<PAGE>
FELLOW SHAREHOLDERS
Before we review the financial markets and your Fund's performance, we want to
mention that you have received two consecutive annual reports because your
Fund's fiscal year-end was recently changed from February 28 to May 31.
MARKET ENVIRONMENT
Interest rates rose sharply during the three months ended May 31. Yields on
three-month Treasury bills increased approximately 80 basis points and those
on 30-year Treasury bonds about 75 basis points. For the 12-month period, the
increases were 113 basis points and 44 basis points, respectively. Since
yields on short and intermediate maturities rose more than on long maturities,
the yield curve has flattened.
Although the economy has slowed from the torrid pace of 1993's fourth
quarter, it continues to perform very well. In an attempt to contain inflation
by keeping the economy from overheating, the Federal Reserve started to
tighten credit in February by pushing the federal funds rate higher. In four
steps over four months, this basic money market rate was raised from 3% to
4.25%.
INTEREST RATE LEVELS CHART
A line graph compares the yields of the 30-Year Treasury Bond, the 5-Year
Treasury Note, the 1-Year Treasury Bill, and the federal funds rate from
5/31/93 to 5/31/94.
PERFORMANCE AND STRATEGY REVIEW
In this difficult environment, your Fund provided a modest positive return for
the 12-month period fell into negative territory for the quarter. While these
numbers may not seem like a cause for cheering, they were significantly better
than the average returns of our peer category and also the benchmark index,
shown below.
PERFORMANCE COMPARISON
Periods Ended
5/31/94
3 Months 12 Months
-------- ----------
New Income Fund -2.84% 1.40%
Lehman Brothers
Aggregate Bond Index -3.26 0.71
Lipper Average of Corporate
Bond Funds - A Rated -4.03 0.34
- ------------------------------------------------
After making no real change in the Fund's 4.4 year duration for many months
prior to the start of the quarter, we began raising it as interest rates rose
and bond prices fell. We believe that the major move in long-term rates is
behind us and want to take advantage of the new, higher yield levels as well
as to increase the portfolio's potential for appreciation if rates should come
down a bit. The weighted average quality of the portfolio was little changed
over the 12-month period and remains high at AA.
The major sector change in the portfolio was a large increase in
mortgage-backed securities, as you can see in the chart on the next page. From
9% in May a year ago, our mortgage position soon dropped to 5% as we sought to
reduce our exposure to potential losses due to prepayments. (When interest
rates fall, prices of mortgage securities frequently rise above par. Investors
paying these "premium" prices suffer a loss when homeowners, perhaps seeking
to refinance at lower rates, prepay their mortgages at par.) As rates began to
rise in November of 1993 and prepayment concerns faded along with the pace of
refinancings, we began to rebuild the mortgage-backed sector. As of May 31, it
represented almost one-third of net assets.
<PAGE>
PORTFOLIO DIVERSIFICATION CHART
Two pie charts showing percent invested in mortgages, corporate bonds, U.S.
Government bonds, and Other for 5/31/93 to 5/31/94.
OUTLOOK
The rise in interest rates along with higher taxes should dampen the pace of
economic growth during the balance of the year. However, consumer sentiment
has been buoyed by the falling unemployment rate and gains in personal income,
and interest rates are still relatively low compared with the 1980s.
Therefore, any slowdown should be gradual. If economic growth is around a 3%
rate in the second half, we expect the Federal Reserve to tighten monetary
policy a bit further before the year is out.
The magnified response of note and bond yields to the initial phase of Fed
tightening is probably over, to judge from the reaction of bond yields to the
tightening in May. A flattening of the yield curve with short-term rates
rising more than long-term yields is typical of this phase of the interest
rate cycle. Nevertheless, bond investors are highly sensitive to signs of
inflation and bond markets will remain volatile.
