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PROSPECTUS
May 1, 1997, revised to February 10, 1998
T. Rowe Price
Equity Index 500 Fund
A fund seeking long-term capital growth through investment in stocks composing
the Standard & Poor's 500 Stock Index.
Ram logo
FACTS AT A GLANCE
Equity Index 500 Fund
Investment Goal
To match the total return performance of the U.S. equity markets as represented
by the Standard & Poor's 500 Composite Stock Index/(R)/ (S&P 500 Index).
As with any mutual fund, there is no guarantee the fund will achieve its goal.
Strategy
To invest in all 500 stocks that compose the S&P 500 Index.
Risk/Reward
The potential to match the performance and volatility of the broad stock
market. The share price of the fund may decline, causing a loss.
Investor Profile
Investors seeking capital appreciation and dividend income who can accept the
risk of loss inherent in common stock investing. Appropriate for both regular
and tax-deferred accounts, such as IRAs.
Fees and Charges
100% no load. Shares held for less than six months (excluding those purchased
through reinvested distributions) are subject to a 0.50% redemption fee. No
fees or charges to buy shares or to reinvest dividends; no 12b-1 marketing
fees; free telephone exchange among T. Rowe Price funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed over $99 billion for more
than five million individual and institutional investor accounts as of December
31, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
fund, dated May 1, 1997, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a free
copy, call 1-800-638-5660.
T. Rowe Price Index Trust, Inc.
Prospectus
May 1, 1997, revised to February 10, 1998
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CONTENTS
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1 ABOUT THE FUND
Transaction and Fund Expenses 2
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Financial Highlights 3
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Fund, Market, and Risk 5
Characteristics
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 8
Sale Proceeds
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Distributions and Taxes 10
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Transaction Procedures and 12
Special Requirements
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3 MORE ABOUT THE FUND
Organization and Management 15
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Understanding Performance Information 17
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Investment Policies and Practices 18
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4 INVESTING WITH T. ROWE PRICE
Account Requirements 21
and Transaction Information
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Opening a New Account 21
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Purchasing Additional Shares 23
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Exchanging and Redeeming 23
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Rights Reserved by the Fund 24
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Shareholder Services 25
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Discount Brokerage 27
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Investment Information 28
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ABOUT THE FUND 1
TRANSACTION AND FUND EXPENSES
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o Like all T. Rowe Price funds, this fund is 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in the fund goes to work for you, subject
to the fees explained below. Annual Fund Expenses shows how much it will cost
to operate the fund for a year, based on 1996 fiscal year expenses. These are
costs you pay indirectly, because they are deducted from the fund's total
assets before the daily share price is calculated and before dividends and
other distributions are made. In other words, you will not see these expenses
on your account statement.
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Table 1
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Shareholder Transaction Annual Fund Expenses Percentage of Fiscal 1996
Expenses (After reduction) Average Net Assets
Sales charge "load" on purchases None Management fee 0.14%/a/
Sales charge "load" on reinvested
distributions None Marketing fees (12b-1) None
Redemption fees
(for shares held Total other (shareholder servicing,
less than six months) 0.50% custodial, auditing, etc.) 0.26%/a/
Exchange fees None None
Account maintenance fee/b/ $10 Total fund expenses 0.40%/a/
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a The fund's management fee, other expenses, and total expense ratio would have
been 0.20%, 0.26%, and 0.46%, respectively, had T. Rowe Price not agreed to
waive fees and bear any expenses in accordance with the expense limitations
described below. Effective January 1, 1994, T. Rowe Price agreed to extend the
fund's initial 0.45% expense limitation for a period of two years through
December 31, 1995. Effective January 1, 1996, T. Rowe Price agreed that the
expense ratio for the fund would not exceed 0.40% for a period of two years
from January 1, 1996. Effective January 1, 1998, T. Rowe Price agreed to
extend the existing expense limitation of 0.40% for a period of two years
through December 31, 1999. Fees waived or expenses paid or assumed under these
agreements are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 0.45% (for the first agreement) or 0.40%
(for the second and third agreements). However, no reimbursement will be made
after December 31, 1997 (for the first agreement), December 31, 1999 (for the
second agreement), or December 31, 2001 (for the third agreement); or if it
would result in the expense ratio exceeding 0.45% (for the first agreement) or
b A $2.50 quarterly account maintenance fee is charged for accounts with
Note: The fund charges a $5 fee for wire redemptions under $5,000, subject to
change without notice.
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the fund's investment
manager. The fund's fee is 0.20%.
. "Other" administrative expenses Primarily the servicing of shareholder
accounts, such as providing statements and reports, disbursing dividends, and
providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
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Table 2
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Hypothetical Fund Expenses
1 year 3 years 5 years 10 years
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Fund Expenses $ 4 $13 $22 $ 51
Account Fee 10 30 50 100
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o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
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Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements which are included in its annual
report, and are incorporated by reference into the Statement of Additional
Information (available upon request). The financial statements in the annual
report were audited by Coopers & Lybrand L.L.P., the fund's independent
accountants.
