 6,503
GTE, Deb., 9.375%, 12/1/00........................................... 10,000 11,420
NYNEX Credit, MTN, (144a), 6.30%, 6/15/94............................ 4,000 4,025
6.45%, 9/15/94..................................................... 2,000 2,024
Pacific Bell, Notes, 7.125%, 3/15/26................................. 10,000 9,823
44,322
- -------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST - $725,129) 753,699
U.S. Government Mortgage-Backed Securities - 24.5%
U.S. GOVERNMENT GUARANTEED OBLIGATIONS - 21.6%
Government National Mortgage Assn., I, 6.50%, 1/15 - 2/15/24......... 2,677 2,610
7.00%, 1/15/23 - 1/15/24......................................... 29,012 29,120
7.50%, 8/15/16 - 1/15/24......................................... 68,994 71,114
8.00%, 7/15/16 - 11/15/21........................................ 29,879 31,658
8.50%, 9/15/16 - 8/15/23......................................... 25,315 26,922
9.00%, 1/15/09 - 9/15/23......................................... 12,656 13,528
9.50%, 2/15/16 - 1/15/22......................................... 58,421 63,480
10.00%, 11/15/09 - 6/15/21....................................... 49,641 54,833
II, 9.00%, 6/20/16 - 2/20/19....................................... 16,358 17,278
Graduated Payment Mortgage, I, 10.25%, 8/15/17 - 9/15/20........... 4,412 4,727
315,270
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.9%
Federal Home Loan Mortgage, 6.50%, 11/1/04........................... 88 92
7.00%, 2/1/24...................................................... 5,295 5,310
8.00%, 6/1/08...................................................... 226 236
9.00%, 3/1/21 - 5/1/22............................................. 13,376 14,243
9.75%, 12/1/17..................................................... 4,703 5,070
10.50%, 7/1/11 - 8/1/20............................................ 2,156 2,361
11.00%, 5/1/11 - 7/1/20............................................ 1,337 1,479
11.50%, 6/1/01..................................................... 32 34
Federal National Mortgage Assn., 7.80%, 12/25/04..................... 6,548 6,717
8.75%, 3/1/10...................................................... 38 41
10.50%, 7/1/09 - 4/1/22............................................ 5,442 6,041
41,624
- -------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES (COST - $356,119) 356,894
Asset-Backed Securities - 4.8%
AUTO LOANS-BACKED - 4.0%
Capital Auto Receivables Asset Trust, 4.20%, 11/15/95................ 7,500 7,500
Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98..................... 8,348 8,269
Ford Credit Grantor Trust, 4.30%, 7/15/98............................ 5,934 5,897
GMAC Grantor Trust, 4.15%, 8/15/97................................... 5,319 5,310
Olympic Automobile Receivable, 4.95%, 10/15/99....................... 4,481 4,439
Premier Auto Trust, 4.22%, 3/2/99.................................... 10,000 9,872
RCSB Grantor Trust, 7.75%, 11/15/96.................................. 2,294 2,330
8.85%, 5/15/95..................................................... 892 886
Toyota Auto Receivables, 3.90%, 8/17/98.............................. 7,600 7,536
World Omni Grantor Trust, 7.95%, 7/15/96 (Private Placement)......... 1,014 1,018
Zions Auto Trust, 4.65%, 6/15/99..................................... 4,687 4,640
57,697
CREDIT CARD RECEIVABLES-BACKED - 0.7%
Standard Credit Card Trust, Credit Card Participation Cert., 9.375%,
6/10/95............................................................ 10,000 10,572
WHOLE LOANS-BACKED - 0.1%
Home Equity Loan Remic Trust, 5.65%, 8/15/00......................... 1,531 1,518
- -------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES (COST - $69,549) 69,787
U.S. Government Obligations - 12.3%
U.S. Treasury Bonds, 7.125%, 2/15/23................................. 5,000 5,219
8.00%, 11/15/21.................................................... 96,260 110,338
8.125%, 5/15/21.................................................... 15,000 17,384
U.S. Treasury Notes, 4.625%, 8/15/95................................. 1,395 1,399
5.125%, 4/30/98.................................................... 2,150 2,124
5.50%, 9/30/97..................................................... 42,700 43,033
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST - $162,793) 179,497
U.S. $ Denominated Foreign Securities/1/ - 3.7%
British Columbia Hydro & Power, Notes, 15.50%, 11/15/11.............. 14,150 18,484
Inter-American Development Bank, Notes, 9.50%, 10/15/97.............. 2,600 2,922
KFW International Finance, Gtd., MTN, 8.20%, 6/1/06.................. 7,500 8,292
Province of Ontario, Deb., 6.125%, 6/28/00........................... 6,000 5,925
15.75%, 3/15/12.................................................... 9,000 11,975
17.00%, 11/5/11.................................................... 5,000 6,687
- -------------------------------------------------------------------------------------------------
TOTAL U.S. $ DENOMINATED FOREIGN SECURITIES (COST - $50,262) 54,285
Commercial Paper - 1.9%
Harvard University, 3.45%, 3/1/94.................................... 7,053 7,052
Pacific Bell, 3.45%, 3/1/94.......................................... 21,115 21,113
- -------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST - $28,165) 28,165
- -------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 98.9% (COST - $1,392,017).......... 1,442,327
- -------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 1.1%................................. 15,632
NET ASSETS CONSISTING OF:
Accumulated realized gains/losses - net of distributions............. 10,964
Unrealized appreciation of investments............................... 50,310
Paid-in-capital applicable to 159,860,044 shares of $1.00 par value
capital stock outstanding; 300,000,000 shares authorized........... 1,396,685
-------------
NET ASSETS - 100.0%.................................................. $1,457,959
-------------
-------------
NET ASSET VALUE PER SHARE............................................ $9.12
-------------
-------------
- -------------------------------------------------------------------------------------------------
<FN>
/1/ Marketable securities (payable in U.S. dollars) issued or guaranteed by a
foreign government or community.