Respectfully submitted,
/signature/Charles P. Smith
Charles P. Smith
President and Chairman of the
Investment Advisory Committee
June 17, 1994
<PAGE>
STATISTICAL HIGHLIGHTS
T. ROWE PRICE NEW INCOME FUND / MAY 31, 1994
KEY STATISTICS
Periods
Dividend Yield* Ended 5/31/94
- ------------------------------------------------------------
3 Months 6.46%
12 Months 6.06
Dividend Per Share
- -------------------------------
3 Months $0.14
12 Months 0.54
Change in Per-Share Value
- -------------------------------
3 Months (From $9.12 to $8.65) -$0.47[dagger]
12 Months (From $9.19 to $8.65) -0.54[dagger][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.
[dagger][dagger] Includes the reductions in the share prices resulting from
$0.14 in capital gain distributions.
QUALITY DIVERSIFICATION
Percent of Net Assets
TRPA Quality Rating* 5/31/93 2/28/94 5/31/94
- --------------------------------------------
1 39% 40% 45%
2 21 17 13
3 29 31 28
4 & Below 11 12 14
- --------------------------------------------
WEIGHTED AVERAGE 2.2 2.2 2.1
- --------------------------------------------
*On a scale of 1 to 10, with Grade 1 representing highest quality.
MATURITY DIVERSIFICATION
Percent of Net Assets
Range 5/31/93 2/28/94 5/31/94
- ---------------------------------------------------
Short-Term (0 to 1 Year) 7% 10% 6%
Short Intermediate-Term
(1+ to 5 Years) 47 45 43
Long Intermediate-Term
(5+ to 10 Years) 24 21 28
Long-Term
(Over 10 Years) 22 24 23
- --------------------------- ------- ------- -------
WEIGHTED AVERAGE
MATURITY (YRS.) 8.3 8.8 9.1
WEIGHTED AVERAGE
EFFECTIVE DURATION (YRS.) 4.4 4.4 4.9
- ---------------------------------------------------
SECTOR DIVERSIFICATION*
Percent of Net Assets
5/31/93 2/28/94 5/31/94
- ---------------------------------------------------
U.S. Governments,
Agencies, &
Agency-Backed 40% 37% 45%
Banking 11 12 14
Industrial 8 9 8
Electric Utilities 4 5 6
Finance & Credit 7 5 4
Auto-Backed 1 4 4
Investment Dealers 6 5 4
Miscellaneous 5 3 3
Telephone 3 3 3
U.S. $ Denominated
Foreign Securities 4 4 3
Petroleum 3 3 3
- ---------------------------------------------------
*Sectors representing at least 2% of net assets on 5/31/94.
<PAGE>
FISCAL-YEAR PERFORMANCE COMPARISON CHART
A line graph compares the 5/31/94 value of a hypothetical $10,000 investment
made ten years earlier in both the New Income Fund and the Lehman Brothers
Aggregate Index. At 5/31/94, the Fund investment would have been worth $25333,
the Lehman Index investment would have been worth $30424.
FISCAL-YEAR PERFORMANCE
New Income Fund
Periods Ended May 31, 1994
Since Inception
1 Year 5 Years* (8/31/73)*
------ -------- ---------------
1.40% 8.49% 8.99%
- --------------------------------
* 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 Gains Total
Ended Value Dividends Distributions/2/ Reinvested Reinvested/2/ Return
- ------------ ------ --------- ---------------- ---------- ------------- ------
[S] [C] [C] [C] [C] [C] [C]
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 1.184 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 0.955 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
5/31/946 8.65 0.14 0.07 58.54 59.71 -2.84
- ------------------------------------------------------------------------------
TOTAL $16.84 $0.18
- ------------------------------------------------------------------------------
/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;
long-term capital gain of $0.07 on 12/31/93; and long-term capital gain
of $0.07 on 3/31/94.
/3/ Fiscal year-end changed from December 31 to February 28; figures are for
two months from 1/1/83-2/28/83.
/4/ Declaration of dividends changed from quarterly to monthly.
/5/ Declaration of dividends changed from monthly to daily.
/6/ Fiscal year-end changed from February 28 to May 31; figures are for three
months from 3/1/94-5/31/94.
