PAGE 1
SMALL-CAP VALUE FUND
Prospectus
May 1, 1993
Revised to
December 31, 1993
T. Rowe Price
Small-Cap Value Fund, Inc.
TABLE OF CONTENTS
FUND INFORMATION
Investment Objective 2
Investment Program 2
Summary of Fund Fees and Expenses 3
Per-Share Data and Other
Annualized Ratios 4
Investment Policies 5
Performance Information 7
Capital Stock 7
NAV, Pricing, and Effective Date 8
Receiving Your Proceeds 8
Dividends and Distributions 9
Taxes 9
Management of the Fund 9
Expenses and Management Fee 10
HOW TO INVEST
Shareholder Services 11
Conditions of Your Purchase 12
Completing the New Account Form 13
Opening a New Account 14
Purchasing Additional Shares 14
Exchanging and Redeeming Shares 15
INVESTMENT SUMMARY
The Fund's objective is long-term capital growth through
investment primarily
in the stock of small companies which are believed to be
undervalued and have
potential for capital appreciation. Such companies generally
have a market
value of less than $500 million.
T. ROWE PRICE
100% No Load. This Fund has no sales charges, no redemption
fees, and no 12b-1
fees. 100% of your investment is credited to your account.
Services. The Fund provides easy access to your money through
bank wires or
telephone redemptions and offers easy exchange to other T. Rowe
Price Funds.
T. Rowe Price Associates, Inc. (T. Rowe Price) was founded in
1937 by the late Thomas Rowe Price, Jr. As of December 31,
1992, the firm and its affiliates managed approximately
$41.4 billion for approximately two and one-half million
individual and institutional investors.
This prospectus contains information you should know about the
Fund before you
invest. PLEASE KEEP IT FOR FUTURE REFERENCE. A Statement of
Additional
Information for the Fund (dated May 1, 1993, revised to
December 31, 1993) has been filed with the Securities
and Exchange Commission and is incorporated by reference in this
prospectus. It is available at no charge by calling: 1-800-638-5660.
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.
INVESTMENT
OBJECTIVE
The Fund's investment objective is long-term capital growth. The
Fund will
invest primarily in the common stock of companies with relatively
small market
capitalizations (small-cap) which are believed to be undervalued
and have good prospects for capital appreciation.
The Fund's share price will fluctuate with changing market
conditions, and your investment may be worth more or less when
redeemed than when purchased. The Fund should not be relied
upon as a complete investment program, nor used to play
short-term swings in the stock market. In addition, stocks of
small companies may be subject to more abrupt or erratic price
movements than larger company securities. The Fund cannot
guarantee it will achieve its investment objective.
INVESTMENT
PROGRAM
The Fund will invest primarily in small companies using a value
approach. This approach entails finding companies whose current
stock price is believed not to adequately reflect their underlying
value as measured by assets, earnings, cash flow or business franchises.
Investing in small
companies using a value
approach.
Small companies--those with a capitalization (market value) of
$500 million or
less--May offer greater potential for capital appreciation since
they are often
overlooked or undervalued by investors. Because of their size,
small-cap stocks
are less actively followed by stock analysts and less information
is available
on which to base stock price evaluations. As a result, greater
variations often
exist between the current stock price and its estimated
underlying value which
may present greater opportunity for long-term capital growth.
The Fund's manager, T. Rowe Price Associates, Inc. (T. Rowe
Price) will rely on
its proprietary research to identify undervalued, small-cap
stocks before their
value is recognized by the investment community. Stocks will be
selected when
T. Rowe Price believes: (1) the current stock price is
undervalued based on a low
price to earnings ratio, cash flow or estimated asset value per
share and (2) the
potential for a catalyst exists (such as increased investor
attention, asset
sales or a change in management) which will cause the stock's
price to increase to reflect the company's underlying value.
Higher risks are often associated with small companies.
These companies may have limited product lines, markets and
financial
resources, or they may be dependent on a small or inexperienced
management group. In addition, their securities may trade less
frequently and in limited volume and move more abruptly than
securities of larger companies. However, as noted, securities
of smaller companies may offer greater potential for capital
appreciation since they are often overlooked or undervalued by
investors.
The Fund's holdings will generally be traded in established
over-the-counter markets, but assets may also be invested in
securities listed on a national or regional securities
exchange. The Fund may also invest a portion of its assets in
publicly traded stocks with limited marketability and up to 10%
of its assets in restricted securities.
Please see INVESTMENT POLICIES for a more complete
description of the Fund's investments.
Effective as of 4:00 p.m. (ET) on March 4, 1993 (``Closing
Date''), and until otherwise determined by the Fund's Board of
Directors, the offering of shares of the Fund is limited to
(i) persons who are shareholders of the Fund, or whose orders
to purchase shares of the Fund were mailed or received, as of
the Closing Date; (ii) participants of employer-sponsored
retirement plans administered by T. Rowe Price Retirement Plan
Services, Inc.; and (iii) defined contribution plans with assets
of $50,000,000 or more not administered by T. Rowe Price Retirement
Plan Services, Inc. In addition, as of the Closing Date, the Fund
ceased taking any further orders for the purchase of its shares
from omnibus-brokerage accounts. The Fund reserves the right
in appropriate cases to extend the offering to other classes of
persons, to restrict sales further, or to withdraw the offering
altogether, all without notice.
SUMMARY OF
FUND FEES
AND EXPENSES
THE FUND IS 100% NO-LOAD . . . you pay no fees to purchase,
exchange or redeem shares, nor any ongoing marketing (12b-1) expenses.
Lower expenses benefit you by increasing your investment return from
the Fund.
Shown below are all expenses and fees the Fund incurred during
its fiscal year. Where applicable, expenses were restated to reflect
current fees. Expenses are expressed as a percent of average Fund net
assets. More information about these expenses may be found below and under
EXPENSES and MANAGEMENT FEE and in the Statement of Additional Information
under MANAGEMENT FEE and LIMITATION ON FUND EXPENSES.
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES ANNUAL FUND EXPENSES
Sales load ``charge'' on purchases NONE Management fee 0.78%(d)
Sales load ``charge'' on reinvested
dividends NONE Total other (Shareholder servicing,
Redemption fees NONE cutodial, auditing etc.)(dd) 0.47%
Exchange fees NONE Ditribution fees (12b-1) NONE
--------
Total Fund Expenses 1.25%(d)
(d)The management fee presented includes 0.08% of management
fees repaid from prior years pursuant to the expense
limitation. The Fund's management fee and its total expense
ratio would have been 0.70% and 1.17%, respectively, without
this repayment.
(dd)The Fund charges a $5.00 fee for wire redemptions under
$5,000, subject to change without notice.
</TABLE>
Example of
Fund expenses.
The following example illustrates the expenses you would incur on
a $1,000 investment, assuming a 5% annual rate of return and redemption at
the end of each period shown. For example, expenses for the first year in
the Fund would be $13. THIS IS AN ILLUSTRATION ONLY. Actual expenses and
performance may be more or less than shown.
1 Year--$13 3 Years--$40 5 Years--$69 10 Years--$151
MANAGEMENT FEE. The Fund pays T. Rowe Price an investment
management fee consisting of a flat Individual Fund Fee of
0.35% of the Fund's net assets and a Group Fee, defined on page
10 under EXPENSES AND MANAGEMENT FEE, of 0.35% as of December
31, 1992. Thus, the total combined management fee for the Fund
would be 0.70% of net assets.
Effective January 1, 1990, T. Rowe Price agreed to bear any
expenses through December 31, 1991, which would cause the
Fund's ratio of expenses to average net assets to exceed 1.25%.
Effective January 1, 1992, T. Rowe Price agreed to extend the
Fund's 1.25% expense limitation for a period of two years
through December 31, 1993. 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 1.25%; however,
no reimbursement will be made after December 31, 1993 (for the
first agreement) or December 31, 1995 (for the second
agreement), or if it would result in the expense ratio
exceeding 1.25%.
TRANSFER AGENT, SHAREHOLDER SERVICING, AND ADMINISTRATIVE
COSTS. The Fund paid fees to: (i) T. Rowe Price Services, Inc.
(TRP Services) for transfer and dividend disbursing agent
functions and shareholder services for all accounts; (ii) T.
Rowe Price Retirement Plan Services, Inc. for subaccounting and
recordkeeping services for certain retirement accounts; and
(iii) T. Rowe Price for calculating the daily share price and
maintaining the portfolio and general accounting records of the
Fund. These fees totaled approximately $309,000, $11,000, and
$60,000, respectively.
PER-SHARE
DATA AND
OTHER
ANNUALIZED
RATIOS
The following table provides information about the Fund's
financial history. It is based on a single share outstanding
throughout each fiscal year (which ends on the last day of December).
The table is part of the Fund's financial statements which are
included in the Fund's annual report and incorporated by
reference into the Statement of Additional Information, which is available
to shareholders. The per-share and other information for periods subsequent
to June 30, 1988, presented below, was included in financial statements
audited by the Fund's independent accountants, Coopers & Lybrand, whose
reports thereon were unqualified. The per-share and other information for
the years ended June 30, 1988 and prior were derived from financial
statements which were audited by other independent accountants, whose
reports expressed unqualified opinions on those statements.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Activities Distributions
Net Realized Total Ratio of Ratio of
Net and from Net Expenses Net
Asset Net Unrealized Invest- Net Asset to Investment
Value, Invest- Gain (Loss) ment Invest- Net Total Value, Average Income to
Year Ended, Beginning ment on Activi- ment Realized Distri- End of Net Average
June 30(d) of Period Income Expenses Income Investments ties Income Gain butions Period Assets Net Assets
1983 $4.59 $.09 $(.06) $ .03 $ 4.68 $ 4.71 -- -- -- $9.30 1.10% .50%
1984 9.30 .14 (.08) .06 (2.28) (2.22) -- -- -- 7.08 .90% .70%
1985 7.08 .11 (.10) .01 1.96 1.97 -- -- -- 9.05 .90% .10%
1986 9.05 .09 (.10) (.01) 1.79 1.78 -- -- -- 10.83 .90% (.10)%
1987 10.83 .08 (.09) (.01) .69 .68 -- -- -- 11.51 .90% (.03)%
1988 11.51 .11 (.10) .01 (1.52) (1.51) -- -- -- 10.00 1.20% .10%
Year Ended,
December 31
1988(dd) $10.00 $.14 $(.06)(ddd) $.08 $(.47) $(.39) $(.08) $(.55) $(.63) $8.98 1.25%(ddd) 1.81%
1989 8.98 .27 (.13)(ddd) .14 1.45 1.59 (.14) (.90) (1.04) 9.53 1.25%(ddd) 1.42%
1990 9.53 .35 (.12)(ddd) .23 (1.31) (1.08) (.24) (.12) (.36) 8.09 1.25%(ddd) 2.57%
1991 8.09 .24 (.11)(ddd) .13 2.61 2.74 (.12) (.34) (.46) 10.37 1.25%(ddd) 1.31%
1992 10.37 .25 (.14) .11 2.05 2.16 (.10) (.15) (.25) 12.28 1.25% 0.98%
Shares
Outstanding
Portfolio at End of
Year Ended, Turnover Period (in
June 30(d) Rate thousands)
1983 42.0% 6,022
1984 30.0% 2,962
1985 22.0% 2,887
1986 52.0% 2,826
1987 70.0% 2,804
1988 50.0% 2,550
Year Ended,
December 31
1988(dd) 54.2% 2,846
1989 43.3% 3,445
1990 33.1% 3,267
1991 30.5% 5,132
1992 12.1% 21,498
(d)Information for each of the six years in the period ended June 30, 1988,
represents the activities of the Fund's predecessor, PEMCO.
(dd)For the period June 30, 1988 (commencement of Fund operations) to
December 31, 1988.
(ddd)Excludes expenses in excess of a 1.25% voluntary expense
limitation in effect through December 31, 1993.
</TABLE>
INVESTMENT
POLICIES
The Fund's investment program and policies are subject to further
restrictions and risks which are described in the Statement of Additional
Information. The Fund will not make a material change in its investment
objective or a change in its fundamental policies without obtaining
shareholder approval. The Fund's investment program, unless otherwise
specified, is not a fundamental policy and may be changed without
shareholder approval. Shareholders will be notified of
any material change in the investment program. In addition to
the investments described under Investment Program, the Fund's investments
may include, but are not limited to, those described below.