MTN - Medium Term Note
144a - Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to
qualified institutional buyers.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Operations
T. Rowe Price New Income Fund / Year Ended February 28, 1994
Amounts in Thousands
---------------------------
INVESTMENT INCOME
Interest income................................. $102,703
Expenses
Investment management fees.................... $ 7,750
Shareholder servicing fees & expenses......... 4,439
Custodian and accounting fees & expenses...... 323
Prospectus & shareholder reports.............. 166
Registration fees & expenses.................. 52
Legal & auditing fees......................... 33
Directors' fees & expenses.................... 27
Miscellaneous................................. 35
------------
Total expenses................................ 12,825
------------
Net investment income........................... 89,878
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain............................... 24,262
Change in unrealized appreciation or
depreciation.................................. (32,142)
------------
Net loss on investments......................... (7,880)
------------
INCREASE IN NET ASSETS FROM OPERATIONS.......... $ 81,998
------------
------------
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of Changes in Net Assets
T. Rowe Price New Income Fund
Year Ended Year Ended
Feb. 28, 1994 Feb. 28, 1993
------------- -------------
Amounts in Thousands
----------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income.......................... $ 89,878 $ 89,940
Net realized gain on investments............... 24,262 14,333
Change in unrealized appreciation or
depreciation of investments.................. (32,142) 34,028
------------ -------------
Increase in net assets from operations......... 81,998 138,301
------------ -------------
Distributions to shareholders
Net investment income.......................... (89,878) (89,986)
Net realized gain on investments............... (11,782) -
------------ -------------
Decrease in net assets from distributions
to shareholders.............................. (101,660) (89,986)
------------ -------------
Capital share transactions
Sold 34,796 and 50,001 shares.................. 323,889 451,404
Distributions reinvested of 9,735 and 8,737
shares....................................... 90,466 78,877
Redeemed 49,912 and 39,701 shares.............. (464,033) (357,971)
------------ -------------
Increase (decrease) in net assets from capital
share transactions........................... (49,678) 172,310
------------ -------------
Total increase (decrease)........................ (69,340) 220,625
NET ASSETS
Beginning of year.............................. 1,527,299 1,306,674
------------ -------------
End of year.................................... $1,457,959 $1,527,299
------------ -------------
------------ -------------
- -----------------------------------------------------------------------------
Notes to Financial Statements
T. Rowe Price New Income Fund / February 28, 1994
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price New Income Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by, or under the supervision of, the officers of
the Fund, as authorized by the Board of Directors.
<PAGE>
B) Premiums and Discounts - Premiums and discounts on debt securities are
amortized for both financial and tax reporting purposes.
C) Other - Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on an identified cost basis. Distributions to shareholders are
recorded by the Fund on the ex-dividend date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles.
D) Accounting Change - Effective as of the beginning of the year, the Fund
adopted a recently issued accounting standard related to shareholder
distributions. This change resulted in a reclassification to paid-in-capital
of permanent differences between tax and financial reporting of net investment
income and net realized gains/losses. The cumulative effect of this change as
of February 28, 1993, increased Accumulated net investment income - net of
distributions by $46,000, increased Accumulated net realized gains/losses -
net of distributions by $793,000 and decreased Paid-in-capital by $839,000.
The results of operations, shareholder distributions and net assets were not
affected by this change.
NOTE 2 - FINANCIAL INSTRUMENTS
As a part of its investment program, the Fund loans its portfolio securities
to brokers. The nature and risk of these loans and the reasons for using them
are set forth more fully in the Fund's Prospectus and Statement of Additional
Information. Although risk is mitigated by obtaining collateral, the Fund
could experience a delay in recovering its securities and possibly incur a
capital loss if the borrower fails to return them. At February 28, 1994, the
market value of securities on loan to brokers was $69,531,000 for which the
Fund has collateral of $72,067,000, consisting of cash and U.S. Treasury
securities.