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Table 3 Financial Highlights
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Income From Investment Activities
Period Net Asset Net Net Realized Total From
Ended Value, Investment & Unrealized Investment
Beginning Income Gain (Loss) on Activities
of Period Investments
1990/a/ $ 10.00 $ 0.31/b/ $ (0.28) $ 0.03
1991 9.72 0.34/b/ 2.46 2.80
1992 12.10 0.32/b/ 0.53 0.85
1993 12.63 0.32/b/ 0.86 1.18
1994 13.48 0.36/b/ (0.23) 0.13
1995 13.09 0.39/b/ 4.43 4.82
1996 17.21 0.38/c/ 3.47 3.85
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Less Distributions
Net Net Realized Distributions in Total Net Asset
Investment Gain (Loss) Excess of Net Distributions Value,
Income (Loss) Realized Gain End of Period
$ (0.31) -- -- $ (0.31) $ 9.72
(0.34) $ (0.08) -- (0.42) 12.10
(0.31) (0.01) -- (0.32) 12.63
(0.32) (0.01) -- (0.33) 13.48
(0.36) (0.09) $(0.07) (0.52) 13.09
(0.40) (0.30) -- (0.70) 17.21
(0.38) (0.34) -- (0.72) 20.34
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Table 3 Financial Highlights (continued)
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Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net
Ended (Includes Net Assets Expenses to Investment Portfolio Average
Reinvested ($ Thousands) Average Net Income to Turnover Rate Commission
Distributions) Assets Average Net Rate Paid
Assets
1990/a/ 0.40%/b//d/ $ 7,285 0.45%/b/ 4.28%/b/ 7.0% --
1991 29.20/b/ 22,069 0.45/b/ 3.07/b/ 5.8 --
1992 7.19/b/ 128,242 0.45/b/ 2.57/b/ 0.1 --
1993 9.42/b/ 166,994 0.45/b/ 2.40/b/ 0.8 --
1994 1.01/b/ 270,165 0.45/b/ 2.73/b/ 1.3 --
1995 37.16/b/ 457,256 0.45/b/ 2.54/b/ 1.3 --
1996 22.65/c/ 807,655 0.40/c/ 2.05/c/ 1.3 $0.0183
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a For the period March 30, 1990 (commencement of operations) to December 31,
1990.
b Excludes expenses in excess of a 0.45% voluntary expense limitation in effect
through December 31, 1995.
c Excludes expenses in excess of a 0.40% voluntary expense limitation in effect
through December 31, 1997.
d Annualized.
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
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To help you decide whether this fund is appropriate for you, this section
takes a closer look at its investment objective and approach.
o The fund should not represent your complete investment program nor be used
for short-term trading purposes.
What is the fund's objective?
The fund seeks to match the investment performance of the U.S. equity markets
as represented by the Standard & Poor's 500 Stock Index.
What is the fund's investment program?
The fund will invest in all 500 stocks composing the S&P 500/(R)/, which
includes companies operating across a broad spectrum of the U.S. economy. The
index represents a significant portion of the total market value of all U.S.
common stocks.
S&P/(R)/ first identifies important industry categories and then allocates a
representative sample of stocks to them. It determines the appropriate
percentage of each stock in the index by a "weighting" that reflects the
total market value of its outstanding shares. Because of this weighting
technique, the 50 largest companies in the index currently account for over
45% of its value. The inclusion of a stock in the index is in no way an
endorsement by S&P of its attractiveness as an investment, nor is S&P a
sponsor of the fund, or in any way affiliated with it.
How does a stock index fund differ from the typical stock fund?
Index funds are passively managed, attempting to deviate as little as
possible from a particular benchmark. Since fewer resources are devoted to
researching stocks, and portfolio turnover (the buying and selling of stocks)
is low, an index fund incurs lower costs than the average equity fund. The
typical equity fund is actively managed, meaning the manager makes buy and
sell decisions in pursuit of the fund's investment objective.
Why was the S&P 500 chosen as the fund's benchmark?
The S&P 500 Index is a widely accepted performance benchmark for the U.S.
stock market. Standard & Poor's/(R)/ seeks a representative sample of common
stocks that trade on the New York and American Stock Exchanges as well as
certain Nasdaq National Market and other issues.
How will the fund's portfolio specifically attempt to match the performance of
the index?
The fund relies on a full replication strategy, in which the fund manager
attempts to maintain holdings of every S&P 500 stock in the same relative
weightings as the index. The fund manager may also purchase stock index
futures to manage cash flows.
o Stock index futures can help manage cash flow and track the index
efficiently.
Will the fund's performance match the index exactly?
No. Returns are likely to be slightly below the index primarily because the
fund has fees and transaction expenses while an index has none. The timing of
cash flows and the fund's size can also influence returns. While there is no
guarantee, the investment manager expects the correlation between the fund's
return and the return of the S&P 500 Index to be at least .95. A correlation
of 1.00 means the return of the fund can be completely explained by the
return of the S&P 500.
T. Rowe Price compares the composition of the portfolio with that of the
index at least weekly. If a misweighting develops, the portfolio is
rebalanced to bring it in line with the index. When investing cash flow, the
fund may purchase a sample of stocks from the index or purchase stock index
futures or both. This approach is intended to minimize deviations in
performance versus the index.
What are some of the fund's potential risks?
Because it seeks to closely track performance of the S&P Index, the fund will
be subject to the same degree of fluctuation as the broad U.S. stock market.
Since the fund is passively managed, assets cannot be shifted from one stock
to another based on market conditions or in reaction to trends in market
sectors. Therefore, actively managed funds may outperform this fund.
o The fund's share price will fluctuate; when you sell your shares, you may
lose money.
What are some of the fund's potential rewards?
Stocks have historically been among the most rewarding investments, although
past performance is no guarantee of future results. The fund offers investors
the opportunity to diversify their assets in many industries and individual
stocks. Most of the S&P 500 stocks pay a dividend, which, when reinvested, is
an important capital-building component.