<PAGE>
STATEMENT OF NET ASSETS (AMOUNTS IN THOUSANDS)
T. ROWE PRICE NEW INCOME FUND / MAY 31, 1994
<TABLE>
<CAPTION>
Corporate Bonds & Notes---48.8%
Face
Amount Value
---------- ----------
<S> <C> <C>
BANKING---13.7%
Banesto Delaware, Gtd. Notes, 8.25%, 7/28/02 .................................................. $5,700 $5,481
BankAmerica, Sub. Notes, 10.00%, 2/1/03 ....................................................... 9,625 10,793
Banponce Financial, MTN, 5.25%, 1/30/95 ....................................................... 15,000 14,958
Banque Paribas, 8.35%, 6/15/07 ................................................................ 7,500 7,519
Barclays North America Capital, Gtd. Cap. Notes, 10.50%, 12/15/17 ............................. 13,000 14,763
Central Fidelity Banks, 4.38%, 8/7/95 ......................................................... 15,000 14,511
Chase Manhattan, Sub. Notes, 7.75%, 11/1/99 ................................................... 6,500 6,548
8.00%, 5/15/04 .............................................................................. 9,000 8,904
Citicorp, MTN, 5.70%, 2/12/96 ................................................................. 15,000 14,881
Colonial National Bank USA Delaware, Sub. Notes, 7.00%, 8/1/03 ................................ 5,000 4,596
First Chicago, MTN, 5.50%, 4/15/96 ............................................................ 5,000 4,927
8.20%, 11/14/96 ............................................................................. 5,000 5,172
First Security, Sub. Deb., 7.50%, 9/1/02 ...................................................... 2,800 2,673
First USA Bank Wilmington, Delaware, 4.55%, 8/23/95 ........................................... 10,000 9,616
4.80%, 9/15/95 .............................................................................. 5,000 4,832
Great Western Bank, Sub. Notes, 10.25%, 6/15/00 ............................................... 8,860 9,823
Hartford National, Sub. Capital Notes, 9.85%, 6/1/99 .......................................... 5,000 5,454
Mercantile Bankshares, Sr. Notes, 6.13%, 7/15/98 (Private Placement) .......................... 5,000 4,978
Napa Valley Bancorp, Sr. Notes, 10.87%, 6/30/95 ............................................... 5,000 5,315
Scotland International, (144a), 8.80%, 1/27/04 ................................................ 10,000 10,494
Society, MTN, Zero Coupon, 3/11/96 ............................................................ 7,000 6,821
Wells Fargo & Company, MTN, 5.57%, 8/21/95 .................................................... 10,000 9,966
5.61%, 8/18/95 .............................................................................. 5,300 5,285
188,310
BEVERAGES---1.0%
Coca-Cola Enterprises, Notes, 8.35%, 6/20/95 .................................................. 11,000 11,263
Seagram (Joseph E.) & Sons, Notes, 7.00%, 4/15/08 ............................................. 3,000 2,679
13,942
ELECTRIC UTILITIES---5.5%
Alabama Power, 1st Mtg. Bonds, 7.75%, 2/1/23 .................................................. 3,650 3,381
Commonwealth Edison, 1st Mtg. Bonds, 6.50%, 4/15/00 ........................................... 5,000 4,669
7.00%, 7/1/05 ............................................................................... 8,200 7,370
7.50%, 7/1/13 ............................................................................... 7,400 6,675
9.375%, 2/15/00 ............................................................................. 5,000 5,313
Connecticut Light & Power, 1st Mtg. Bonds, 7.50%, 7/1/23 ...................................... 5,400 4,739
Consumers Power Company, 1st Mtg. Bonds, 6.375%, 9/15/03 ...................................... 5,000 4,393
Cooperative Utility Trust, Equip. Trust Cert., 10.70%, 9/15/17 ................................ 2,500 2,878
Florida Power & Light, MTN, 4.85%, 6/24/96 .................................................... 4,600 4,458
Georgia Power, 1st Mtg. Bonds, 7.625%, 3/1/23 ................................................. 5,750 5,290
7.95%, 2/1/23 ............................................................................... 4,800 4,589
Gulf States Utilities, 1st Mtg. Bonds, 5.375%, 2/1/97 ......................................... 4,000 3,665
Long Island Lighting Company, 1st Mortgage, 5.50%, 4/1/97 ..................................... 5,500 5,169