CASH RESERVES. While the Fund will remain primarily invested in
common stocks, it may, for temporary defensive purposes, invest
in reserves without limitation. The Fund may also establish and
maintain reserves as T. Rowe Price believes is advisable to
facilitate the Fund's cash flow needs (e.g., redemptions,
expenses, and purchases of portfolio securities). The Fund's
reserves will be invested in domestic and foreign money market
instruments rated within the top two credit categories by a
national rating organization or, if unrated, the T. Rowe Price
equivalent.
CONVERTIBLE SECURITIES, PREFERRED STOCKS, AND WARRANTS. The
Fund may invest in debt or preferred equity securities
convertible into or exchangeable for equity securities.
Preferred stocks are securities that represent an ownership
interest in a corporation providing the owner with claims on
the company's earnings and assets before common stock owners,
but after bond owners. Warrants are options to buy a stated
number of shares of common stock at a specified price any time
during the life of the warrants (generally, two or more years).
CORPORATE DEBT SECURITIES. The Fund may invest up to 5%
(measured at the time of purchase) of its total assets in
corporate debt securities without regard to quality or rating.
FOREIGN CURRENCY TRANSACTIONS. Foreign securities of the Fund
are subject to currency risk, that is, the risk that the U.S.
dollar value of these securities may be affected favorably or
unfavorably by changes in foreign currency exchange rates and
exchange control regulations. To manage this risk and
facilitate the purchase and sale of foreign securities, the
Fund will engage in foreign currency transactions involving the
purchase and sale of forward foreign currency exchange
contracts. Although foreign currency transactions will be used
primarily to protect the Fund from adverse currency movements,
they also involve the risk that anticipated currency movements
will not be accurately predicted and the Fund's total return
could be adversely affected as a result.
FOREIGN SECURITIES. The Fund may invest up to 20% of its total
assets in securities principally traded in markets outside the
United States. While investments in foreign securities are
intended to reduce risk by providing further diversification,
such investments involve sovereign risk in addition to credit
and market risks. Sovereign risk includes local political or
economic developments, potential nationalization, withholding
taxes on dividend or interest payments, and currency blockage
(which would prevent cash from being brought back to the United
States). Foreign investments may be affected favorably or
unfavorably by changes in currency rates and exchange control
regulations. Foreign companies may have less public or less
reliable information available about them and may be subject to
less governmental regulation than U.S. companies. Securities
of foreign companies may be less liquid or more volatile than
securities of U.S. companies.
ILLIQUID SECURITIES. The Fund may acquire illiquid securities
(no more than 10% of net assets). Because an active trading
market does not exist for such securities, the sale of such
securities may be subject to delay and additional costs. The
Fund will not invest more than 5% of its total assets in
restricted securities (other than securities eligible for
resale under Rule 144A of the Securities Act of 1933).
LENDING OF PORTFOLIO SECURITIES. As a fundamental policy, for
the purpose of realizing additional income, the Fund may lend
securities with a value of up to 30% of its total assets to
broker-dealers or institutional investors. Any such loan will
be continuously secured by collateral at least equal to the
value of the security loaned. Such lending could result in
delays in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral
should the borrower fail financially.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase
agreements with a well-established securities dealer or a bank
which is a member of the Federal Reserve System. In the event
of a bankruptcy or default of certain sellers of repurchase
agreements, the Fund could experience costs and delays in
liquidating the underlying security, which is held as
collateral, and the Fund might incur a loss if the value of the
collateral held declines during this period.
STOCK INDEX FUTURES CONTRACTS AND OPTIONS. The Fund may enter
into stock index futures contracts (or options thereon) to
hedge all or a portion of its portfolio, or as an efficient
means of regulating its exposure to the equity markets. The
Fund will not use futures contracts for speculation. The Fund
will limit its use of futures contracts so that no more than 5%
of the Fund's total assets would be committed to initial margin
deposits or premiums on such contracts. The Fund may also
write covered call and put options and purchase call and put
options on securities and financial indices. The aggregate
market value of the Fund's portfolio securities covering call
and put options will not exceed 25% of the Fund's net assets.
Futures contracts and options can be highly volatile and could
result in reduction of the Fund's total return, and the Fund's
attempt to use such investments for hedging purposes may not be
successful. Successful futures strategies require the ability
to predict future movements in securities prices, interest
rates and other economic factors. The Fund's potential losses
from the use of futures extends beyond its initial investment
in such contracts. Also, losses from options and futures could
be significant if the Fund is unable to close out its position
due to disruptions in the market or lack of liquidity.
PORTFOLIO TURNOVER. The Fund will not generally trade in
securities for short-term profits but, when circumstances
warrant, securities may be purchased and sold without regard to
the length of time held. For the years ended 1992, 1991, and
1990, the Fund's portfolio turnover rate was 12%, 31%, and 33%,
respectively.
FUNDAMENTAL INVESTMENT POLICIES. As a matter of fundamental
policy, the Fund will not, among other things: (1) purchase
the securities of any company if, as a result: (a) the Fund
would have more than 25% of its total assets concentrated in
any one industry or (b) with respect to 75% of its assets, the
Fund's holdings of that issuer would amount to more than 5% of
the Fund's total assets; (2) borrow money except temporarily
from banks to facilitate redemption requests in amounts not
exceeding 30% of its total assets valued at market; and (3) in
any manner transfer as collateral any securities owned by the
Fund except as may be necessary in connection with permissible
borrowings, which in no event will exceed 30% of its assets
valued at cost.
OTHER INVESTMENT POLICIES. As a matter of operating policy,
the Fund will not, among other things: (1) purchase a security
if, as a result, the Fund would own more than 10% of the
outstanding voting securities of the issuer; (2) purchase
additional securities when money borrowed exceeds 5% of the
Fund's total assets; and (3) invest more than 5% of the value
of the Fund's total assets in the securities of unseasoned
issuers which at the time of purchase have been in operation
for less than three years, including predecessors and
unconditional guarantors.
PERFORMANCE
INFORMATION
The Fund may advertise total return figures on both a cumulative
and compound average annual basis and compare them to various indices (e.g.,
the S&P 500), other mutual funds or other performance measures. (The total
return of the Fund consists of the change in its net asset value per share
and the net income it earns.) Cumulative total return compares the amount
invested at the beginning of a period with the amount redeemed at the end
of the period, assuming the reinvestment of all dividends and capital gain
distributions. The compound average annual total return indicates a yearly
compound average of the Fund's performance, derived from the cumulative
total return. The annual compound rate of return for the Fund may vary
from any average. Further information about the Fund's performance is
contained in its annual report which is available free of charge.
CAPITAL STOCK
The Fund is a Maryland corporation organized in 1988 and
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a diversified, open-end investment company, commonly
known as a ``mutual fund.'' A mutual fund, such as the Fund, enables
shareholders to: (1) obtain professional
management of investments, including T. Rowe Price's proprietary
research; (2) diversify their portfolio to a greater degree than would be
generally possible if they were investing as individuals and thereby
reduce, but not eliminate risks; and (3) simplify the recordkeeping and
reduce transaction costs associated with investments. The Fund is a series
fund and has the authority to issue other series in addition to the one
currently in existence. Because the Fund has issued only one series,
however, the term `Fund' as used in this prospectus
refers to that series only.
SHAREHOLDER RIGHTS. The Fund issues one class of capital
stock, all shares of which have equal rights with regard to
voting, redemptions, dividends, distributions, and
liquidations. Fractional shares have voting rights and
participate in any distributions and dividends. Shareholders
have no preemptive or conversion rights; nor do they have
cumulative voting rights. When the Fund's shares are issued,
they are fully paid and nonassessable. The Fund does not
routinely hold annual meetings of shareholders. However, if
shareholders representing at least 10% of all votes of the Fund
entitled to be cast so desire, they may call a special meeting
of shareholders of the Fund for the purpose of voting on the
question of the removal of any director(s). The total
authorized capital stock of the Fund consists of 1,000,000,000
shares, each having a par value of $.01. As of December 31,
1992, there were approximately 20,374 shareholders in the Fund
and 2,476,327 shareholders in the other 43 T. Rowe Price Funds.
The Fund is the successor to a New York limited partnership,
PEMCO, which was registered with the SEC as a mutual fund and
managed by T. Rowe Price. On June 30, 1988, following approval
of its partners, the partnership was reorganized as a Maryland
corporation.
FUND OPERATIONS
AND SERVICES
The following sections apply to this Fund and all T. Rowe Price
Equity Funds.
NAV,
PRICING, AND
EFFECTIVE
DATE
NET ASSET VALUE PER SHARE (NAV). The NAV per share, or share
price, for the Fund is normally determined as of 4:00 pm
Eastern Time (ET) each day the New York Stock Exchange is open.
The Fund's share price is calculated by subtracting its
liabilities from its total assets and dividing the result by
the total number of shares outstanding. Among other things, the
Fund's liabilities include accrued expenses and dividends
payable, and its total assets include portfolio securities
valued at market as well as income accrued but not yet
received.
If your order is received
in good order before 4:00
pm ET, you will receive
that day'S NAV.
PURCHASED SHARES are priced at that day's NAV if your request
is received before 4:00 pm ET in good order. (See Completing
the New Account Form and Opening a New Account.) If received
later than 4:00 pm ET, shares will be priced at the next
business day's NAV.
REDEMPTIONS are priced at that day's NAV if your request is
received before 4:00 pm ET in good order at the transfer
agent's offices at T. Rowe Price Account Services, P.O. Box
89000, Baltimore, MD 21289-0220. If received after 4:00 pm ET,
shares will be priced at the next business day's NAV.
Also, we cannot accept requests which specify a particular
date for purchase or redemption or which specify any special conditions.
If your redemption request cannot be accepted, you will be notified and
given further instructions.
EXCHANGES are normally priced in the same manner as purchases
and redemptions. However, if you are exchanging into a bond or
money fund and the release of your exchange proceeds is delayed
for the allowable five business days (see Receiving Your
Proceeds), you will not begin to earn dividends until the sixth
business day after the exchange.
The Fund reserves the right to change the time at which
purchases, redemptions, and exchanges are priced if the New
York Stock Exchange closes at a time other than 4:00 pm ET or
an emergency exists.
RECEIVING
YOUR
PROCEEDS
Redemption proceeds are mailed to the address or sent by wire or ACH
transfer to the bank account designated on your New Account Form. They are
generally sent the next business day after your redemption
request is received in good order. Proceeds sent by bank wire will be
credited to your bank account the next business day and proceeds sent
by ACH transfer will be credited the second day after the sale.
In addition, under unusual conditions, or when deemed to be in
the best interests of the Fund, redemption proceeds may not be
sent for up to five business days after your request is
received to allow for the orderly liquidation of securities.
Requests by mail for wire redemptions (unless previously
authorized) must have a signature guarantee.
DIVIDENDS AND
DISTRIBUTIONS
The Fund distributes all net investment income and capital
gains to shareholders. Dividends from net investment income and
distributions from capital gains, if any, are normally declared
in December and paid in January. However, dividends from net
investment income for the Balanced, Growth & Income, Equity
Income, and Dividend Growth Funds will be declared and paid
quarterly. Dividends and distributions declared by the Fund
will be reinvested unless you choose an alternative payment
option on the New Account Form. Dividends not reinvested are
paid by check or transmitted to your bank account via ACH. If
the U.S. 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.
TAXES
Form 1099-DIV
will be mailed
to you in January.
DIVIDENDS AND DISTRIBUTIONS. In January, the Fund will mail you
Form 1099-DIV indicating the federal tax status of your
dividends and capital gain distributions. Generally, dividends
and distributions are taxable in the year they are paid.
However, any dividends and distributions paid in January but
declared during the prior three months are taxable in the year
they are declared. Dividends and distributions are taxable to
you regardless of whether they are taken in cash or reinvested.
Dividends and short-term capital gain distributions are taxable
as ordinary income; long-term capital gain distributions are
taxable as long-term capital gains. The capital gain holding
period is determined by the length of time the Fund has held
the securities, not the length of time you have owned Fund
shares.
SHARES SOLD. A redemption or exchange of Fund shares is
treated as a sale for tax purposes which will result in a short
or long-term capital gain or loss, depending on how long you
have owned the shares. In January, the Fund will mail you Form
1099-B indicating the trade date and proceeds from all sales
and exchanges.
UNDISTRIBUTED INCOME AND GAINS. At the time of purchase, the
share price of the Fund may reflect undistributed income,
capital gains or unrealized appreciation of securities. Any
income or capital gains from these amounts which are later
distributed to you are fully taxable.
FOREIGN TRANSACTIONS (ALL FUNDS OTHER THAN NEW AMERICA GROWTH
FUND). Distributions resulting from the sale of certain foreign
currencies and debt securities, to the extent of foreign
exchange gains, are taxed as ordinary income or loss. If the
Fund pays nonrefundable taxes to foreign governments during the
year, the taxes will reduce the Fund's dividends.