Because it is passively managed, the fund's expenses are lower than the
average stock market fund. Assuming all other factors are equal, lower
expenses can increase a fund's total return. The fund's lower turnover may
also offer a tax benefit, because the amount of capital gain distributions
should be reduced.
What are some potential risks and rewards of investing in the stock market
through the fund?
Common stocks in general offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated by
periods of stagnation and recession. Share prices of all companies, even the
best managed and most profitable, can fall for any number of reasons, ranging
from lower-than-expected earnings to changes in investor psychology.
Significant trading by large institutional investors also can lead to price
declines. Since 1950, the U.S. stock market has experienced 10 negative years
as well as steep drops of shorter duration. Its worst calendar quarter return
in recent years was -22.5% in 1987's fourth quarter.
o Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.
How can I decide if the fund is appropriate for me?
Review your own financial objectives, time horizon, and risk tolerance to
choose the fund suitable for your particular needs. The Equity Index 500 Fund
provides an opportunity for investors seeking long-term capital appreciation
along with some dividend income.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
ABOUT YOUR ACCOUNT 2
PRICING SHARES AND RECEIVING SALE PROCEEDS
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Here are some procedures you should know when investing in a T. Rowe Price
equity fund.
How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the fund
is calculated at 4 p.m. ET each day the New York Stock Exchange is open for
business. To calculate the NAV, the fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
may differ for institutional and employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from and receiving
payments in your financial institution account. ACH is a payment system
supported by over 20,000 banks, savings banks, and credit unions, which
electronically exchanges the transactions primarily through the Federal
Reserve Banks. Proceeds sent by bank wire should be credited to your account
the next business day.
. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after receiving your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
Contingent Redemption Fee
The fund can experience substantial price fluctuations and is intended for
long-term investors. Short-term "market timers" who engage in frequent
purchases and redemptions can disrupt the fund's investment program and
create additional transaction costs that are borne by all shareholders. For
these reasons, the fund assesses a 0.50% fee on redemptions (including
exchanges) of fund shares held for less than six months.
Redemption fees will be paid to the fund to help offset transaction costs.
The fund will use the "first-in, first-out" (FIFO) method to determine the
six-month holding period. Under this method, the date of the redemption or
exchange will be compared with the earliest purchase date of shares held in
the account. If this holding period is less than six months, the fee will be
assessed.
The fee does not apply to any shares purchased through reinvestment of
dividends or to shares held in retirement plans such as 401(k), 403(b), 457,
Keogh, profit sharing, SIMPLE IRA, SEP-IRA, and money purchase pension
accounts. The fee does apply to shares held in IRA accounts and to shares
purchased through automatic investment plans (described under Shareholder
Services). The fee may apply to shares in retirement plans held in broker
omnibus accounts.
In determining "six months" the fund will use the six-month anniversary date
of the transaction. Thus, shares purchased on May 1, 1997, for example, will
be subject to the fee if they are redeemed on or prior to October 31, 1997.
If they are redeemed on or after November 1, 1997, they will not be subject
to the fee.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
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o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office 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 NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund.
Income dividends
. The fund declares and pays dividends (if any) quarterly.
. All or part of the fund's dividends will be eligible for the 70% deduction
for dividends received by corporations.
Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If the fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month. If a second
distribution is necessary, it is usually declared and paid during the first
quarter of the following year.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For accounts opened new or by exchange in 1983
or later, we will provide you with the gain or loss of the shares you sold
during the year, based on the "average cost" method. This information is not
reported to the IRS, and you do not have to use it. You may calculate the
cost basis using other methods acceptable to the IRS, such as "specific
identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distribution made to you. This information will
also be reported to the IRS. All distributions made by the funds are taxable
to you for the year in which they were paid. The only exception is that
distributions declared during the last three months of a calendar year and
paid in January are taxed as though they were paid by December 31. You will
be sent any additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
Short-term capital gain distributions are taxable as ordinary income and
long-term gain distributions are taxable at the applicable long-term gain
rate. The gain is long- or short-term depending on how long the fund held the
securities, not how long you held shares in the fund. If you realize a loss
on the sale or exchange of fund shares held six months or less, your
short-term loss recognized is reclassified to long-term to the extent of any
long-term capital gain distribution received.
Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease the fund's ordinary income dividend. Net foreign currency losses
may result in the fund's dividend being classified as a return of capital.
If a fund pays nonrefundable taxes to foreign governments during the year,
the taxes will reduce the fund's dividends, but will still be included in
your taxable income. However, you may be able to claim an offsetting credit
or deduction on your tax return for your portion of foreign taxes paid by the
fund.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain or dividend distribution.
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive, in the form of a taxable distribution, a portion of the money you
just invested. Therefore, you may also wish to find out the fund's record
date before investing. Of course, the fund's share price may, at any time,
reflect undistributed capital gains or income and unrealized appreciation.
When these amounts are eventually distributed, they are taxable.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
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o Following these procedures helps assure timely and accurate transactions.
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. (The 10-day hold
does not apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
These exchange and redemption services 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 and is not liable for acting on these instructions. 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. A confirmation is sent promptly after the
telephone transaction. All conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of the fund's net assets,
the fund has the right to delay sending your proceeds for up to five business
days after receiving your request, or to pay the difference between the
redemption amount and the lesser of the two previously mentioned figures with
securities from the fund.
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. We define "excessive trading" as
exceeding one purchase and sale involving the same fund within any 120-day
period.
For example, you are in fund A. You can move substantial assets from fund A
to fund B and, within the next 120 days, sell your shares in fund B to return
to fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see Shareholder
Services).