Pacificorp, MTN, 7.12%, 8/15/02 ............................................................... 3,900 3,769
Southern California Edison, 1st Mtg. Bonds, 9.25%, 6/15/21 .................................... 5,000 5,347
Texas Utilities Electric, 1st Mtg. Bonds, 7.875%, 3/1/23 ...................................... 3,450 3,167
74,872
FINANCE & CREDIT---4.4%
Advanta, Notes, 5.125%, 11/15/96 .............................................................. 10,000 9,596
American General Finance, Notes, 8.50%, 8/15/98 ............................................... 5,000 5,218
Associates Corporation of North America, 4.50%, 2/15/96 ....................................... 2,400 2,326
AVCO Financial Services, MTN, 4.33%, 3/3/95 ................................................... 5,000 4,962
GPA Leasing USA Sub I, Equip. Trust Cert., (144a), 9.125%, 12/2/96 ............................ 9,677 8,624
Greyhound Financial, MTN, 5.75%, 7/28/95 ...................................................... 9,550 9,506
6.95%, 5/19/95 .............................................................................. 10,000 10,096
Transamerica Finance Group, Sr. Sub. Notes, 8.30%, 5/1/95 ..................................... 10,000 10,217
60,545
GAS & GAS TRANSMISSION---0.9%
Southern California Gas, MTN, 4.69%, 6/16/95 .................................................. 13,000 12,859
INDUSTRIALS---8.2%
Chrysler Financial, MTN, 4.62%, 10/13/95 ...................................................... 10,000 9,713
Clark Equipment, MTN, 5.57%, 6/11/96 .......................................................... 5,000 4,889
Clorox, Notes, 8.80%, 7/15/01 ................................................................. 5,000 5,343
Deere & Company, MTN, 8.47%, 3/18/96 .......................................................... 9,000 9,327
Ford Holdings, Gtd. Notes, 9.25%, 3/1/00 ...................................................... 5,000 5,381
Ford Motor Credit, MTN, 9.70%, 6/2/95 ......................................................... 5,000 5,185
General Motors Acceptance Corporation, MTN, 6.00%, 1/30/95 .................................... 15,000 15,037
IBM Credit, MTN, 4.70%, 8/1/95 ................................................................ 31,000 30,567
MCA Funding, MTN, 4.88%, 5/20/96 .............................................................. 5,000 4,854
Qantas Airways, Sr. Notes, (144a), 6.625%, 6/30/98 ............................................ 7,000 6,743
United Technologies, Deb., 8.875%, 11/15/19 ................................................... 4,340 4,598
Weyerhaeuser, Notes, 9.05%, 2/1/03 ............................................................ 10,600 11,304
112,941
INVESTMENT DEALERS---3.5%
Goldman Sachs Group, L.P., Notes, (144a), 7.80%, 7/15/02 ...................................... 10,000 9,831
PaineWebber Group, MTN, 7.07%, 8/11/97 ........................................................ 8,000 7,969
Notes, 7.625%, 2/15/14 ...................................................................... 5,000 4,418
Sr. Notes, 9.25%, 12/15/01 .................................................................. 5,000 5,267
Salomon, MTN, Zero Coupon, 6/15/99 ............................................................ 6,000 6,007
5.50%, 1/19/95 .............................................................................. 14,500 14,489
47,981
MISCELLANEOUS---3.2%
Capital Cities/ABC, Notes, 8.75%, 8/15/21 ..................................................... 11,500 12,143
8.875%, 12/15/00 ............................................................................ 10,000 10,867
ITT, Notes, 8.375%, 3/15/96 ................................................................... 5,000 5,149
Kaiser Foundation Health Plan, Notes, 9.00%, 11/1/01 .......................................... 10,325 11,083
Waste Management, Deb., 7.875%, 8/15/96 ....................................................... 5,000 5,117
44,359
PETROLEUM---2.7%
Atlantic Richfield, Deb., 8.50%, 4/1/12 ....................................................... 6,650 6,816
BP America, Gtd. Notes, 8.50%, 4/15/01 ........................................................ 5,000 5,226
Mobil, Deb., 7.625%, 2/23/33 .................................................................. 9,250 8,613
Texaco Capital, Deb., 7.875%, 5/1/95 .......................................................... 10,000 10,180