CORPORATIONS. All or part of the Fund's dividends will be
eligible for the 70% deduction for dividends received by
corporations.
TAX-QUALIFIED RETIREMENT PLANS. Tax-qualified retirement plans
generally will not be subject to federal tax liability on
either distributions from the Fund or redemption of shares of
the Fund. Rather, participants in such plans will be taxed when
they begin taking distributions from the plans.
MANAGEMENT
OF THE FUND
INVESTMENT MANAGER. T. Rowe Price is responsible for selection
and management of the Fund's portfolio investments. T. Rowe
Price serves as investment manager to a variety of individual
and institutional investors, including limited and real estate
partnerships and other mutual funds.
BOARD OF DIRECTORS/TRUSTEES. The management of the Fund's
business and affairs is the responsibility of the Fund's Board
of Directors/Trustees.
PORTFOLIO TRANSACTIONS. Decisions with respect to the purchase
and sale of the Fund's portfolio securities are made by T. Rowe
Price. The Fund's Board of Directors/Trustees has authorized T.
Rowe Price to utilize certain brokers indirectly related to T.
Rowe Price in the capacity of broker in connection with the
execution of the Fund's portfolio transactions.
INVESTMENT SERVICES. T. Rowe Price Investment Services, Inc.,
a wholly-owned subsidiary of T. Rowe Price, is the distributor
for this Fund as well as all other T. Rowe Price Funds.
TRANSFER AND DIVIDEND DISBURSING AGENT, SHAREHOLDER SERVICING
AND ADMINISTRATIVE. TRP Services, a wholly-owned subsidiary of
T. Rowe Price, serves the Fund as transfer and dividend
disbursing agent. T. Rowe Price Retirement Plan Services, Inc.,
a wholly-owned subsidiary of T. Rowe Price, performs
subaccounting and recordkeeping services for shareholder
accounts in certain retirement plans investing in the Price
Funds. T. Rowe Price calculates the daily share price and
maintains the portfolio and general accounting records of the
Fund. The address for TRP Services and T. Rowe Price Retirement
Plan Services, Inc. is 100 East Pratt Street, Baltimore,
Maryland 21202.
EXPENSES AND
MANAGEMENT
FEE
The Fund bears all expenses of its operations other than those
incurred by T. Rowe Price under its Investment Management
Agreement with T. Rowe Price. Fund expenses include: the
management fee; shareholder servicing fees and expenses;
custodian and accounting fees and expenses; legal and auditing
fees; expenses of preparing and printing prospectuses and
shareholder reports; registration fees and expenses; proxy and
annual meeting expenses, if any; and directors'/trustees' fees
and expenses.
MANAGEMENT FEE. The Fund pays T. Rowe Price an investment
management fee consisting of an Individual Fund Fee and a Group
Fee. See Summary of Fund Fees and Expenses for the Individual
Fund Fee. The Group Fee varies and is based on the combined net
assets of all mutual funds sponsored and managed by T. Rowe
Price and Rowe Price-Fleming International, Inc., excluding T.
Rowe Price Spectrum Fund, Inc., and any institutional or
private label mutual funds, and distributed by T. Rowe Price
Investment Services, Inc.
The Fund pays, as its portion of the Group Fee, an amount equal
to the ratio of its daily net assets to the daily net assets of
all the Price Funds. The table below shows the annual Group Fee
rate at various asset levels of the combined Price Funds:
0.480% First $1 billion 0.350% Next $2 billion
0.450% Next $1 billion 0.340% Next $5 billion
0.420% Next $1 billion 0.330% Next $10 billion
0.390% Next $1 billion 0.320% Next $10 billion
0.370% Next $1 billion 0.310% Thereafter
0.360% Next $2 billion
Based on combined Price Funds' assets of approximately $26.2
billion at December 31, 1992, the Group Fee was 0.35%.
SHAREHOLDER
SERVICES
The following is a brief summary of services available to
shareholders in the T. Rowe Price Funds, some of which may be
restricted or unavailable to retirement plan accounts. You must
authorize most of these services on an Account Form. Services
may be modified or withdrawn at any time without notice. Please
verify all transactions on your confirmation statements
promptly after receiving them. Any discrepancies must be
reported to Shareholder Services immediately.
AUTOMATIC ASSET BUILDER. You can have us move $50 or more on
the same day each month from your bank account or invest $50 or
more from your paycheck into any T. Rowe Price Fund.
Investor Services
1-800-638-5660
1-410-547-2308
DISCOUNT BROKERAGE SERVICE. You can trade stocks, bonds,
options, CDs, Treasury Bills, and precious metals at
substantial savings through our Discount Brokerage Service.
Call Investor Services for more information.
EXCHANGE SERVICE. You can move money from one account to an
existing identically registered account or open a new
identically registered account. Remember that, for tax
purposes, an exchange is treated as a redemption and a new
purchase. Exchanges into a state tax-free fund are limited to
investors residing in states where those funds are qualified
for sale. Some of the T. Rowe Price Funds may impose a
redemption fee of 1-2%, payable to such Funds, on shares held
for less than one year.
RETIREMENT PLANS. For details on IRAs, please call Investor
Services. For details on all other retirement plans, please
call our Trust Company at 1-800-492-7670.
Shareholder Services
1-800-225-5132
1-410-625-6500
TELEPHONE SERVICES. The following services are explained fully
in the Services Guide, which is mailed to new T. Rowe Price
investors. If you don't have a copy, please call Shareholder
Services. (All telephone calls to Shareholder Services and
Investor Services are recorded in order to protect you, the
Fund, and its agents.)
24-HOUR SERVICE. Tele*Access(R) provides information on yields,
prices, latest dividends, account balances, and last transaction as well
as the ability to initiate purchase, redemption and exchange orders
(if you have established Telephone Services). Just call 1-800-638-2587
and press the appropriate codes into your touch-tone phone. PC*Access(R)
provides the same information as Tele*Access, but on a personal computer.
ELECTRONIC TRANSFERS. We offer three free methods for purchasing or
redeeming Fund shares in amounts of $100 to $100,000 through ACH
transfers between your bank checking and Fund accounts:
--By calling Shareholder Services during business hours
(TELE-CONNECT(R));
--By touch-tone phone any day, any time (TELE*ACCESS).
--By personal computer any day, any time (PC*ACCESS).
If your bank checking and fund account are not identically
registered, you will need a signature guarantee to establish this service.
WIRE TRANSFERS. Wire transfers can be processed through bank
wires (a $5 charge applies to redemption amounts under $5,000 and your bank
may charge you for receiving wires). While this is usually the quickest
transfer method, the Fund reserves the right to temporarily suspend wires
under unusual circumstances.
CONDITIONS
OF YOUR
PURCHASE
ACCOUNT BALANCE (All Funds other than New Era Fund). If your
account drops below $1,000 for three months or more, the Fund has
the right to close your account, after giving 60 days' notice,
unless you make additional investments to bring your account value
to $1,000 or more.
BROKER DEALERS. Purchases or redemptions through broker-dealers,
banks, and other institutions may be subject to service fees imposed
by those entities. No such fees are charged by T. Rowe Price Investment
Services or the Fund if shares are purchased or redeemed directly from
the Fund.
EXCESSIVE TRADING AND EXCHANGE LIMITATIONS. To protect Fund
shareholders against disruptions in portfolio management which might
occur as a result of too frequent buy and sell activity and to minimize
Fund expenses associated with such transaction activity, the Fund prohibits
excessive trading in any account (or group of accounts managed by the same
person). Within any 120 consecutive-day period, investors may not exchange
between Price Funds more than twice or buy and sell the Price Funds more
than once, if the transactions involve substantial assets or a substantial
portion of the assets in the account or accounts. This policy is applied
on a multi-fund basis. Any transactions above and beyond these
guidelines will be considered to be excessive trading, and the
investor may be prohibited from making additional purchases or exercising
the exchange privilege.
This policy does not apply to exchanges solely between, or
purchases and sales solely of, the Price Money Funds, nor does it apply
to simple redemptions from any Fund.
NONPAYMENT. If your check, wire or ACH transfer does not clear, or if
payment is not received for any telephone purchase, the transaction will
be cancelled and you will be responsible for any loss the Fund or Investment
Services incurs. If you are already a shareholder, the Fund can redeem
shares from any identically registered account in this Fund or any other
T. Rowe Price Fund as reimbursement for any loss incurred. You may be
prohibited or restricted from making future purchases in any of the
T. Rowe Price Funds.
U.S. DOLLARS. All purchases must be paid for in U.S. dollars, and
checks must be drawn on U.S. banks.
REDEMPTIONS IN EXCESS OF $250,000. Redemption proceeds are
normally paid in cash. However, if you redeem more than $250,000, or 1% of
the Fund's net assets, in any 90-day period, the Fund may in its discretion:
(1) pay the difference between the redemption amount and the lesser of
these two figures with securities of the Fund or (2) delay the transmission
of your proceeds for up to five business days after your request is received.
SIGNATURE GUARANTEES. A signature guarantee is designed to
protect you and the Fund by verifying your signature. You will need one to:
(1) Establish certain services after the account is opened.
(2) Redeem over $50,000 by written request (unless you
have authorized telephone services).
(3) Redeem or exchange shares when proceeds are: (i) being
mailed to an address other than the address of record, (ii) made
payable to other than the registered owner(s), or (iii) being
sent to a bank account
other than the bank account listed on your fund account.
(4) Transfer shares to another owner.
(5) Send us written instructions asking us to wire
redemption proceeds (unless previously authorized).
(6) Establish Electronic Transfers when your bank checking
and fund account are not identically registered.
These requirements may be waived or modified in certain instances.
Acceptable guarantors are all eligible guarantor institutions as
defined by the Securities Exchange Act of 1934 such as: commercial banks
which are FDIC members, trust companies, firms which are members of a
domestic stock exchange, and foreign branches of any of the above. We
cannot accept guarantees from institutions or individuals who do not
provide reimbursement in the case of fraud, such as notaries public.
TELEPHONE EXCHANGE AND REDEMPTION. 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 within five business days after
the telephone transaction.
TEN-DAY HOLD. The mailing of proceeds for redemption requests
involving any shares purchased by personal, corporate or government check,
or ACH transfer is generally subject to a 10-day delay to allow the
check or transfer to clear. The 10-day clearing period does not
affect the trade date on which your purchase or redemption order is priced,
or any dividends and capital gain distributions to which you may be entitled
through the date of redemption. 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 made by wire,
Automatic Asset Builder-Paycheck, or cashier's, treasurer's, or certified
checks.
THE FUND AND ITS AGENTS RESERVE THE RIGHT TO: (1) reject any
purchase or exchange, cancel any purchase due to nonpayment, or reject any
exchange or redemption where the Fund has not received payment; (2) waive or
lower the investment minimums; (3) accept initial purchases by telephone or
mailgram; (4) waive the limit on subsequent purchases by telephone;
(5) reject any purchase or exchange prior to receipt of the confirmation
statement; (6) redeem your account (see Tax Identification Number);
(7) modify the conditions of purchase at any time; and (8) reject any
check not made directly payable to the Fund or T. Rowe
Price (call Shareholder Services for more information).
COMPLETING
THE NEW
ACCOUNT FORM
You must provide your
tax ID number and sign
the New Account Form.
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 a fine.
You also will 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 otherwise request, one shareholder report will be
mailed to multiple account owners with the same tax identification number
and same zip code and to those shareholders who have requested that their
accounts be combined with someone else's for financial reporting.
ACCOUNT REGISTRATION. If you own other T. Rowe Price Funds, make
certain the registration (name and account type) is identical to your other
funds for easy exchange. REMEMBER TO SIGN THE FORM EXACTLY AS THE NAME
APPEARS IN THE REGISTRATION SECTION.
SERVICES. By signing up for services on the New Account Form,
rather than after the account is opened, you will avoid having to complete
a separate form and obtain a signature guarantee (see Conditions of Your
Purchase).
OPENING A NEW ACCOUNT
Checks payable to T. Rowe Price Funds.
Minimum initial investment: $2,500 ($1,000 for retirement plans
and UGMA/UTMA accounts; $50 per month for Automatic Asset Builder
accounts--see Shareholder Services)
By Mail Send your New Account Form and check to:
REGULAR MAIL MAILGRAM, EXPRESS, REGISTERED, OR
CERTIFIED MAIL
T. Rowe Price Account Services T. Rowe Price Account Services
P.O. Box 17300 10090 Red Run Boulevard
Baltimore, MD 21298-9353 Owings Mills, MD 21117
Investor Services
1-800-638-5660
1-410-547-2308
By Wire Call Investor Services for an account number and use
Wire Address below. Then, complete the New Account Form and mail
it to one of the addresses above. (Not applicable to retirement
plans.)