Keeping Your Account Open
Due to the relatively high cost to the fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Account Maintenance Fee
The account maintenance fee is charged on a quarterly basis usually during
the last week of a calendar quarter. On the day of the assessment, accounts
with balances below $10,000 will be charged the fee. Please note that the fee
will be charged to accounts that fall below $10,000 due to market
fluctuations or other reasons. When an account with less than $10,000 is
closed either through redemption or exchange, the fee will be charged and
deducted from the proceeds. The fee will apply to IRA accounts. The fee does
not apply to retirement plans directly registered with T. Rowe Price
Services.
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
MORE ABOUT THE FUND 3
ORGANIZATION AND MANAGEMENT
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How is the fund organized?
The fund was incorporated in Maryland in 1989, and is a "diversified,
open-end investment company," or mutual fund. Mutual funds pool money
received from shareholders and invest it to try to achieve specified
objectives. The fund was originally established as the T. Rowe Price Equity
Index Fund but changed its name to the T. Rowe Price Equity Index 500 Fund
o Shareholders benefit from T. Rowe Price's 60 years of investment management
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
The funds are not required to hold annual meetings and, in order to avoid
unnecessary costs to fund shareholders, do not intend to do so except when
certain matters, such as a change in a fund's fundamental policies, are to be
decided. In addition, shareholders representing at least 10% of all eligible
votes may call a special meeting if they wish for the purpose of voting on
the removal of any fund director or trustee. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the fund will send
you proxy materials that explain the issues to be decided and include a
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.
Portfolio Management
The fund has an Investment Advisory Committee composed of the following
members: Richard T. Whitney, Chairman, Kristen F. Culp, and Donald J. Peters.
The committee chairman has day-to-day responsibility for managing the
portfolio and works with the committee in developing and executing the fund's
investment program. Mr. Whitney has been chairman of the fund's committee
since 1990. He joined T. Rowe Price in 1985 and has been managing investments
since 1986.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of this and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
fund's transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
How are fund expenses determined?
The management agreement spells out the expenses to be paid by the fund. In
addition to the management fee, the fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
o For the fiscal year ended December 31, 1996, fees paid by the fund included
the following: $249,000 to T. Rowe Price Services, Inc. for transfer and
dividend disbursing functions and shareholder services; $854,000 to T. Rowe
Price Retirement Plan Services, Inc. for recordkeeping services for certain
retirement plans; and $61,000 to T. Rowe Price for accounting services.
The Management Fee
The fund pays the fund manager an annual investment management fee of 0.20%
of the average daily net asset value of the fund. The fund calculates and
accrues the fee daily.
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us, in our newsletter, The Price Report, in Insights articles, in T.
Rowe Price advertisements, and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in the fund's annual and semiannual
shareholder reports, and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced
the actual cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.
Shareholder approval is required to substantively change the fund's
objectives and certain investment restrictions noted in the following section
as "fundamental policies." The managers also follow certain "operating
policies" which can be changed without shareholder approval. However,
significant changes are discussed with shareholders in fund reports. The fund
adheres to applicable investment restrictions and policies at the time it
makes an investment. A later change in circumstances will not require the
sale of an investment if it was proper at the time it was made.
Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.
Types of Portfolio Securities
In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
the principal types of portfolio securities and investment management
practices of the fund.
Fundamental policy The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer or if more than 10% of the
voting securities of the issuer would be held by the fund.
Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities index.
Such securities may bear interest or pay dividends at below market (or even
relatively nominal) rates. Under certain conditions, the redemption value of
such an investment could be zero.
o Hybrids can have volatile prices and limited liquidity and their use by the
fund may not be successful.
Operating policy The fund may invest up to 10% of its total assets in hybrid
instruments.
Types of Management Practices
Cash Position
The fund will hold a certain portion of its assets in U.S. and foreign
dollar-denominated money market securities, including repurchase agreements,
in the two highest rating categories, maturing in one year or less. For
temporary, defensive purposes, the fund may invest without limitation in such
securities. This reserve position provides flexibility in meeting
redemptions, expenses, and the timing of new investments and serves as a
short-term defense during periods of unusual market volatility.
Borrowing Money and Transferring Assets
The fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with the fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33 1/3% of total fund assets.
Operating policies The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33 1/3% of the
fund's total assets. The fund may not purchase additional securities when
borrowings exceed 5% of total assets.
Futures and Options
The fund may make such investments to provide an efficient means of
maintaining liquidity while being invested in the market, to facilitate
trading or to reduce transaction costs. The fund may also purchase call
options on stock indices. Such options would be used in a manner similar to
the fund's use of stock index futures.
Futures contracts and options prices can be highly volatile; using them could
lower the fund's total return; and the potential loss from the use of futures
can exceed the fund's initial investment in such contracts.
Operating policies Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not equal more than 5% of the fund's net
asset value. Options on indicies: The fund will not commit more than 5% of
its total assets to premiums when purchasing call options.
Lending of Portfolio Securities
Like other mutual funds, the fund may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In
this event, the fund could experience delays in recovering its securities and
possibly capital losses.
Fundamental policy The value of loaned securities may not exceed
33 1/3% of total fund assets.
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. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1996, 1995,
and 1994, were 1.30%, 1.30%, and 1.30%, respectively.