8.65%, 1/30/98 .............................................................................. 6,000 6,309
37,144
RAILROADS---0.4%
Consolidated Rail, Deb., 9.75%, 6/15/20 ....................................................... 5,000 5,765
RETAIL---1.5%
Dayton Hudson, Notes, 7.875%, 6/15/23 ......................................................... 5,000 4,613
9.40%, 2/15/01 .............................................................................. 5,620 6,108
Sears, Roebuck & Company, MTN, 6.65%, 4/17/95 ................................................. 4,500 4,532
The May Department Stores, Deb., 9.875%, 12/1/02 .............................................. 5,000 5,622
20,875
SAVINGS & LOAN---0.7%
World Savings & Loan Assn., MTN, 4.875%, 3/1/96 ............................................... 10,150 9,902
TELEPHONE---3.1%
AT&T, 8.125%, 7/15/24 ......................................................................... 5,000 4,945
AT&T Capital, MTN, 6.87%, 10/23/95 ............................................................ 5,000 5,055
Bellsouth Telecom, 7.875%, 8/1/32 ............................................................. 6,400 6,121
GTE, Deb., 9.375%, 12/1/00 .................................................................... 10,000 10,827
NYNEX Credit, MTN, (144a), 6.30%, 6/15/94 ..................................................... 4,000 4,004
6.45%, 9/15/94 .............................................................................. 2,000 2,009
Pacific Bell, 6.625%, 10/15/34 ................................................................ 11,200 9,099
42,060
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES (COST---$674,015) 671,555
U.S. Government Mortgage-Backed Securities---29.5%
U.S. GOVERNMENT GUARANTEED OBLIGATIONS---25.3%
Government National Mortgage Assn., I, 6.50%, 1/15 - 2/15/24 .................................. 2,668 2,406
7.00%, 1/15/23 - 3/15/24 .................................................................. 32,742 30,639
7.50%, 8/15/16 - 1/15/24 .................................................................. 77,749 75,175
8.00%, 7/15/16 - 9/15/22 .................................................................. 39,898 39,797
8.50%, 9/15/16 - 5/15/24 .................................................................. 23,336 23,768
9.00%, 1/15/09 - 5/15/20 .................................................................. 16,539 17,166
9.50%, 2/15/16 - 1/15/22 .................................................................. 59,937 63,347
10.00%, 11/15/09 - 6/15/21 ................................................................ 52,367 56,113
11.00%, 1/15/10 - 10/15/17 ................................................................ 18,600 21,030
II, 9.00%, 6/20/16 - 5/20/22 ................................................................ 13,739 14,081
Graduated Payment Mortgage, I, 10.25%, 8/15/17 - 9/15/20 .................................... 3,719 3,879
347,401
U.S. GOVERNMENT AGENCY OBLIGATIONS---4.2%
Federal Home Loan Mortgage, 6.50%, 11/1/04 - 6/1/24 ........................................... 12,859 11,774
7.00%, 2/1/24 ............................................................................... 5,264 4,978
7.50%, 5/1/24 - 6/1/24 ...................................................................... 10,883 10,594
8.00%, 6/1/08 ............................................................................... 211 211
9.00%, 3/1/21 - 5/1/22 ...................................................................... 11,418 11,778
9.75%, 12/1/17 .............................................................................. 4,338 4,548
10.50%, 2/1/01 - 8/1/20 ..................................................................... 2,023 2,192
11.00%, 5/1/11 - 7/1/20 ..................................................................... 1,213 1,336
11.50%, 6/1/01 .............................................................................. 28 30
Federal National Mortgage Assn., 7.80%, 12/25/04 .............................................. 4,545 4,583
8.75%, 3/1/10 ............................................................................... 34 35
10.50%, 7/1/09 - 4/1/22 ..................................................................... 4,947 5,440
57,499
- ---------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES (COST---$419,413) 404,900
Asset-Backed Securities---4.4%
AUTO LOANS-BACKED---3.6%