Wire Address Morgan Guaranty Trust Company of New York
(to give to your bank): ABA #021000238
T. Rowe Price (fund name)/AC-00153938
Account name(s) and account number
Shareholder Services
1-800-225-5132
1-410-625-6500
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
Excessive Trading and Exchange Limitations under Conditions of
Your Purchase.
In Person Drop off your New Account Form and obtain a
receipt at a T. Rowe Price Investor Center:
101 East Lombard T. Rowe Price Financial Center
First Floor First Floor
Baltimore, MD 10090 Red Run Boulevard
Owings Mills, MD
Farragut Square ARCO Tower
First Floor 31st Floor
900 17th Street, NW 515 South Flower Street
Washington, DC Los Angeles, CA
PURCHASING ADDITIONAL SHARES
Minimum: $100 ($50 for retirement plans)
By Wire Call Shareholder Services or use the Wire Address in
Opening a New Account.
Shareholder Services
1-800-225-5132
1-410-625-6500
By Mail Indicate your account number and the Fund name on your
check. Mail it to us at the address below with the
stub from a statement confirming a prior transaction
or a note stating that you want to purchase shares
in that Fund and giving us the account number.
T. Rowe Price Funds
Account Services
P.O. Box 89000
Baltimore, MD 21289-1500
By ACH Use Tele*Access, PC*Access or call Shareholder Services (if you
Transfer have established Telephone Services) for ACH transfers.
By Automatic Fill out the Automatic Asset Builder section on the New
Asset Builder Account or Shareholder Services Form.
Minimum: $5,000
By Phone Call Shareholder Services.
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 express mail, mailgram, Tele*Access or PC*Access if you
have authorized telephone services. For exchange policy, see
Excessive Trading and Exchange Limitations under Conditions of
Your Purchase.
Redemption proceeds can be mailed, sent by Electronic Transfer,
or wired to your bank. The Fund charges a $5.00 fee for wire
redemptions under $5,000, subject to change without notice.
Your bank may also charge you for receiving wires.
Shareholder Services
1-800-225-5132
1-410-625-6500
T. Rowe Price Trust Company
1-800-492-7670
1-410-625-6585
By Mail Indicate account name(s) and numbers, fund name(s), and
exchange or redemption amount. For exchanges, indicate the
accounts you are exchanging from and to along with the
amount. We require the signature of all owners
exactly as registered, and possibly a signature
guarantee (see Signature Guarantees under Conditions of
Your Purchase).
NOTE: Distributions from retirement accounts, including IRAs,
must be in writing. Please call Shareholder Services to obtain an
IRA Distribution Request Form. For employer-sponsored retirement
accounts, call T. Rowe Price Trust Company or your plan
administrator for instructions. Shareholders holding previously
issued certificates must conduct transactions by mail. If you
lose a stock certificate, you may incur an expense to replace it.
Call Shareholder Services for further information.
MAILING ADDRESSES:
REGULAR MAIL MAILGRAM, EXPRESS, REGISTERED, OR
CERTIFIED MAIL
Non-Retirement All Accounts
and IRA Accounts T. Rowe Price Account Services
T. Rowe Price Account Services 10090 Red Run Boulevard
P.O. Box 89000 Owings Mills, MD 21117
Baltimore, MD 21289-0220
Employer-Sponsored
Retirement Accounts
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
TO OPEN AN ACCOUNT:
Investor Services
1-800-638-5660
547-2308 in Baltimore
YIELDS & PRICES:
Tele*Access(R)
24 hours, 7 days a week
1-800-638-2587
625-7676 in Baltimore
EXISTING ACCOUNT:
Shareholder Services
1-800-225-5132
625-6500 in Baltimore
INVESTOR CENTERS:
101 East Lombard Street
First Floor
Baltimore, Maryland
Farragut Square
900 17th Street, NW
First Floor
Washington, DC
T. Rowe Price Financial Center
First Floor
10090 Red Run Boulevard
Owings Mills, Maryland
ARCO Tower
31st Floor
515 South Flower Street
Los Angeles, California
May 1, 1993
Revised to
December 31, 1993
To Open an Account:
Investor Services
1-800-638-5660
547-2308 in Baltimore
Yields & Prices:
Tele*AccessR
24 hours, 7 days a week
1-800-638-2587
625-7676 in Baltimore
Existing Account:
Shareholder Services
1-800-225-5132
625-6500 in Baltimore
Investor Centers:
101 East Lombard Street
First Floor
Baltimore, Maryland May 1, 1993
Revised to
Farragut Square December 31, 1993
First Floor
Washington, DC
T. Rowe Price Financial Center
First Floor
10090 Red Run Boulevard
Owings Mills, Maryland
ARCO Tower
31st Floor
515 South Flower Street
Los Angeles, California
<PAGE>
PAGE 2
STATEMENT OF ADDITIONAL INFORMATION
T. Rowe Small-Cap Value Fund, Inc.
(the "Fund")
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Fund's prospectus dated May 1, 1993, revised
to December 31, 1993, which may be obtained from T. Rowe Price Investment
Services, Inc., 100 East Pratt Street, Baltimore, Maryland 21202.
The date of this Statement of Additional Information is May 1, 1993,
revised to December 31, 1993.
<PAGE>
PAGE 3
TABLE OF CONTENTS
Page Page
Call and Put Options . . . . . . . 3 Investment Objective and Policies. . 2
Capital Stock. . . . . . . . . . .39 Investment Performance . . . . . . .22
Corporate Debt Securities. . . . .18 Investment Program . . . . . . . . . 3
Custodian. . . . . . . . . . . . .32 (page 2 in Prospectus)
Dealer Options . . . . . . . . . . 7 Investment Restrictions. . . . . . .19
Distributor for Fund . . . . . . .31 Legal Counsel. . . . . . . . . . . .40
Dividends. . . . . . . . . . . . .38 Lending of Portfolio Securities. . .18
Federal and State Registration . . . .Management of Fund
. . . . . . . . . . . . . . . . .28
of Shares . . . . . . . . . . .40 Net Asset Value Per Share. . . . . .37
Foreign Currency Transactions. . .15 Portfolio Transactions . . . . . . .32
Foreign Securities . . . . . . . .15 Pricing of Securities. . . . . . . .37
Futures Contracts. . . . . . . . . 8 Principal Holders of Securities. . .29
Illiquid Securities. . . . . . . .13 Rating of Corporate Debt
Independent Accountants. . . . . .41 Securities. . . . . . . . . . . .41
Investment Management Services . .29 Repurchase Agreements. . . . . . . .13
(page 9 in Prospectus) 8 Tax Status . . . . . .38
Investment Objective . . . . . . . 2 (page 9 in Prospectus)
(page 2 in Prospectus) . . . . . . . . .Warrants
. . . . . . . . . . . . . . . . .14
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages 2 and 5 through 7 of the
prospectus. Unless otherwise specified, the investment program and
restrictions of the Fund are not fundamental policies. The operating policies
of the Fund are subject to change by its Board of Directors without
shareholder approval. However, shareholders will be notified of a material
change in an operating policy. The fundamental policies of the 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 are
represented.
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital growth. The Fund
will invest primarily in the common stock of companies with relatively small
market capitalizations ("small cap") which are believed to be undervalued and
have good prospects for capital appreciation.
The Fund's share price will fluctuate with changing market conditions,
and your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon as a complete investment
program, nor used to play short-term swings in the stock market. In addition,
stocks of small companies may be subject to more abrupt or erratic price
movements than larger company securities. The Fund cannot guarantee it will
achieve its investment objective.
INVESTMENT PROGRAM
In addition to the investments described in the Fund's prospectus,
the Fund may invest in the following:
Writing Covered Call Options
PAGE 4
The Fund may write (sell) "covered" call options and purchase options
to close out options previously written by the Fund. In writing covered call
options, the Fund expects to generate additional premium income which should
serve to enhance the Fund's total return and reduce the effect of any price
decline of the security involved in the option. Covered call options will
generally be written on securities which, in the opinion of the Fund's
investment manager, T. Rowe Price Associates, Inc. ("T. Rowe Price"), are not
expected to make any major price increases in the near future but which, over
the long term, are deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security at a specified price (the exercise price), at expiration of the
option (European style) or at any time until a certain date (the expiration
date) (American style). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security against payment of the exercise price. This obligation terminates
upon the expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by repurchasing an option
identical to that previously sold. To secure his obligation to deliver the
underlying security in the case of a call option, a writer is required to
deposit in escrow the underlying security or other assets in accordance with
the rules of a clearing corporation. The Fund will write only covered call
options. This means that the Fund will own the security subject to the option
or an option to purchase the same underlying security, having an exercise
price equal to or less than the exercise price of the "covered" option, or
will establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid
high-grade debt obligations having a value equal to the fluctuating market
value of the optioned securities. In order to comply with the requirements of
several states, the Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities covering call or put
options exceeds 25% of the market value of the Fund's net assets. Should
these state laws change or should the Fund obtain a waiver of their
application, the Fund reserves the right to increase this percentage. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities with identical maturity dates.
Portfolio securities on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing the Fund's total return. When writing a
covered call option, the Fund, in return for the premium, gives up the
opportunity for profit from a price increase in the underlying security above
the exercise price, but conversely retains the risk of loss should the price
of the security decline. Unlike one who owns securities not subject to an
option, the Fund has no control over when it may be required to sell the
underlying securities, since it may be assigned an exercise notice at any time
prior to the expiration of its obligation as a writer. If a call option which
the Fund has written expires, the Fund will realize a gain in the amount of
the premium; however, such gain may be offset by a decline in the market value
of the underlying security during the option period. If the call option is
exercised, the Fund will realize a gain or loss from the sale of the
underlying security. The Fund does not consider a security covered by a call
to be "pledged" as that term is used in the Fund's policy which limits the
pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
PAGE 5
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision
to write a call option has been made, T. Rowe Price, in determining whether a
particular call option should be written on a particular security, will
consider the reasonableness of the anticipated premium and the likelihood that
a liquid secondary market will exist for those options. The premium received
by the Fund for writing covered call options will be recorded as a liability
of the Fund. This liability will be adjusted daily to the option's current
market value, which will be the latest sale price at the time at which the net
asset value per share of the Fund is computed (close of the New York Stock
Exchange), or, in the absence of such sale, the latest asked price. The
option will be terminated upon expiration of the option, the purchase of an
identical option in a closing transaction, or delivery of the underlying
security upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called,
or, to permit the sale of the underlying security. Furthermore, effecting a
closing transaction will permit the Fund to write another call option on the
underlying security with either a different exercise price or expiration date
or both. If the Fund desires to sell a particular security from its portfolio
on which it has written a call option, or purchased a put option, it will seek
to effect a closing transaction prior to, or concurrently with, the sale of
the security. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at a favorable price. If the Fund cannot
enter into such a transaction, it may be required to hold a security that it
might otherwise have sold. When the Fund writes a covered call option, it
runs the risk of not being able to participate in the appreciation of the
underlying security above the exercise price, as well as the risk of being
required to hold onto securities that are depreciating in value. This could
result in higher transaction costs. The Fund will pay transaction costs in
connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates
of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities at the time the options are written. From time to time,
the Fund may purchase an underlying security for delivery in accordance with
an exercise notice of a call option assigned to it, rather than delivering
such security from its portfolio. In such cases, additional costs may be
incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
<PAGE>
PAGE 6
the underlying security, any loss resulting from the repurchase of a call
option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
Writing Covered Put Options
The Fund may write American or European style covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security at the exercise
price during the option period (American style) or at the expiration of the
option (European style). So long as the obligation of the writer continues,
he may be assigned an exercise notice by the broker-dealer through whom such
option was sold, requiring him to make payment of the exercise price against
delivery of the underlying security. The operation of put options in other
respects, including their related risks and rewards, is substantially
identical to that of call options.
The Fund would write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash, U.S. government
securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option at all times while the put
option is outstanding. (The rules of a clearing corporation currently require
that such assets be deposited in escrow to secure payment of the exercise
price.) The Fund would generally write covered put options in circumstances
where T. Rowe Price wishes to purchase the underlying security for the Fund's
portfolio at a price lower than the current market price of the security. In
such event the Fund would write a put option at an exercise price which,
reduced by the premium received on the option, reflects the lower price it is
willing to pay. Since the Fund would also receive interest on debt securities
maintained to cover the exercise price of the option, this technique could be
used to enhance current return during periods of market uncertainty. The risk
in such a transaction would be that the market price of the underlying
security would decline below the exercise price less the premiums received.