Standard & Poor's
Although S&P obtains information for inclusion in or for use in the
calculation of the S&P 500 Index from sources which S&P considers reliable,
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein. S&P makes no warranty, express or
implied, as to results to be obtained by the fund, or any other person or
entity from the use of the S&P 500 Index or any data included therein. S&P
makes no express or implied warranties, and expressly disclaims all
warranties of merchantability or fitness for a particular purpose with
respect to the S&P 500 Index or any data included therein. Standard & Poor's,
S&P, S&P 500 Index, Standard & Poor's 500, and 500 are trademarks of
McGraw-Hill, Inc. and have been licensed for use by the fund. The fund is not
sponsored, endorsed, sold, or promoted by S&P, and S&P makes no
representation regarding the advisability of investing in the fund.
INVESTING WITH T. ROWE PRICE 4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. 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.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts
T. Rowe Price Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check together with the New Account Form to the address
on the next page. We do not accept third party checks to open new accounts,
except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh)
ABA# 043000096
T. Rowe Price [fund name]
Account#1004397951
account name and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed above.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under 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. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access, your personal computer, or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the address shown below with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
(For mailgrams, express, registered, or certified mail, see previous section.)
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
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 your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services
P.O. Box 89000
Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300
(For mailgrams, express, registered, or certified mail, see addresses under
Opening a New Account.)
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, if an account
has been restricted due to excessive trading or fraud) upon notice to the
shareholder within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; to
freeze any account and suspend account services when notice has been received of
a dispute between the registered or beneficial account owners or there is reason
to believe a fraudulent transaction may occur; to otherwise modify the
conditions of purchase and any services at any time; or to act on instructions
believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services
1-800-225-5132
1-410-625-6500
Investor Services
1-800-638-5660
1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide with
our Welcome Kit.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call Investor
Services. For information on all other retirement plans, including our no-load
variable annuity, please call our Trust Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account, or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the funds are registered.) Some of
the T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on shares held
for less than six months or one year, as specified in the prospectus. The fee is
paid to the fund.
Automated Services
Tele*Access
1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access, but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
This additional service gives you the opportunity to easily consolidate all of
your investments with one company. Through our discount brokerage, you can buy
and sell individual securities - stocks, bonds, options, and others - at
considerable commission savings over full-service brokers. We also provide a
wide range of services, including:
To open an account 1-800-638-5660
For existing discount brokerage investors 1-800-225-7720
Automated telephone and on-line services
You can enter trades, access quotes, and review account information 24 hours a
day, seven days a week. Any trades executed through these programs save you an
additional 10% on commissions.
Note: Discount applies to our current commission schedule, subject to our $35
minimum commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month Newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
Discount Brokerage is a division of T. Rowe Price Investment Services,
Inc., Member NASD/SIPC.
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
Quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Personal Strategy Planner, Retirees
Financial Guide, Retirement Planning Kit, Tax Considerations for Investors, and
Diversifying Overseas: A T. Rowe Price Guide to International Investing.
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587 24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
Invest With Confidence
T. Rowe Price
Ram logo
F050-040 2/10/98
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE BALANCED FUND, INC.
T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
T. ROWE PRICE CAPITAL APPRECIATION FUND
T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
T. ROWE PRICE EQUITY INCOME FUND
T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
T. ROWE PRICE GROWTH & INCOME FUND, INC.
T. ROWE PRICE GROWTH STOCK FUND, INC.
T. ROWE PRICE HEALTH SCIENCES FUND, INC.
T. ROWE PRICE INDEX TRUST, INC.
T. ROWE PRICE EQUITY INDEX 500 FUND
T. ROWE PRICE EXTENDED EQUITY MARKET INDEX FUND
T. ROWE PRICE TOTAL EQUITY MARKET INDEX FUND
T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
T. ROWE PRICE MID-CAP GROWTH FUND, INC.
T. ROWE PRICE MID-CAP VALUE FUND, INC.
T. ROWE PRICE NEW AMERICA GROWTH FUND
T. ROWE PRICE NEW ERA FUND, INC.
T. ROWE PRICE NEW HORIZONS FUND, INC.
T. ROWE PRICE REAL ESTATE FUND, INC.
T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
T. ROWE PRICE VALUE FUND, INC.
and
INSTITUTIONAL EQUITY FUNDS, INC.
MID-CAP EQUITY GROWTH FUND
(collectively the "Funds" and individually the "Fund")
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate Fund prospectus dated May 1, 1997
(or June 30, 1997, for the T. Rowe Price Diversified Small-Cap Growth Fund,
Inc.; or July 28, 1997, for the T. Rowe Price Media & Telecommunications
Fund, Inc.; or October 31, 1997 for the T. Rowe Price Real Estate Fund; or
January 30, 1998 for the Equity Index Funds), which may be obtained from T.
Rowe Price Investment Services, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202.
If you would like a prospectus for a Fund of which you are not a shareholder,
please call 1-800-638-5660. A prospectus with more complete information,
including management fees and expenses, will be sent to you. Please read it
carefully.
The date of this Statement of Additional Information is May 1, 1997; revised
to June 30, 1997, for the Diversified Small-Cap Growth Fund, Inc.; to July
28, 1997, for the T. Rowe Price Media & Telecommunications Fund, Inc.; to
October 31, 1997 for the T. Rowe Price Real Estate Fund; and to January 30,
1998 for the Equity Index Funds.