Capital Auto Receivables Asset Trust, 4.20%, 11/15/95 ......................................... 7,190 7,145
Daimler-Benz Auto Grantor Trust, 3.90%, 10/15/98 .............................................. 7,209 7,056
Ford Credit Grantor Trust, 4.30%, 7/15/98 ..................................................... 5,252 5,141
GMAC Grantor Trust, 4.15%, 3/15/98 ............................................................ 4,375 4,323
Olympic Automobile Receivable, 4.95%, 10/15/99 ................................................ 3,933 3,832
Premier Auto Trust, 4.22%, 3/2/99 ............................................................. 10,000 9,665
RCSB Grantor Trust, 7.75%, 11/15/96 ........................................................... 1,827 1,839
Toyota Auto Receivables, 3.90%, 8/17/98 ....................................................... 6,493 6,359
Zions Auto Trust, 4.65%, 6/15/99 .............................................................. 3,883 3,825
49,185
CREDIT CARD RECEIVABLES-BACKED---0.7%
Standard Credit Card Trust, Credit Card Participation Cert., 9.375%, 8/10/96 .................. 10,000 10,325
WHOLE LOANS-BACKED---0.1%
Home Equity Loan Remic Trust, 5.65%, 11/15/14 ................................................. 1,325 1,279
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES (COST---$61,414) 60,789
U.S. Government Obligations---15.0%
U.S. Treasury Bonds, 6.25%, 8/15/23 ........................................................... 15,750 13,535
7.875%, 2/15/21 ............................................................................. 35,000 36,094
8.00%, 11/15/21 ............................................................................. 42,160 44,255
8.125%, 5/15/21 ............................................................................. 15,000 15,907
U.S. Treasury Notes, 5.875%, 2/15/04 .......................................................... 125 114
7.25%, 5/15/04 .............................................................................. 95,000 95,593
- ---------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (COST---$203,957) 205,498
U.S. $ Denominated Foreign Securities/1/---3.2%
British Columbia Hydro & Power, Notes, 15.50%, 11/15/11 ....................................... 14,150 17,692
Inter-American Development Bank, Notes, 9.50%, 10/15/97 ....................................... 2,600 2,800
Province of Ontario, Deb., 6.125%, 6/28/00 .................................................... 6,000 5,610
15.75%, 3/15/12 ............................................................................. 9,000 11,451
17.00%, 11/5/11 ............................................................................. 5,000 6,391
- ---------------------------------------------------------------------------------------------------------------------
TOTAL U.S. $ DENOMINATED FOREIGN SECURITIES (COST---$42,648) 43,944
Commercial Paper---0.2%
BASF, 4.25%, 6/22/94 .......................................................................... 3,290 3,277
Harvard University, 4.25%, 6/1/94 ............................................................. 14 14
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (COST---$3,291) 3,291
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES---101.1% (COST $1,404,738) .................................... 1,389,977
- ---------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities---(1.1)% (14,921)
----------
NET ASSETS CONSISTING OF:
Accumulated net investment income - net of distributions ...................................... 22
Accumulated realized gains/losses - net of distributions ...................................... 872
Unrealized depreciation of investments ........................................................ (14,761)
Paid-in-capital applicable to 158,991,275 shares of $1.00 par value capital stock outstanding;
300,000,000 shares authorized ............................................................... 1,388,923
----------
NET ASSETS---100.0% ........................................................................... $1,375,056
----------
----------
NET ASSET VALUE PER SHARE ..................................................................... $8.65
----------
----------
- ---------------------------------------------------------------------------------------------------------------------
<FN>/1/Marketable securities (payable in U.S. dollars) issued or guaranteed by
a foreign government or community.