Such a decline could be substantial and result in a significant loss to the
Fund. In addition, the Fund, because it does not own the specific securities
which it may be required to purchase in the exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities.
In order to comply with the requirements of several states, the Fund will not
write a covered put option if, as a result, the aggregate market value of all
portfolio securities covering put or call options exceeds 25% of the market
value of the Fund's net assets. Should these state laws change or should the
Fund obtain a waiver of their application, the Fund reserves the right to
increase this percentage. In calculating the 25% limit, the Fund will offset,
against the value of assets covering written puts and calls, the value of
purchased puts and calls on identical securities with identical maturity
dates.
Purchasing Put Options
The Fund may purchase American or European style put options. As the
holder of a put option, the Fund has the right to sell the underlying security
at the exercise price at any time during the option period (American style) or
at the expiration of the option (European style). The Fund may enter into
closing sale transactions with respect to such options, exercise them or
permit them to expire. The Fund may purchase put options for defensive
purposes in order to protect against
<PAGE>
PAGE 7
an anticipated decline in the value of its securities. An example of such use
of put options is provided below.
The Fund may purchase a put option on an underlying security (a
"protective put") owned by the Fund as a defensive technique in order to
protect against an anticipated decline in the value of the security. Such
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying security
at the put exercise price regardless of any decline in the underlying
security's market price. For example, a put option may be purchased in order
to protect unrealized appreciation of a security where T. Rowe Price deems it
desirable to continue to hold the security because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security is
eventually sold.
Although the Fund has no current intention, in the foreseeable future,
of purchasing put options at a time when the Fund does not own the underlying
security, it reserves the right to do so. By purchasing put options on a
security it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security. If the put option is not sold when
it has remaining value, and if the market price of the underlying security
remains equal to or greater than the exercise price during the life of the put
option, the Fund will lose its entire investment in the put option. In order
for the purchase of a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs, unless the put option is sold in a
closing sale transaction.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund
obtain a waiver of their application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The premium paid by
the Fund when purchasing a put option will be recorded as an asset of the
Fund. This asset will be adjusted daily to the option's current market value,
which will be the latest sale price at the time at which the net asset value
per share of the Fund is computed (close of New York Stock Exchange), or, in
the absence of such sale, the latest bid price. This asset will be terminated
upon expiration of the option, the selling (writing) of an identical option in
a closing transaction, or the delivery of the underlying security upon the
exercise of the option.
Purchasing Call Options
The Fund may purchase American or European style call options. As the
holder of a call option, the Fund has the right to purchase the underlying
security at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The Fund may
enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The Fund may purchase call options for the
purpose of increasing its current return or avoiding tax consequences which
could reduce its current return. The Fund may also purchase call options in
order to acquire the underlying securities. Examples of such uses of call
options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring
the underlying securities for its portfolio. Utilized in this fashion, the
purchase of call options enables the Fund to acquire the securities at the
exercise price of the call option plus the premium paid. At times the net
cost of acquiring securities in this manner may be less than the cost of
acquiring the securities directly. This technique may also be useful to the
Fund in purchasing a large block of securities that would be more difficult to
PAGE 8
acquire by direct market purchases. So long as it holds such a call option
rather than the underlying security itself, the Fund is partially protected
from any unexpected decline in the market price of the underlying security and
in such event could allow the call option to expire, incurring a loss only to
the extent of the premium paid for the option.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund
obtain a waiver of their application, the Fund may commit more than 5% of its
assets to premiums when purchasing call and put options. The Fund may also
purchase call options on underlying securities it owns in order to protect
unrealized gains on call options previously written by it. A call option
would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction.
Call options may also be purchased at times to avoid realizing losses.
Dealer Options
The Fund may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While the Fund would look to a clearing
corporation to exercise exchange-traded options, if the Fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the option
to perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. While the Fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
Fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event
of insolvency of the contra party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund.
For example, since the Fund must maintain a secured position with respect to
any call option on a security it writes, the Fund may not sell the assets
which it has segregated to secure the position while it is obligated under the
option. This requirement may impair the Fund's ability to sell portfolio
securities at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer options
and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as
liquid if the dealer agrees that the Fund may repurchase the OTC option it has
written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. Accordingly, the Fund will treat dealer options as subject to the
Fund's limitation on illiquid securities. If the SEC changes its position on
the liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
Futures Contracts
PAGE 9
Transactions in Futures
The Fund may enter into stock index futures contracts ("futures or
futures contracts").
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for T. Rowe Price to implement either an increase or decrease in portfolio
market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Fund may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Fund's portfolio successfully, the Fund must sell
futures contacts with respect to indices or subindices whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
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. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board
of Trade. Futures exchanges and 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 transactions in futures contracts and options
thereon only for bona fide hedging purposes, in accordance with the rules and
regulations of the CFTC, and not for speculation.
The Fund may not enter into futures contracts or options thereon if
immediately thereafter the sum of the amounts of initial margin deposits on
the Fund's existing futures and premiums paid for options on futures would
exceed 5% of the market value of the Fund's total assets; 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.
In instances involving the purchase of futures contracts or call
options thereon or the writing of 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 deposited in a segregated
account with the Fund's custodian to cover the position, or alternative cover
will be employed thereby insuring that the use of such futures contracts and
options is unleveraged.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain risk management strategies. 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
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
PAGE 10
instrument (e.g., units of a stock index) for a specified price, date, time
and place designated at the time the contract is made. Brokerage fees are
incurred when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying
or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open
positions in futures contracts, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, U.S. government securities, suitable money market instruments, 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.
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 purchase or sale, respectively, for the
same aggregate amount of the identical securities and the same delivery date.
If the offsetting purchase price is less than the original sale price, the
Fund realizes a gain; if it is more, the Fund realizes a loss. Conversely, if
the offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is composed of 500
selected common stocks, most of which are listed on the New York Stock
Exchange. The S&P 500 Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stock making up the
index will take place. Instead, settlement in cash occurs. Over the life of
the contract, the gain or loss realized by the Fund will equal the difference
between the purchase (or sale) price of the contract and the price at which
PAGE 11
the contract is terminated. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that future date,
the Fund will gain $2,000 (500 units x gain of $4). If the Fund enters into a
futures contract to sell 500 units of the stock index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $152 on that
future date, the Fund will lose $1,000 (500 units x loss of $2).
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 policies 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 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 positions or increase exposure
represented by 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
PAGE 12
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 the 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 underlying instruments on which the 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 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 which are intended to
correlate to the price movements of the underlying instruments sought to be
hedged. 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
PAGE 13
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
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 the delivery of the accumulated balance in
the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. Alternatively, settlement may be made totally in
cash. Purchasers of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on
stock index futures, the Fund may write or purchase call and put options on
stock indices. Such options would be used in a manner similar to the use of
options on futures contracts. From time to time, a single order to purchase
or sell futures contracts (or options thereon) may be made on behalf of the
Fund and other T. Rowe Price Funds. Such aggregated orders would be allocated
among the 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 Fund may seek to close out an option position by writing or
buying an offsetting option covering the same index, underlying instruments,
or contract and having the same exercise price and expiration date. The
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.
Repurchase Agreements
The Fund may enter into repurchase agreements through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank which is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
PAGE 14
approved list and have a credit rating with respect to its short-term debt of
at least A1 by Standard & Poor's Corporation, P1 by Moody's Investors Service,
Inc. or the equivalent rating by T. Rowe Price. At that time, the bank or
securities dealer agrees to repurchase the underlying security at the same
price, plus specified interest. Repurchase agreements are generally for a
short period of time, often less than a week. The Fund will not enter into a
repurchase agreement which does not provide for payment within seven days if,
as a result, more than 10% of the value of its net assets would then be
invested in such repurchase agreements. The Fund will only enter into a
repurchase agreement where (i) the underlying securities are of the type
(excluding maturity limitations) which the Fund's investment guidelines would
allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry
transfer to the account of the custodian or a bank acting as agent. In the
event of a bankruptcy or other default of a seller of a repurchase agreement,
the Fund could experience both delays in liquidating the underlying securities
and losses, including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its rights thereto;
(b) possible subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
Illiquid Securities
The Fund may invest in illiquid securities including repurchase
agreements which do not provide for payment within seven days, but will not
acquire such securities if, as a result, they would comprise more than 10% of
the value of the Fund's net assets, provided further that the Fund will not
invest more than 5% of its net assets in restricted securities.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act").
Where registration is required, the Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Board of Directors. If through the appreciation of illiquid
securities or the depreciation of liquid securities, the Fund should be in a
position where more than 10% of the value of its net assets are invested in
illiquid assets, including restricted securities, the Fund will take
appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as
the Fund, to trade in privately placed securities even though such securities
are not registered under the 1933 Act. T. Rowe Price, under the supervision
of the Fund's Board of Directors, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Fund's restriction of
investing no more than 10% of its assets in illiquid securities. A
determination of whether a Rule 144A security is liquid or not is a question
of fact. In making this determination, T. Rowe Price will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, T. Rowe Price could consider the
(1) frequency of trades and quotes, (2) number of dealers and potential
purchasers, (3) dealer undertakings to make a market, and (4) nature of the
security and of marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). The
PAGE 15
liquidity of Rule 144A securities would be monitored and, if as a result of
changed conditions, it is determined that a Rule 144A security is no longer
liquid, the Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 10% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
Warrants
The Fund may invest in warrants; however, in order to comply with the
securities law of a certain state, not more than 5% of its assets (at the time
of purchase) will be invested in warrants other than warrants acquired in
units or attached to other securities. Of such 5% not more than 2% of assets
at the time of purchase may be invested in warrants that are not listed on the
New York or American Stock Exchanges. Should the law of this state change or
should the Fund obtain a waiver of its application, the Fund may invest in
warrants to a greater extent than 5% of its assets. Warrants are pure
speculation in that they have no voting rights, pay no dividends and have no
rights with respect to the assets of the corporation issuing them. Warrants
basically are options to purchase equity securities at a specific price valid
for a specific period of time. They do not represent ownership of the
securities, but only the right to buy them. Warrants differ from call options
in that warrants are issued by the issuer of the security which may be
purchased on their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel to the prices
of the underlying securities.
Foreign Securities
The Fund may invest in the securities of foreign issuers. The Fund
currently intends to limit any such investment to not more than 20% of its
assets. Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment in
a fund which invests only in securities of U.S. domestic issuers. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
There may be less governmental supervision of securities markets, brokers and
issuers of securities. Securities of some foreign companies are less liquid
or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject
to other risks different from those affecting U.S. investments, including
local political or economic developments, expropriation or nationalization of
assets, restrictions on foreign investment and repatriation of capital,
imposition of withholding taxes on dividend or interest payments, currency
blockage (which would prevent cash from being brought back to the United
States), and difficulty in enforcing legal rights outside the U.S.
Foreign Currency Transactions
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally
PAGE 16
has no deposit requirement, and no commissions are charged at any stage for
trades.
The Fund may enter into forward foreign currency exchange contracts
under two circumstances. First, when the Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of
the amount of foreign currency involved in the underlying security
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar
and the subject foreign currency during the period between the date the
security is purchased or sold and the date on which payment is made or
received.
Second, when T. Rowe Price believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Fund's portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. T. Rowe Price does not intend to enter into
such forward contracts under this second circumstance on a regular or
continuous basis, and will not do so if, as a result, the Fund will have more
than 20% of the value of its total assets committed to the consummation of
such contracts. Other than as set forth above, and immediately below, the
Fund will also not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. The Fund, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess
of the value of the Fund's portfolio securities or other assets to which the
forward contracts relate (including accrued interest to the maturity of the
forward on such securities) provided the excess amount is "covered" by liquid,
high-grade debt securities, denominated in any currency, at least equal at all
times to the amount of such excess. For these purposes, "the securities or
other assets to which the forward contracts relate" may be securities or
assets denominated in a single currency, or where proxy forwards are used,
securities denominated in more than one currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall
diversification strategies. However, T. Rowe Price believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
PAGE 17
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value exceeds
the amount of foreign currency the Fund is obligated to deliver. However, as
noted, in order to avoid excessive transactions and transaction costs, the
Fund may use liquid, high-grade debt securities denominated in any currency,
to cover the amount by which the value of a forward contract exceeds the value
of the securities to which it relates.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices.