C20-043 1/30/98
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock 62 Legal Counsel 63
- ------------------------------------ --------------------------------------
Code of Ethics 50 Management of Funds 29
- ------------------------------------ --------------------------------------
Custodian 50 Net Asset Value Per Share 57
- ------------------------------------ --------------------------------------
Distributor for Fund 49 Organization of the Funds 62
- ------------------------------------ --------------------------------------
Dividends and Distributions 57 Portfolio Management Practices 14
- ------------------------------------ --------------------------------------
Federal Registration of 63 Portfolio Transactions 51
Shares
- ------------------------------------ --------------------------------------
Independent Accountants 64 Pricing of Securities 56
- ------------------------------------ --------------------------------------
Investment Management 44 Principal Holders of 44
Services Securities
- ------------------------------------ --------------------------------------
Investment Objectives and 2 Ratings of Corporate Debt 74
Policies Securities
- ------------------------------------ --------------------------------------
Investment Performance 58 Risk Factors 2
- ------------------------------------ --------------------------------------
Investment Program 5 Shareholder Services 50
- ------------------------------------ --------------------------------------
Investment Restrictions 26 Tax Status 57
- ------------------------------------ --------------------------------------
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each Fund's
investment objectives and policies discussed in each Fund's prospectus.
The Funds will not make a material change in their investment objectives
without obtaining shareholder approval. Unless otherwise specified, the
investment programs and restrictions of the Funds are not fundamental
policies. Each Fund's operating policies are subject to change by each Board
of Directors/Trustees without shareholder approval. However, shareholders
will be notified of a material change in an operating policy. Each Fund's
fundamental policies 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.
Throughout this Statement of Additional Information, "the Fund" is intended
to refer to each Fund listed on the cover page, unless otherwise indicated.
RISK FACTORS
-------------------------------------------------------------------------------
Because of its investment policy, the Fund may or may not be suitable or
appropriate for all investors. The Fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. The Fund will normally have substantially all (for the Balanced
Fund 50-70% and for the Capital Appreciation Fund at least 50%) of its assets
in equity securities (e.g., common stocks). This portion of the Fund's assets
will be subject to all of the risks of investing in the stock market. There
is risk in all investment. The value of the portfolio securities of the Fund
will fluctuate based upon market conditions. Although the Fund seeks to
reduce risk by investing in a diversified portfolio, such diversification
does not eliminate all risk. There can, of course, be no assurance that the
Fund will achieve its investment objective. Reference is also made to the
sections entitled "Types of Securities" and "Portfolio Management Practices"
for discussions of the risks associated with the investments and practices
described therein as they apply to the Fund.
2
<PAGE>
Foreign Securities (All Funds other than Equity Index 500, Extended Equity
Market, and Total Equity Market Funds)
The Fund may invest in U.S. dollar-denominated and non-U.S.
dollar-denominated securities of foreign issuers.
Risk Factors of Foreign Investing
There are special risks in foreign investing. Certain of these risks are
inherent in any international mutual fund while others relate more to the
countries in which the Funds will invest. Many of the risks are more
pronounced for investments in developing or emerging countries, such as many
of the countries of Southeast Asia, Latin America, Eastern Europe and the
Middle East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which is in the
initial stages of its industrialization cycle with a per capita gross
national product of less than $8,000.
Political and Economic Factors Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy
in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as
stable as in the United States. For example, in 1991, the existing government
in Thailand was overthrown in a military coup. In 1992, there were two
military coup attempts in Venezuela and in 1992 the President of Brazil was
impeached. In addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim sovereignty of one
another and there is a demilitarized border between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies
of many foreign countries are heavily dependent upon international trade and
are accordingly affected by protective trade barriers and economic conditions
of their trading partners. The enactment by these trading partners of
protectionist trade legislation could have a significant adverse effect upon
the securities markets of such countries.
Currency Fluctuations The Fund may invest in securities denominated in
various currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U. S.
dollar value of the Fund's assets denominated in that currency. Such changes
will also affect the Fund's income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of the Fund's
securities denominated in that currency will rise. When a given currency
depreciates against the dollar (the dollar strengthens) the value of the
Fund's securities denominated in that currency would be expected to decline.
Investment and Repatriation of Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions may limit at times and preclude
investment in certain of such countries and may increase the cost and
expenses of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These restrictions may
take the form of prior governmental approval, limits on the amount or type of
securities held by foreigners, and limits on the types of companies in which
foreigners may invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including
in some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.
Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on stock exchanges located in the
countries in which the respective principal offices of the issuers of the
various securities are located, if that is the best available market.
Investments in certain markets may be made through ADRs traded in the United
States. Foreign stock markets are generally not as developed or efficient as,
and may be more volatile than, those in the United States. While growing in
volume, they usually have substantially less volume than U.S. markets and the
Funds' portfolio securities may be less liquid and subject to more rapid and
erratic price movements than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable
United States securities and such
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levels may not be sustainable. Fixed commissions on foreign stock exchanges
are generally higher than negotiated commissions on United States exchanges,
although the Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government supervision
and regulation of foreign stock exchanges, brokers, and listed companies than
in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets. Such
differences may include delays beyond periods customary in the United States
and practices, such as delivery of securities prior to receipt of payment,
which increase the likelihood of a "failed settlement." Failed settlements
can result in losses to a Fund.
Investment Funds The Fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. If the Fund invests in such
investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.
Information and Supervision There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices, and requirements comparable to those
applicable to United States companies. It also may be more difficult to keep
currently informed of corporate actions which affect the prices of portfolio
securities.