Purchases and sales of portfolio securities, other than short-term and U.S.
Government securities, aggregated $386,154,000 and $332,772,000. Purchases and
sales of U.S. Government securities aggregated $509,553,000 and $648,331,000
respectively, for the year ended February 28, 1994.
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
At February 28, 1994, the aggregate cost of investments for federal income
tax and financial reporting purposes was $1,392,017,000 and net unrealized
appreciation aggregated $50,310,000, of which $57,338,000 related to
appreciated investments and $7,028,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.15% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at February 28,
1994, was 0.34%, and for the year then ended was 0.35%. The Fund pays a pro
rata portion of the Group Fee based on the ratio of the Fund's net assets to
those of the Group.
<PAGE>
T. Rowe Price Services, Inc. (TRPS) and Retirement Plan Services, Inc. (RPS)
are wholly owned subsidiaries of the Manager. TRPS provides transfer and
dividend disbursing agent functions and shareholder services for all accounts.
RPS provides subaccounting and recordkeeping services for certain retirement
accounts invested in the Fund. The Manager, under a separate agreement,
calculates the daily share price and maintains the financial records of the
Fund. The Fund is one of several T. Rowe Price mutual funds (the Underlying
Funds) in which the T. Rowe Price Spectrum Income Fund (Spectrum) invests. In
accordance with an Agreement between Spectrum, the Underlying Funds, the
Manager and TRPS, expenses from the operation of Spectrum are borne by the
Underlying Funds based on each Underlying Fund's proportionate share of assets
owned by Spectrum. For the year ended February 28, 1994, the Fund incurred
fees totalling approximately $4,072,000 for these services provided by related
parties. At February 28, 1994, investment management and service fees payable
were $1,024,000.
<TABLE>
Financial Highlights
T. Rowe Price New Income Fund
<CAPTION>
For a share outstanding throughout each year ended
---------------------------------------------------------------------
Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1994 1993 1992 1991 1990
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.... $9.24 $8.94 $8.60 $8.37 $8.26
------ ------ ------ ------ ------
Investment Activities
Net investment income............... 0.54 0.57 0.67 0.70 0.75
Net realized and unrealized gain (0.05) 0.30 0.36 0.24 0.12
(loss)................................ ------ ------ ------ ------ ------
Total from Investment Activities...... 0.49 0.87 1.03 0.94 0.87
------ ------ ------ ------ ------
Distributions
Net investment income............... (0.54) (0.57) (0.67) (0.70) (0.75)
Net realized gain................... (0.07) - (0.02) (0.01) (0.01)
------ ------ ------ ------ ------
Total Distributions................... (0.61) (0.57) (0.69) (0.71) (0.76)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR.......... $9.12 $9.24 $8.94 $8.60 $8.37
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return.......................... 5.36% 10.12% 12.40% 11.77% 10.73%
Ratio of Expenses to Average
Net Assets.......................... 0.82% 0.84% 0.87% 0.88% 0.86%
Ratio of Net Investment Income
to Average Net Assets............... 5.77% 6.36% 7.64% 8.33% 8.85%
Portfolio Turnover Rate............... 58.3% 85.8% 49.7% 20.7% 51.1%
Net Assets, End of Year
(in thousands)...................... $1,457,959 $1,527,299 $1,306,674 $1,130,857 $992,566
Number of Shareholder Accounts,
End of Year......................... 47,000 52,000 50,000 50,000 49,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of
T. Rowe Price New Income Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the selected per
share data and information (which appears under the heading "Financial
Highlights") present fairly, in all material respects, the financial position
of T. Rowe Price New Income Fund, Inc. at February 28, 1994, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the selected per share data and
information for each of the five years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
selected per share data and information (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1994 by correspondence with
custodians and brokers and, where appropriate, the application of alternative
auditing procedures for unsettled security transactions, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
March 17, 1994
Officers and Directors
George J. Collins, Chairman Henry H. Hopkins, Vice President
Charles P. Smith, President/Director Heather R. Landon, Vice President
Robert P. Black, Director James M. McDonald, Vice President
Calvin W. Burnett, Director Edmund M. Notzon, Vice President
Anthony W. Deering, Director Joan R. Potee, Vice President
Carter O. Hoffman, Vice President/ Robert M. Rubino, Vice President
Director Charles H. Salisbury, Jr., Vice
F. Pierce Linaweaver, Director President
James S. Riepe, Vice President/Director Peter Van Dyke, Vice President
John Sagan, Director Lenora V. Hornung, Secretary
John G. Schreiber, Director Carmen F. Deyesu, Treasurer
Robert P. Campbell, Vice President David S. Middleton, Controller