If the Fund engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent of the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
be limited to the transactions described above. However, the Fund reserves
the right to enter into forward foreign currency contracts for different
purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate
by T. Rowe Price. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities. It simply establishes a rate of
exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts
The discussion herein may refer to transactions in which the Fund
does not engage. The Fund's prospectus sets forth the types of transactions
permissible for the Fund.
PAGE 18
The Fund may enter into certain option, futures, and forward foreign
exchange contracts, including options and futures on currencies, which will be
treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Fund's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains
or losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Fund
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay
such distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in
which case a loss on any position in a straddle will be subject to deferral to
the extent of unrealized gain in an offsetting position. The holding period
of the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. For securities offsetting a purchased
put, this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may
be long-term capital loss, if the security covering the option was held for
more than twelve months prior to the writing of the option.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent that
net gain realized from option, futures or foreign forward exchange contracts
on currencies is qualifying income for purposes of the 90% requirement. In
addition, gains realized on the sale or other disposition of securities,
including option, futures or foreign forward exchange contracts on securities
or securities indexes and, in some cases, currencies, 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 or currencies held
less than three months, the Fund may be required to defer the closing out of
option, futures or foreign forward exchange contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on Section 1256 option, futures and foreign forward exchange 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 or currencies held less than three months for purposes of
the 30% test.
Lending of Portfolio Securities
For the purpose of realizing additional income, the Fund may make
secured loans of portfolio securities amounting to not more than 30% of its
total assets. This policy is a fundamental policy. Securities loans are made
to broker-dealers, institutional investors, or other persons pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market
on a daily basis. The collateral received will consist of cash, U.S.
PAGE 19
government securities, letters of credit or such other collateral as may be
permitted under its investment program. While the securities are being lent,
the Fund will continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities, as well as interest on the investment of
the collateral or a fee from the borrower. The Fund has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Fund will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delay in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to persons deemed by T. Rowe Price to be
of good standing and will not be made unless, in the judgment of T. Rowe
Price, the consideration to be earned from such loans would justify the risk.
Corporate Debt Securities
The Fund may invest up to 5% of its total assets in corporate debt
securities without regard to quality or rating. This may include securities
in default, rated Ca by Moody's Investors Service, Inc. or CC by Standard &
Poor's Corporation, or, if not rated, of comparable quality. Such bonds are
regarded, on balance, as predominantly speculative with respect to an issuer's
capacity to pay interest and repay principal in accordance with terms of the
obligation.
INVESTMENT RESTRICTIONS
Fundamental policies of the Fund may not be changed without the
approval of the lesser of (1) 67% of the Fund's shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the Fund's outstanding
shares. Other restrictions, in the form of operating policies, are subject to
change by the Fund's Board of Directors without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money, except the Fund may borrow from banks as
a temporary measure for extraordinary or emergency purposes, and
then only in amounts not exceeding 30% of its total assets valued
at market. The Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which
might otherwise require untimely disposition of portfolio
securities (see page 6 of the prospectus). Interest paid on any
such borrowings will reduce net investment income. The Fund may
enter into futures contracts as set forth in (3) below;
PAGE 20
(2) Commodities. Purchase or sell commodities or commodity contracts;
except that it may (i) enter into futures contracts and options on
futures contracts, subject to (3)
below; and (ii) enter into forward foreign currency exchange
contracts (although the Fund does not consider such contracts to
be commodities);
(3) Futures Contracts. Enter into a futures contract or an option
thereon, although the Fund may enter into a futures contract or an
option on a futures contract if, as a result, no more than 5% of
the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to initial margin
or premiums on options on such futures contracts; provided
however, that in the case of an option which is in-the-money at
the time of purchase, the in-the-money amount as defined under
certain CFTC regulations may be excluded in computing such 5%;
(4) 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 (other than
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities);
(5) Investment Companies. Purchase securities of open-end investment
companies except in compliance with the Investment Company Act of
1940 and applicable state law. Duplicate fees may result from
such purchases;
(6) Loans. Make loans, although the Fund may (i) purchase money
market securities and enter into repurchase agreements, and (ii)
lend portfolio securities provided that no such loan may be made
if, as a result, the aggregate of such loans would exceed 30% of
the value of the Fund's total assets; provided, however, that the
Fund may acquire publicly-distributed bonds, debentures, notes and
other debt securities and purchase debt securities at private
placement within the limits imposed on the acquisition of
restricted securities;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer as security for indebtedness any security owned by the
Fund, except (i) as may be necessary in connection with
permissible borrowings, in which event such mortgaging, pledging,
or hypothecating may not exceed 30% of the Fund's assets, valued
at cost; and (ii) it may enter into futures contracts and options
thereon;
(8) Percent Limit on Assets Invested in Any One Issuer. Purchase the
securities of any issuer (other than obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities) if, as a result, with respect to 75% of the
Fund's assets, more than 5% of the value of the Fund's total
assets would be invested in the securities of a single issuer
(including repurchase agreements with any one issuer);
(9) Real Estate. Purchase or sell real estate limited partnerships
(although it may purchase money market securities secured by real
estate or interests therein, or issued by companies which invest
in real estate or interests therein);
(10) Senior Securities. Issue senior securities except in compliance
with the Investment Company Act of 1940;
PAGE 21
(11) Short Sales and Purchase on Margin. Effect short sales of
securities or 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, subject to (3) above; or
(12) Underwriting. Underwrite securities issued by other persons,
except: (i) 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 of government securities directly
from the issuer in accordance with the Fund's investment
objective, program, and restrictions; and (ii) the later
disposition of restricted securities acquired within the limits
imposed on the acquisition of restricted securities.
<PAGE>
PAGE 22
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Control of Portfolio Companies. Invest in companies for the
purpose of exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result, more
than 10% of its net assets would be invested in illiquid
securities, including repurchase agreements which do not provide
for payment within seven days, provided that the Fund will not
invest more than 5% of its total assets in restricted securities
(other than securities eligible for resale under Rule 144A of the
Securities Act of 1933);
(3) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to oil, gas, other
mineral exploration or development programs;
(4) Options, Etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except that the Fund may invest in or commit
its assets to writing call and put options and purchasing put and
call options;
(5) Ownership of Portfolio Securities by Officers and Directors.
Purchase or retain the securities of any issuer if, to the
knowledge of the Fund's management, those officers and directors
of the Fund, and of its investment manager, who each owns
beneficially more than .5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities;
(6) Percent Limit on Share Ownership of Any One Issuer. Purchase the
securities of any issuer (other than obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities) if, as a result, more than 10% of the
outstanding voting securities of any issuer would be held by the
Fund; or
(7) Unseasoned Issuers. Purchase a security (other than obligations
issued or guaranteed by the U.S. government, its 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 of
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).
Under the 1940 Act, the Fund may not invest in any securities of any
issuer which, in its most recent fiscal year, derived more than 15% of its
gross revenues from "securities related activities," as defined by rules of
the 1940 Act, unless certain conditions are met. As a result of these
restrictions, the Fund may not invest in the securities of certain banks,
broker-dealers and other companies in foreign countries. If the Fund finds
that this restriction prevents it from pursuing its investment objective, it
may apply to the Securities and Exchange Commission for an order which would
permit it to acquire such securities, but no assurance can be given that any
such order will be granted. It is also possible the law in this area will
change, in which case the Fund could have greater flexibility in the purchase
of the securities of foreign banks, broker-dealers, and other companies.
PAGE 23
INVESTMENT PERFORMANCE
Total Return Performance
The Fund's calculation of total return performance includes the
reinvestment of all capital gain distributions and income dividends for the
period or periods indicated, without regard to tax consequences to a
shareholder in the Fund. Total return is calculated as the percentage change
between the beginning value of a static account in the Fund and the ending
value of that account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital gains
dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual
compound rate of return is derived from the cumulative performance of the Fund
over the time period specified. The annual compound rate of return for the
Fund may vary from any average.
Cumulative Performance Percentage Change
1 Year 3 Years Since Inception
Ended Ended 6/30/88 to
12/31/91+ 12/31/92 12/31/92++
_________ ________ _______________
Small-Cap Value Fund 20.87% 43.90% 63.43%
S&P 500 7.61 36.43 85.44
NASDAQ Composite 15.45 48.84 71.53
Lipper Small Company
Growth Average 12.54 52.88 83.90
CPI 2.90 12.85 20.59
Total Return
Capital Dividend Total
Change Income Return
_______ ________ ______
12/31/91 - 12/31/92 19.89% 0.98% 20.87%
12/31/89 - 12/31/92 37.00 6.90 43.90
6/30/88 - 12/31/92 52.08 11.35 63.43
<PAGE>
PAGE 24
Average Annual Compound Rates of Return
1 Year 3 Years Since Inception
Ended Ended 6/30/88 to
12/31/92+ 12/31/92 12/31/92++
_________ ________ _______________
Small-Cap Value Fund 20.87% 12.89% 11.53%
S&P 500 7.61 10.90 14.69
NASDAQ Composite 15.45 14.16 12.72
Lipper Small Company
Growth Average 12.54 15.18 14.11
CPI 2.90 4.11 4.24
+ If you invested $1,000 at the beginning of 1992, the total return on
12/31/92 would be $1,208.70 [($1,000 x 1.2087)].
++Assumes purchase of one share of the Small-Cap Value Fund at the inception
price of $10.00 on 6/30/88. Over this time, stock prices in general have
risen.
From time to time, in reports and promotional literature: (1) the
Fund's total return performance or P/E ratio may be compared with any one or
combination of the following: (i) the Standard & Poor's 500 Stock Index and
Dow Jones Industrial Average so that you may compare the Fund's results with
those of a group of unmanaged securities widely regarded by investors as
representative of the stock market in general; (ii) other groups of mutual
funds, including T. Rowe Price Funds, tracked by: (A) Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets; (B) Morningstar, Inc.,
another widely used independent research firm which ranks mutual funds; or (C)
other financial or business publications, such as Business Week, Money
Magazine, Forbes and Barron's, which provide similar information; (iii)
indices of stocks comparable to those in which the Fund invests; (2) the
Consumer Price Index (measure for inflation) may be used to assess the real
rate of return from an investment in the Fund; (3) other government statistics
such as GNP, and net import and export figures derived from governmental
publications, e.g. The Survey of Current Business, may be used to illustrate
investment attributes of the Fund or the general economic, business,
investment, or financial environment in which the Fund operates; (4) the
effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general, may be illustrated by graphs, charts, etc. where such
graphs or charts would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and assuming one or more
tax rates) with the return on a taxable basis; and (5) the sectors or
industries in which the Fund invests may be compared with relevant indices or
surveys (e.g. S&P Industry Surveys) in order to evaluate the
<PAGE>
PAGE 25
Fund's historical performance or current or potential value with respect to
the particular industry or sector. In connection with (4) above, information
derived from the following chart may be used:
IRA Versus Taxable Returns
Assuming 9% annual rate of return, $2,000 annual contribution, and 28%
tax bracket.
Tax
Year Taxable Deferred
____ _______ ________
10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200
IRAs
An IRA is a long-term investment whose objective is to accumulate
personal savings for retirement. Due to the long-term nature of the
investment, even slight differences in performance will result in
significantly different assets at retirement. Mutual funds, with their
diversity of choice, can be used for IRA investments. Generally, individuals
may need to adjust their underlying IRA investments as their time to
retirement and tolerance for risk changes.
Other Features and Benefits
The Fund is a member of the T. Rowe Price Family of Funds and may help
investors achieve various long-term investment goals, such as investing money
for retirement, saving for a down payment on a home, or paying college costs.
To explain how the Fund could be used to assist investors in planning for
these goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc. and/or T.
Rowe Price Investment Services, Inc. may be made available. 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; the Retirement Planning Kit (also
available in a PC version) which includes a detailed workbook to determine how
much money you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes a detailed
workbook to determine how much money you can afford to spend and still
preserve your purchasing power and suggests how you might invest to reach your
goal. From time to time, other worksheets and guides may be made available as
well. Of course, an investment in the Fund cannot guarantee that such goals
will be met.
To assist investors in understanding the different returns and risk
characteristics of various investments, the aforementioned guides will include
presentation of historical returns of various investments using published
indices. An example of this is shown below.
<PAGE>
PAGE 26
Performance
Small company stocks achieved higher total annualized returns than
large-cap stocks and long-term bonds for the 25 and 50-year periods ending
December 31, 1992, as shown in the following table. The table shows the
reversal of these trends during the past ten years.