MTN - Medium Term Notes
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
<TABLE>
<CAPTION>
Three Months Ended
May 31, 1994 Year Ended
[double dagger] Feb. 28, 1994
-----------------------------------
Amounts in Thousands
-----------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest income ................................ $25,545 $102,703
-------- --------
Expenses
Investment management fees.................... 1,748 7,750
Shareholder servicing fees & expenses......... 940 4,439
Custodian and accounting fees & expenses...... 79 323
Prospectus & shareholder reports.............. 32 166
Legal & auditing fees......................... 15 33
Registration fees & expenses.................. 10 52
Directors' fees & expenses.................... 5 27
Miscellaneous expenses........................ 9 35
-------- --------
Total expenses................................ 2,838 12,825
-------- --------
Net investment income........................... 22,707 89,878
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain............................... 1,015 24,262
Change in unrealized appreciation or
depreciation.................................. (65,071) (32,142)
-------- --------
Net loss on investments......................... (64,056) (7,880)
-------- --------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS...................................... $(41,349) $81,998
-------- --------
-------- --------
- ------------------------------------------------------------------------------------
[double dagger]The Fund's fiscal year-end was changed to May 31.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
T. ROWE PRICE NEW INCOME FUND
</TABLE>
<TABLE>
<CAPTION>
Three
Months Ended
May 31, 1994 Year Ended
[double --------------------------------------
dagger] Feb. 28, 1994 Feb. 28, 1993
------------ ------------- -------------
Amounts in Thousands
---------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income.................................. $22,707 $89,878 $89,940
Net realized gain on investments....................... 1,015 24,262 14,333
Change in unrealized appreciation or depreciation of (65,071) (32,142) 34,028
investments.......................................... ------------ ------------- -------------
Increase (decrease) in net assets from
operations........................................... (41,349) 81,998 138,301
------------ ------------- -------------
Distributions to shareholders
Net investment income.................................. (22,682) (89,878) (89,986)
Net realized gain on investments....................... (11,110) (11,782) -
------------ ------------- -------------
Decrease in net assets from distributions to
shareholders......................................... (33,792) (101,660) (89,986)
------------ ------------- -------------
Capital share transactions/1/
Sold................................................... 60,807 323,889 451,404
Distributions reinvested............................... 30,328 90,466 78,877
Redeemed............................................... (98,897) (464,033) (357,971)
------------ ------------- -------------
Increase (decrease) in net assets from capital share
transactions......................................... (7,762) (49,678) 172,310
------------ ------------- -------------
Total increase (decrease)................................ (82,903) (69,340) 220,625
NET ASSETS
Beginning of period.................................... 1,457,959 1,527,299 1,306,674
------------ ------------- -------------
End of period.......................................... $1,375,056 $1,457,959 $1,527,299
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
/1/Share transactions
Sold................................................... 6,891 shs. 34,796 shs. 50,001 shs.
Distributions reinvested............................... 3,456 9,735 8,737
Redeemed............................................... (11,216) (49,912) (39,701)
------------ ------------- -------------
Increase (decrease) in shares outstanding.............. (869) shs. (5,381) shs. 19,037 shs.
------------ ------------- -------------
------------ ------------- -------------
- --------------------------------------------------------------------------------------------------------------------
<FN>
[double dagger]The Fund's fiscal year-end was changed to May 31.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
T. ROWE PRICE NEW INCOME FUND / MAY 31, 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.
Effective March 1, 1994, the fiscal year-end of the Fund changed from February
28 to May 31.
A) Security valuation - Debt securities are generally traded in the
over-the-counter market. Investments in securities with remaining maturities
of one year or more are stated at fair value as furnished by dealers who make
markets in such securities or by an independent pricing service, which
considers yield or price of bonds of comparable quality, coupon, maturity, and
type, as well as prices quoted by dealers who make markets in such securities.
Securities with remaining maturities less than one year are stated at fair
value which is determined by using a matrix system that establishes a value
for each security based on money market yields.
<PAGE>
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by, or under the supervision of, the officers of
the Fund, as authorized by the Board of Directors.
B) 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.
NOTE 2 - FINANCIAL INSTRUMENTS
As a part of its investment program, the Fund engages in the following
activities, the nature and risk of which are set forth more fully in the
Fund's Prospectus and Statement of Additional Information.
A) Securities Lending - To earn additional income, the Fund lends its
securities to approved brokers. At May 31, 1994, the market value of
securities on loan was $179,886,000 for which the Fund was fully
collateralized by cash. Although the risk is mitigated by the collateral, the
Fund could experience a delay in recovering its securities and possibly
experience a capital loss if the borrower fails to return them.
B) Other - Purchases and sales of portfolio and U.S. Government securities
excluding short-term were as follows:
Three
Months Ended Year Ended
May 31, 1994 Feb. 28, 1994
------------ -------------
Portfolio Securities
Purchases............... $55,162,000 $386,154,000
Sales................... 123,317,000 332,772,000
U.S. Government Securities
Purchases............... $310,019,000 $509,553,000
Sales................... 195,322,000 648,331,000
NOTE 3 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
At May 31, 1994, the aggregate cost of investments for federal income tax
and financial reporting purposes was $1,404,738,000 and net unrealized
depreciation aggregated $14,761,000, of which $21,720,000 related to
appreciated investments and $36,481,000 to depreciated investments.