Taxes The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
Other With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Funds, political
or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe and Russia Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs,
growing consumer spending, and substantial economic growth. However,
investment in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too recent to
establish a definite trend away from centrally-planned economies and
state-owned industries. In many of the countries of Eastern Europe and
Russia, there is no stock exchange or formal market for securities. Such
countries may also have government exchange controls, currencies with no
recognizable market value relative to the established currencies of western
market economies, little or no experience in trading in securities, no
financial reporting standards, a lack of a banking and securities
infrastructure to handle such trading, and a legal tradition which does not
recognize rights in private property. In addition, these countries may have
national policies which restrict investments in companies deemed sensitive to
the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as
custodian of the Fund's assets invested in such countries, and these
authorities may not qualify as a foreign custodian under the Investment
Company Act of 1940 and exemptive relief from such Act may be required. All
of these considerations are among the factors which could cause significant
risks and uncertainties to investment in Eastern Europe and Russia. Each Fund
will only invest in a company located in, or a government of, Eastern Europe
and Russia, if it believes the potential return justifies the risk. To the
extent any securities issued by companies in Eastern Europe and Russia are
considered illiquid, each Fund will be required to include such securities
within its 15% restriction on investing in illiquid securities.
Latin America
Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.
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Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.
Foreign Currency Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U. S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. Certain Latin American countries also may restrict the free
conversion of their currency into foreign currencies, including the U.S.
dollar. There is no significant foreign exchange market for certain
currencies and it would, as a result, be difficult for the Fund to engage in
foreign currency transactions designed to protect the value of the Fund's
interests in securities denominated in such currencies.
Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.
INVESTMENT PROGRAM
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Types of Securities
Set forth below is additional information about certain of the investments
described in the Fund's prospectus.
Hybrid Instruments
Hybrid Instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a Fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transactions costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the Fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the Fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of course, there is no guarantee that the strategy will be successful,
and the Fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid.
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The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published Benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party of issuer of the Hybrid Instrument would be an additional risk
factor which the Fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the Fund. Accordingly, the Fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it
is possible that the Fund's investment in Hybrid Instruments will account for
more than 10% of the Fund's return (positive or negative).
Illiquid or 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 Fund's Board of Directors/Trustees. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should
be in a position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
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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/Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
Fund's restriction of investing no more than 15% of its net 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 purchases, (3) dealer undertakings to make a market,
and (4) the 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 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 15% of its net 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 acquire warrants. 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.
Debt Securities
Balanced, Blue Chip Growth, Capital Appreciation, Capital Opportunity,
Dividend Growth, Equity Income, Financial Services, Growth & Income, Media &
Telecommunications, Mid-Cap Value, New Era, Real Estate, Small-Cap Stock,
Small-Cap Value, and Value Funds
Debt Obligations Although a majority of the Fund's assets are invested in
common stocks, the Fund may invest in convertible securities, corporate debt
securities, and preferred stocks which hold the prospect of contributing to
the achievement of the Fund's objectives. Yields on short, intermediate, and
long-term securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the credit quality and rating
of the issuer. Debt securities with longer maturities tend to have higher
yields and are generally subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities and lower yields.
The market prices of debt securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the value of
portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of the Fund to
achieve its investment objective is also dependent on the continuing ability
of the issuers of the debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due. The Fund's
investment program permits it to purchase below investment-grade securities.
Since investors generally perceive that there are greater risks associated
with investment in lower-quality securities, the yields from such securities
normally exceed those obtainable from higher-quality securities. However, the
principal value of lower-rated securities generally will fluctuate more
widely than higher-quality securities. Lower-quality investments entail a
higher risk of default-that is, the nonpayment of interest and principal by
the issuer than higher-quality investments. Such securities are also subject
to special risks, discussed below. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate
all risk. There can, of course, be no assurance that the Fund will achieve
its investment objective.
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After purchase by the Fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, T.
Rowe Price will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus.
Special Risks of High-Yield Investing The Fund may invest in low-quality
bonds commonly referred to as "junk bonds". Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low and
lower-medium-quality bonds involves greater investment risk, to the extent
the Fund invests in such bonds, achievement of its investment objective will
be more dependent on T. Rowe Price's credit analysis than would be the case
if the Fund was investing in higher-quality bonds. High-yield bonds may be
more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high-yield bond prices
because the advent of such events could lessen the ability of highly
leveraged issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high-yield bonds
may be less liquid than the market for higher-grade bonds, which can
adversely affect the ability of a Fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.
Fixed income securities in which the Fund may invest include, but are not
limited to, those described below.
U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.
U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.
Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.
Commercial Paper Short-term promissory notes issued by corporations primarily
to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
Savings and Loan Obligations Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
Supranational Agencies Securities of certain supranational entities, such as
the International Development Bank.
When-Issued Securities and Forward Commitment Contracts
The Fund may purchase securities on a "when-issued" or delayed delivery basis
("When-Issueds") and may purchase securities on a forward commitment basis
("Forwards"). Any or all of the Fund's investments in
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<PAGE>
debt securities may be in the form of When-Issueds and Forwards. The price of
such securities, which may be expressed in yield terms, is fixed at the time
the commitment to purchase is made, but delivery and payment take place at a
later date. Normally, the settlement date occurs within 90 days of the
purchase for When-Issueds, but may be substantially longer for Forwards.
During the period between purchase and settlement, no payment is made by the
Fund to the issuer and no interest accrues to the Fund. The purchase of these
securities will result in a loss if their value declines prior to the
settlement date. This could occur, for example, if interest rates increase
prior to settlement. The longer the period between purchase and settlement,
the greater the risks are. At the time the Fund makes the commitment to
purchase these securities, it will record the transaction and reflect the
value of the security in determining its net asset value. The Fund will cover
these securities by maintaining cash and/or liquid, high-grade debt
securities with its custodian bank equal in value to commitments for them
during the time between the purchase and the settlement. Therefore, the
longer this period, the longer the period during which alternative investment
options are not available to the Fund (to the extent of the securities used
for cover). Such securities either will mature or, if necessary, be sold on
or before the settlement date.