Historical Returns for Different Investments
Annualized returns for periods ended 12/31/92
50 years 25 years 10 years 5 years
Small-Company Stocks 16.3% 12.4% 11.6% 13.6%
Large-Company Stocks 12.6 10.6 16.2 15.9
Foreign Stocks N/A N/A 17.1 1.6
Long-Term Corporate Bonds 5.4 8.8 13.1 12.5
Intermediate-Term U.S.
Gov't. Bonds 5.6 9.0 11.0 10.3
Treasury Bills 4.6 7.2 6.9 6.3
U.S. Inflation 4.3 5.9 3.8 4.2
Sources: Ibbotson Associates. Foreign stocks reflect performance of The
Morgan Stanley Capital International EAFE Index, which includes some 1,000
companies representing the stock markets of Europe, Australia, New Zealand,
and the Far East. This chart is for illustrative purposes only and should not
be considered as performance for any T. Rowe Price Fund. Past performance
does not guarantee future results.
Also included will be various portfolios demonstrating how these historical
indices would have performed in various combinations over a specified time
period in terms of return. An example of this is shown below.
<PAGE>
PAGE 27
Performance of Retirement Portfolios*
Asset Mix Annualized Returns Number Value
20 Years Ending of Years of
12/31/92 with $10,000
Negative Investment
Returns After Period
____________________________________________________ ______
Best Worst
Portfolio Growth Income Safety Average Year Year
I. Low
Risk 15% 35% 50% +9.0% +19.0% -0.2% 1 $ 56,451
II. Moderate
Risk 55% 30% 15% +10.4% +25.7% - 7.5% 2 $ 72,918
III. High
Risk 85% 15% 0% +11.2% +34.5% -16.2% 5 $ 83,382
Source: T. Rowe Price Associates; data supplied by Ibbotson Associates.
* Based on actual performance of stocks (Wilshire 5000), Lehman Brothers
Government/Corporate Bond Index, and Treasury bills from January 1973
through December 1992. Past performance does not guarantee future
results. Figures include changes in principal value and reinvested
dividends. This Exhibit is for illustrative purposes only and is not
representative of the performance of any T. Rowe Price Fund.
The average price-earnings (p/e) ratio of the T. Rowe Price New
Horizons Fund is a valuation measure widely used by the investment community
with respect to small company stocks, and, in the opinion of T. Rowe Price,
has been a good indicator of future small-cap stock performance. The
following chart is intended to show the history of the average (unweighted)
p/e ratio of the New Horizons Fund's portfolio companies compared with the p/e
ratio of the Standard & Poor's 500 Index. Of course, the portfolio of the
Small-Cap Value Fund will differ from the portfolio of the New Horizons Fund.
Earnings per share are estimated by Price Associates for each quarter end.
<PAGE>
PAGE 28
T. ROWE PRICE NEW HORIZONS FUND, INC.
P/E Ratio of Fund's Portfolio Securities
Relative to the S&P "500" P/E Ratio
(12 Months Forward) January 31, 1993
SEE APPENDIX
Redemptions in Kind
In the unlikely event a shareholder were to receive an in kind
redemption of portfolio securities of the Fund, brokerage fees could be
incurred by the shareholder in a subsequent sale of such securities.
Issuance of Fund Shares for Securities
Transactions involving issuance of a fund's 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 objectives and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.
MANAGEMENT OF FUND
The officers and directors of the Fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the Fund's directors who
are considered "interested persons" of T. Rowe Price or the Fund as defined
under Section 2(a)(19) of the Investment Company Act of 1940 are noted with an
asterisk (*). These directors are referred to as inside directors by virtue
of their officership, directorship and/or employment with T. Rowe Price.
PAGE 29
*EDWARD J. MATHIAS, Chairman of the Board--Managing Director, T. Rowe Price
ADDISON LANIER, Director--Financial management; President and Director, Thomas
Emery's Sons, Inc. and Emery Group, Inc.; Director, Scinet Development and
Holdings, Inc.; Address: 441 Vine Street, #2310, Cincinnati, Ohio 45202-2913
*JAMES S. RIEPE, Vice President and Director--Managing Director, T. Rowe
Price; Chairman of the Board, T. Rowe Price Services, Inc., T. Rowe Price
Retirement Plan Services, Inc. and T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc.; Director, Rhone-Paulenc
Rorer, Inc.
HUBERT D. VOS, Director--President, Stonington Capital Corporation, a private
investment company; Address: 1231 State Street, Suite 210, Santa Barbara,
California 93190-0409
PAUL M. WYTHES, Director--Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation, Interventional Technologies, Inc., and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304
PRESTON G. ATHEY, President--Vice President, T. Rowe Price
MARCY L. FISHER, Vice President--Assistant 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.
GREGORY A. MCCRICKARD, Vice President--Vice President, T. Rowe Price
RICHARD T. WHITNEY, Vice President--Vice President, T. Rowe Price and T.
Rowe Price Trust Company; Chartered Financial Analyst
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.
FRANCIES W. HAWKS, Assistant Vice President--Assistant Vice President, T. Rowe
Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T. Rowe Price
<PAGE>
PAGE 30
The Fund's Executive Committee, comprised of Messrs. Mathias and Riepe,
has been authorized by the Board of Directors to exercise all powers of the
Board to manage the Fund 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 directors of the
Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
As of December 31, 1992, the following shareholder beneficially owned
more than 5% of the outstanding shares of the Fund: Charles Schwab & Co.,
Inc., Reinvest Account, Attn: Mutual Fund Department, 101 West Montgomery
street, San Francisco, CA 94104-4122.
INVESTMENT MANAGEMENT SERVICES
Services
Under the Management Agreement, T. Rowe Price provides the Fund with
discretionary investment services. Specifically, T. Rowe Price is responsible
for supervising and directing the investments of the Fund in accordance with
the Fund's investment objective, program, and restrictions as provided in its
prospectus and this Statement of Additional Information. T. Rowe Price is
also responsible for effecting all security transactions on behalf of the
Fund, including the negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these services, T. Rowe
Price provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence and corporate records;
registering and qualifying Fund shares under federal and state laws;
monitoring the financial, accounting, and administrative functions of the
Fund; maintaining liaison with the agents employed by the Fund such as the
Fund's custodian and transfer agent; assisting the Fund in the coordination of
such agents' activities; and permitting T. Rowe Price's employees to serve as
officers, directors, and committee members of the Fund without cost to the
Fund.
The Management Agreement also provides that T. Rowe Price, its
directors, officers, employees, and certain other persons performing specific
functions for the Fund will only be liable to the Fund for losses resulting
from willful misfeasance, bad faith, gross negligence, or reckless disregard
of duty.
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of two
components: a Group Management Fee ("Group Fee") and an Individual Fund Fee
("Fund Fee"). The Fee is paid monthly to T. Rowe Price on the first business
day of the next succeeding calendar month and is calculated as described
below.
The monthly Group Fee ("Monthly Group Fee") is the sum of the daily
Group Fee accruals ("Daily Group Fee Accruals") for each month. The Daily
Group Fee Accrual for any particular day is computed by multiplying the Price
Funds' group fee accrual as determined below ("Daily Price Funds' Group Fee
Accrual") by the ratio of the 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
PAGE 31
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
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 the 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 0.35% and multiplying this product by the net assets of the Fund for
that day, as determined in accordance with the Fund's prospectus as of the
close of business on the previous business day on which the Fund was open for
business.
The management fees paid by the Fund for 1992, 1991 and 1990, were
$1,165,000, $119,000, and $60,000, respectively.
Limitation on Fund Expenses
The Management Agreement between the Fund and T. Rowe Price provides
that the Fund will bear all expenses of its operations not specifically
assumed by T. Rowe Price. However, in compliance with certain state
regulations, T. Rowe Price will reimburse the Fund for certain expenses which
in any year exceed the limits prescribed by any state in which the Fund's
shares are qualified for sale. Presently, the most restrictive expense ratio
limitation imposed by any state is 2.5% of the first $30 million of the Fund's
average daily net assets, 2% of the next $70 million of the Fund's assets, and
1.5% of net assets in excess of $100 million. For the purpose of determining
whether the Fund is entitled to reimbursement, the expenses of the Fund are
calculated on a monthly basis. If the Fund is entitled to reimbursement, that
month's management fee will be reduced or postponed, with any adjustment made
after the end of the year. Under certain circumstances, the Fund may
authorize T. Rowe Price to obtain a full or partial variance from state
expense ratio limitations. The Management Agreement provides that T. Rowe
Price may voluntarily agree to limit the expenses of the Fund. In accordance
with the Agreement, effective January 1, 1990, T. Rowe Price agreed to bear
any expenses through December 31, 1991, which would cause the Fund's ratio of
expenses to average net assets to exceed 1.25%. Effective January 1, 1992, T.
Rowe Price agreed to extend the Fund's expense limitation for a period of two
years through December 31, 1993. 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 1.25%; however, no reimbursement will be
PAGE 32
made after December 31, 1993 (for the first agreement) or December 31, 1995
(for the second agreement), or if it would result in the expense ratio
exceeding 1.25%.
Pursuant to these agreements, $112,000 of unaccrued 1990-91 fees were
repaid during the year ended December 31, 1992 and $180,000 remains subject to
reimbursement through December 31, 1993.
DISTRIBUTOR FOR FUND
T. Rowe Price Investment Services, Inc. ("Investment Services"), a
Maryland corporation formed in 1980 as a wholly-owned subsidiary of T. Rowe
Price, serves as the Fund's distributor. Investment Services is registered as
a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. The offering of the
Fund's shares is continuous.
Investment Services is located at the same address as the Fund and T.
Rowe Price -- 100 East Pratt Street, Baltimore, Maryland 21202.
Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection 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 offering and selling Fund shares;
preparing, setting in type, printing, and mailing all sales literature and
advertising; Investment Services' federal and state registrations as a
broker-dealer; and offering and selling Fund shares, except for those fees and
expenses specifically assumed by the Fund. Investment Services' expenses are
paid by T. Rowe Price.
Investment Services acts as the agent of the Fund in connection with
the sale of its shares in all states in which the shares are qualified and in
which Investment Services is qualified as a
<PAGE>
PAGE 33
broker-dealer. Under the Underwriting Agreement, Investment Services accepts
orders for Fund shares at net asset value. No sales charges are paid by
investors or the Fund.
CUSTODIAN
State Street Bank and Trust Company (the "Bank") is the custodian for
the Fund's securities and cash, but it does not participate in the Fund's
investment decisions. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank and may be entered into the Federal
Reserve Book Entry System, or the security depository system of the Depository
Trust Corporation. The Bank and Fund have entered into a Sub-Custodian
Agreement with The Chase Manhattan Bank, N.A., London, pursuant to which
portfolio securities which are purchased outside the United States are
maintained in the custody of various foreign branches and affiliates of The
Chase Manhattan Bank and such other custodians, including foreign banks and
foreign securities depositories, in accordance with regulations under the
Investment Company Act of 1940. The Bank's main office is at 225 Franklin
Street, Boston, Massachusetts 02110. The address for The Chase Manhattan
Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P 2HD,
England.
PORTFOLIO TRANSACTIONS
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund are made by T. Rowe Price. T. Rowe Price is also
responsible for implementing these decisions, including the negotiation of
commissions and the allocation of portfolio brokerage and principal business.
How Brokers and Dealers are Selected
Equity Securities
In purchasing and selling the Fund's portfolio securities, it is T. Rowe
Price's policy to obtain quality execution at the most favorable prices
through responsible brokers and dealers and, in the case of agency
transactions, at competitive commission rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among market-makers, T.
Rowe Price generally seeks to select those it believes to be actively and
effectively trading the security being purchased or sold. In selecting
broker-dealers to execute the Fund's portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the
commission, the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational capabilities of
competing brokers and dealers, and brokerage and research services provided by
them. It is not the policy of T. Rowe Price to seek the lowest available
commission rate where it is believed that a broker or dealer charging a higher
commission rate would offer greater reliability or provide better price or
execution.
<PAGE>
PAGE 34
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. Transactions placed
through dealers serving as primary market-makers reflect the spread between
the bid and asked prices. Securities may also be purchased from underwriters
at prices which include underwriting fees.
With respect to equity and fixed income securities, T. Rowe Price may
effect principal transactions on behalf of the Fund with a broker or dealer
who furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the
acquisition of securities in underwritings.