NOTE 4 - RELATED PARTY TRANSACTIONS
The investment management agreement between the Fund and T. Rowe Price
Associates, Inc. (the Manager) provides for an annual investment management
fee, computed daily and paid monthly, consisting of an Individual Fund Fee
equal to 0.30% of average daily net assets and a Group Fee. The Group Fee is
based on the combined assets of certain mutual funds sponsored by the Manager
or Rowe Price-Fleming International, Inc. (the Group). The Group Fee rate
ranges from 0.48% for the first $1 billion of assets to 0.31% for assets in
excess of $34 billion. The effective annual Group Fee rate at May 31, 1994 and
for the three months then ended was 0.34%. The rate at February 28, 1994 was
0.34%, and for the year then ended was 0.35%. The Fund pays a pro rata portion
of the Group Fee based on the ratio of the Fund's net assets to those of the
Group.
<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 three months ended May 31, 1994, and the year ended
February 28, 1994, the Fund incurred fees totalling approximately $848,000 and
$4,072,000, respectively, for these services provided by related parties. At
May 31, 1994, investment management and service fees payable were $1,167,000.
FINANCIAL HIGHLIGHTS
T. ROWE PRICE NEW INCOME FUND
<TABLE>
<CAPTION>
For a share outstanding throughout each period
-----------------------------------------------------------------
Three Months
Ended Year Ended
May 31, 1994 ----------------------------------------------------
[double Feb. 28, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
dagger] 1994 1993 1992 1991 1990
------------ ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $9.12 $9.24 $8.94 $8.60 $8.37 $8.26
------------ ---------- ---------- ---------- ---------- --------
Investment Activities
Net investment income....................... 0.14 0.54 0.57 0.67 0.70 0.75
Net realized and unrealized gain (loss)..... (0.40) (0.05) 0.30 0.36 0.24 0.12
------------ ---------- ---------- ---------- ---------- --------
Total from Investment Activities.............. (0.26) 0.49 0.87 1.03 0.94 0.87
------------ ---------- ---------- ---------- ---------- --------
Distributions
Net investment income....................... (0.14) (0.54) (0.57) (0.67) (0.70) (0.75)
Net realized gain........................... (0.07) (0.07) - (0.02) (0.01) (0.01)
------------ ---------- ---------- ---------- ---------- --------
Total Distributions........................... (0.21) (0.61) (0.57) (0.69) (0.71) (0.76)
------------ ---------- ---------- ---------- ---------- --------
NET ASSET VALUE, END OF PERIOD................ $8.65 $9.12 $9.24 $8.94 $8.60 $8.37
------------ ---------- ---------- ---------- ---------- --------
------------ ---------- ---------- ---------- ---------- --------
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Total Return.................................. (2.84)% 5.36% 10.12% 12.40% 11.77% 10.73%
Ratio of Expenses to Average Net Assets....... 0.80% 0.82% 0.84% 0.87% 0.88% 0.86%
[dagger]
Ratio of Net Investment Income to Average Net 6.43% 5.77% 6.36% 7.64% 8.33% 8.85%
Assets...................................... [dagger]
Portfolio Turnover Rate....................... 91.5% 58.3% 85.8% 49.7% 20.7% 51.1%
[dagger]
Net Assets, End of Period
(in thousands).............................. $1,375,056 $1,457,959 $1,527,299 $1,306,674 $1,130,857 $992,566
- ----------------------------------------------------------------------------------------------------------------
<FN>
[double dagger]The Fund's fiscal year-end was changed to May 31.
[dagger]Annualized.
</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 May 31, 1994, the results of its
operations, the changes in its net assets and the selected per share data and
information for each of the fiscal periods presented in conformity with
generally accepted accounting principles. These financial statements and
selected per share data and information (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 1994 by correspondence with custodians
and brokers and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE
Baltimore, Maryland
June 17, 1994