How Evaluations are Made of the Overall Reasonableness of Brokerage
Commissions Paid
On a continuing basis, T. Rowe Price seeks to determine what levels of
commission rates are reasonable in the marketplace for transactions executed
on behalf of the Fund. In evaluating the reasonableness of commission rates,
T. Rowe Price considers: (a) historical commission rates, both before and
since rates have been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c) rates quoted
by brokers and dealers; (d) the size of a particular transaction, in terms of
the number of shares, dollar amount, and number of clients involved; (e) the
complexity of a particular transaction in terms of both execution and
settlement; (f) the level and type of business done with a particular firm
over a period of time; and (g) the extent to which the broker or dealer has
capital at risk in the transaction.
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's Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays cash for
certain research services received from external sources. T. Rowe Price also
allocates brokerage for research services which are available for cash. While
receipt of research services from brokerage firms has not reduced T. Rowe
Price's normal research activities, the expenses of T. Rowe Price could be
materially increased if it attempted to generate such additional information
through its own staff. To the extent that research services of value are
provided by brokers or dealers, T. Rowe Price may be relieved of expenses
PAGE 35
which it might otherwise bear.
T. Rowe Price has a policy of not allocating brokerage business in
return for products or services other than brokerage or research services. In
accordance with the provisions of Section 28(e) of the Securities Exchange Act
of 1934, T. Rowe Price may from time to time receive services and products
which serve both research and non-research functions. In such event, T. Rowe
Price makes a good faith determination of the anticipated research and non-
research use of the product or service and allocates brokerage only with
respect to the research component.
Commissions to Brokers who Furnish Research Services
Certain brokers who provide quality execution services also furnish
research services to T. Rowe Price. In order to be assured of continuing to
receive research services considered of value to its clients, 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.
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 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, 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
and make judgments as to the level of business which would recognize such
services. In addition, brokers 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 brokerage business is allocated on the basis of all the
considerations described above. In no case is a broker 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
PAGE 36
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 which execute transactions
for the Fund are not necessarily used by T. Rowe Price exclusively in
connection with the management of the Fund.
From time to time, orders for clients may be placed through a
computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis of
its sales of the Fund's shares. However, this does not mean that broker-
dealers who purchase Fund shares for their clients will not receive business
from the Fund.
Some of T. Rowe Price's other clients have investment objectives and
programs similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution which
generally results in lower commission rates being attained. In certain cases,
where the aggregate order is executed in a series of transactions at various
prices on a given day, each participating client's proportionate share of such
order reflects the average price paid or received with respect to the total
order. T. Rowe Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a company for
its clients (including the T. Rowe Price Funds) if, as a result of such
purchases, 10% or more of the outstanding common stock of such company would
be held by its clients in the aggregate.
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.
Transactions with Related Brokers and Dealers
As provided in the Investment Management Agreement between the Fund and
T. Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions and
the allocation of portfolio brokerage and principal business. It is expected
that T. Rowe Price may place orders for the Fund's portfolio transactions with
broker-dealers through the same trading desks T. Rowe Price uses for portfolio
transactions in domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings") and Jardine Fleming Group Limited
("JFG"), persons indirectly related to T. Rowe Price. Robert Fleming
Holdings, through Copthall Overseas Limited, a wholly-owned subsidiary, owns
25% of the common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an
investment adviser registered under the Investment Advisers Act of 1940.
Fifty percent of the common stock of RPFI is owned by TRP Finance, Inc., a
wholly-owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by
PAGE 37
Robert Fleming Holdings and 50% owned by Jardine Matheson Holdings Limited.
Orders for the Fund's portfolio transactions placed with affiliates of Robert
Fleming Holdings and JFG will result in commissions being received by such
affiliates.
The Board of Directors of the Fund has authorized T. Rowe Price to
utilize certain affiliates of Robert Fleming and JFG in the capacity of broker
in connection with the execution of the Fund's portfolio transactions. These
affiliates include, but are not limited to, Jardine Fleming Securities Limited
("JFS"), a wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and Robert Fleming,
Inc. (a New York brokerage firm). Other affiliates of Robert Fleming Holdings
and JFG also may be used. Although it does not believe that the Fund's use of
these brokers would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors of the Fund has agreed that the procedures set
forth in Rule 17(e)(1) under that Act will be followed when using such
brokers.
Other
For the years 1992, 1991 and 1990, the total brokerage commissions paid
by the Fund, including the discounts received by securities dealers in
connection with underwritings, were approximately $661,000, $117,000, and
$82,000, respectively. Of these commissions, approximately 26.2%, 12.8%, and
36.5%, respectively, were paid to firms which provided research, statistical
or other services to T. Rowe Price in connection with the management of the
Fund, or in some cases, to the Fund.
On December 31, 1992, the Fund held 55,000 shares of common stock of
Piper, Jaffray, 23,000 shares of common stock of Quick & Reilly, and 9,000
shares of common stock of Raymond James Financial, with a value of $1,471,000,
$569,000, and $201,000, respectively. Piper, Jaffray, Quick & Reilly, and
Raymond James Financial were among the Fund's regular brokers or dealers as
defined in Rule 10b-1 under the Investment Company Act of 1940.
The portfolio turnover rate of the Fund for each of the last three
years has been as follows: 1992--12%, 1991--31%, and 1990--33%.
<PAGE>
PAGE 38
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Other equity securities and those listed
securities that are not traded on a particular day are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors, or by persons delegated by the Board, best to reflect fair value.
Debt securities are generally traded in the over-the-counter market
and are valued at a price deemed best to reflect fair value as quoted by
dealers who make markets in these securities or by an independent pricing
service. Short-term debt securities are valued at their cost in local
currency which, when combined with accrued interest, approximates fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
Fund, as authorized by the Board of Directors.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price. The Fund determines its net
asset value per share by subtracting its liabilities (including accrued
expenses and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income accrued
but not yet received) and dividing the result by the total number of shares
outstanding. The net asset value per share of the Fund is 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 the Fund may be suspended at times (a) during which
the NYSE is closed, other than customary weekend and holiday closings, (b)
during which trading on the NYSE is restricted, (c) during which an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during which a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the Securities and Exchange Commission (or
any succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
DIVIDENDS
Unless you elect otherwise, dividends and capital gain distributions 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
PAGE 39
although the exact timing is subject to change.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code").
A portion of the dividends paid by the Fund may be eligible for the
dividends-received deduction for corporate shareholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends
equal to at least 98% of ordinary income (as of December 31) and capital gains
(as of October 31) in order to avoid a federal excise tax and distribute 100%
of ordinary income and capital gains as of December 31 to avoid federal income
tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to you of such
amounts, although constituting a return of your investment, would be taxable
as either dividends or capital gain distributions. For federal income tax
purposes, the Fund is permitted to carry forward its net realized capital
losses, if any, for eight years, and realize net capital gains up to the
amount of such losses without being required to pay taxes on, or distribute
such gains. On March 31, 1993, the books of the Fund indicated that the
Fund's aggregate net assets included undistributed net income of $1,309,191,
net realized capital gains of $2,408,380, and unrealized appreciation of
$54,441,208.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at the normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders and (ii) the
Fund's distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gain dividends).
Taxation of Foreign Shareholders
The Code provides that dividends from net income will be subject to
U.S. tax. For shareholders who are not engaged in a business in the U.S.,
this tax would be imposed at the rate of 30% upon the gross amount of the
dividends in the absence of a Tax Treaty providing for a reduced rate or
exemption from U.S. taxation. Distributions of net long-term capital gains
realized by the Fund are not subject to tax unless the foreign shareholder is
a nonresident alien individual who was physically present in the U.S. during
the tax year for more than 182 days.
To the extent the Fund invests in foreign securities, the following
would apply:
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PAGE 40
Foreign Currency Gains and Losses
Foreign currency gains and losses, including the portion of gain or
loss on the sale of debt securities attributable to foreign exchange rate
fluctuations, are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by the Fund will be increased; if
the result is a loss, the income dividend paid by the Fund will be decreased.
Adjustments to reflect these gains and losses will be made at the end of the
Fund's taxable year.
Passive Foreign Investment Companies (PFICs)
The Fund may purchase the securities of certain foreign investment
funds or trusts called passive foreign investment companies. Capital gains on
the sale of such holdings will be deemed to be ordinary income regardless of
how long the Fund holds its investment. In addition to bearing their
proportionate share of the fund's expenses (management fees and operating
expenses), shareholders will also indirectly bear similar expenses of such
funds. In addition, the Fund may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to
shareholders.
In accordance with tax regulations, the Fund intends to treat these
securities as sold on the last day of the Fund's fiscal year and recognize any
gains for tax purposes at that time; losses will not be recognized. Such
gains will be considered ordinary income which the Fund will be required to
distribute even though it has not sold the security and received cash to pay
such distributions.
CAPITAL STOCK
The Fund's Charter authorizes the Board of Directors to classify and
reclassify any and all shares which are then unissued, including unissued
shares of capital stock, into any number of classes or series, each class or
series consisting of such number of shares and having such designations, such
powers, preferences, rights, qualifications, limitations, and restrictions, as
shall be determined by the Board subject to the Investment Company Act and
other applicable law. The shares of any such additional classes or series
might therefore differ from the shares of the present class and series of
capital stock and from each other as to preferences, conversions or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption, subject to applicable
law, and might thus be superior or inferior to the capital stock or to other
classes or series in various characteristics. The Board of Directors may
increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that the Fund has authorized to issue
without shareholder approval.
Except to the extent that the Fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class vote
unless and to the extent that such a right might be construed to exist under
Maryland law. The Charter contains no provision entitling the holders of the
present class of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics attaching to
any class of shares, including the present class of capital stock, might be
altered or eliminated, or the class might be combined with another class or
classes, by action approved by the vote of the holders of a majority of all
the shares of all classes entitled to be voted on the proposal, without any
PAGE 41
additional right to vote as a class by the holders of the capital stock or of
another affected class or classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the Fund, a special meeting of
shareholders of the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of all the votes
of the Fund entitled to be cast at such meeting. Shareholders requesting such
a meeting must pay to the Fund the reasonably estimated costs of preparing and
mailing the notice of the meeting. The Fund, however, will otherwise assist
the shareholders seeking to hold the special meeting in communicating to the
other shareholders of the Fund to the extent required by Section 16(c) of the
Investment Company Act of 1940.
The Fund is the successor to PEMCO. PEMCO was a limited partnership
organized on December 23, 1969 under the laws of the state of New York and
registered as an open-end management investment company under the Investment
Company Act of 1940. On June 30, 1988, following approval of its partners,
PEMCO was reorganized as a Maryland corporation. As a result of the
reorganization, the Fund acquired all the assets and assumed all the
liabilities of PEMCO in exchange for shares of the Fund equal in value to the
net asset value of PEMCO immediately prior to the reorganization and PEMCO was
dissolved. T. Rowe Price was the investment adviser to PEMCO.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the Securities Act of
1933, and the Fund or its 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, whose address is 919 Third
Avenue, New York, New York 10022, is legal counsel to the Fund.
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PAGE 42
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, 217 East Redwood Street, Baltimore, Maryland 21202,
are independent accountants to the Fund. The financial statements of the Fund
for the year ended December 31, 1992, and the report of independent
accountants are included in the Fund's Annual Report on pages 6-15. A copy of
the Annual Report accompanies this Statement of Additional Information. The
following financial statements and the report of independent accountants
appearing in the Annual Report for the year ended December 31, 1992, are
incorporated into this Statement of Additional Information by reference:
Annual Report Page
__________________
Report of Independent Accountants 15
Portfolio of Investments, December 31, 1992 6-9
Statement of Assets and Liabilities,
December 31, 1992 9
Statement of Operations, year ended
December 31, 1992 10
Statement of Changes in Net Assets, years ended
December 31, 1992 and December 31, 1991 11
Notes to Financial Statements 12-13
Per Share and Other Information 14
RATINGS OF CORPORATE 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 future
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 characteristics of the desirable investment.
Assurance of interest and principal payments of or 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.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to a debt
PAGE 43
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC - 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 in accordance with the terms of the obligation.
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.
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PAGE 44
APPENDIX
This is a one-line chart that shows the p/e ratio of the New Horizons Fund
relative to the p/e ratio of the S&P 500 Stock Index. The ratio between the
two p/e's is depicted quarterly from 1/31/61 to 1/31/93.
The horizontal axis is divided into four year periods. The vertical axis
indicates the relative p/e ratio with 0.5, 1, 1.5, 2, and 2.5 indicated by
horizontal lines. The ratio at 12/31/61 is 2, is at the lowest point in the
first quarter of 1977 at approximately 0.95, is at the highest point near the
end of 1993 at approximately 2.2, and is at 1.22 on January 31, 1993.