To the extent the Fund remains fully or almost fully invested (in securities
with a remaining maturity of more than one year) at the same time it
purchases these securities, there will be greater fluctuations in the Fund's
net asset value than if the Fund did not purchase them.
Mortgage-Related Securities
Balanced and Real Estate Funds
Mortgage-related securities in which the Fund may invest include, but are not
limited to, those described below.
Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the Fund.
This is in contrast to traditional bonds where principal is normally paid
back at maturity in a lump sum. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. (When
a mortgage in the underlying mortgage pool is prepaid, an unscheduled
principal prepayment is passed through to the Fund. This principal is
returned to the Fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies.
U.S. Government Agency Mortgage-Backed Securities These are obligations
issued or guaranteed by the United States Government of one of its agencies
or instrumentalities, such as the Government National Mortgage Association
("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie
Mae" or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie Mac" or
"FHLMC"), and the Federal Agricultural Mortgage Corporation ("Farmer Mac" or
"FAMC"). FNMA, FHLMC, and FAMC obligations are not backed by the full faith
and credit of the U.S. government as GNMA certificates are, but they are
supported by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates provide for the
pass-through to investors of their pro-rata share of monthly payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees paid to the guarantor of such securities and
the servicer of the underlying mortgage loans. Each of GNMA, FNMA, FHLMC, and
FAMC guarantees timely distributions of interest to certificate holders. GNMA
and FNMA guarantee timely distributions of scheduled principal. FHLMC has in
the past guaranteed only the ultimate collection of principal of the
underlying mortgage loan; however, FHLMC now issues Mortgage-Backed
Securities (FHLMC Gold PCS) which also guarantee timely payment of monthly
principal reductions.
Ginnie Mae Certificates Ginnie Mae is a wholly owned corporate
instrumentality of the United States within the Department of Housing and
Urban Development. The National Housing Act of 1934, as amended (the
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"Housing Act"), authorizes Ginnie Mae to guarantee the timely payment of the
principal of and interest on certificates that are based on and backed by a
pool of mortgage loans insured by the Federal Housing Administration under
the Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or
guaranteed by the Department of Veterans Affairs under the Servicemen's
Readjustment Act of 1944, as amended ("VA Loans"), or by pools of other
eligible mortgage loans. The Housing Act provides that the full faith and
credit of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In order to meet
its obligations under such guaranty, Ginnie Mae is authorized to borrow from
the United States Treasury with no limitations as to amount.
Fannie Mae Certificates Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. FNMA Certificates represent a pro-rata
interest in a group of mortgage loans purchased by Fannie Mae. FNMA
guarantees the timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith and credit
of the U.S. government.
Freddie Mac Certificates Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). Freddie Mac Certificates represent a pro-rata
interest in a group of mortgage loans (a "Freddie Mac Certificate group")
purchased by Freddie Mac. Freddie Mac guarantees timely payment of interest
and principal on certain securities it issues and timely payment of interest
and eventual payment of principal on other securities it issues. The
obligations of Freddie Mac are obligations solely of Freddie Mac and are not
backed by the full faith and credit of the U.S. government.
Farmer Mac Certificates The Federal Agricultural Mortgage Corporation
("Farmer Mac") is a federally chartered instrumentality of the United States
established by Title VIII of the Farm Credit Act of 1971, as amended
("Charter Act"). Farmer Mac was chartered primarily to attract new capital
for financing of agricultural real estate by making a secondary market in
certain qualified agricultural real estate loans. Farmer Mac provides
guarantees of timely payment of principal and interest on securities
representing interests in, or obligations backed by, pools of mortgages
secured by first liens on agricultural real estate ("Farmer Mac
Certificates"). Similar to Fannie Mae and Freddie Mac, Farmer Mac's
Certificates are not supported by the full faith and credit of the U.S.
government; rather, Farmer Mac may borrow up from the U.S. Treasury to meet
its guaranty obligations.
As discussed above, prepayments on the underlying mortgages and their effect
upon the rate of return of a Mortgage-Backed Security, is the principal
investment risk for a purchaser of such securities, like the Fund. Over time,
any pool of mortgages will experience prepayments due to a variety of
factors, including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and (3)
increased amortization by the mortgagee. These factors, in turn, depend upon
general economic factors, such as level of interest rates and economic
growth. Thus, investors normally expect prepayment rates to increase during
periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly,
the life of the Mortgage-Backed Security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment rates, it is not possible to predict
the life of a particular Mortgage-Backed Security, but FHA statistics
indicate that 25- to 30-year single family dwelling mortgages have an average
life of approximately 12 years. The majority of Ginnie Mae Certificates are
backed by mortgages of this type, and, accordingly, the generally accepted
practice treats Ginnie Mae Certificates as 30-year securities which prepay
full in the 12th year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.
Fixed Rate Mortgage-Backed Securities bear a stated "coupon rate" which
represents the effective mortgage rate at the time of issuance, less certain
fees to GNMA, FNMA and FHLMC for providing the guarantee, and the issuer for
assembling the pool and for passing through monthly payments of interest and
principal.
Payments to holders of Mortgage-Backed Securities consist of the monthly
distributions of interest and principal less the applicable fees. The actual
yield to be earned by a holder of Mortgage-Backed Securities is calculated by
dividing interest payments by the purchase price paid for the Mortgage-Backed
Securities (which may be at a premium or a discount from the face value of
the certificate).
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Monthly distributions of interest, as contrasted to semi-annual distributions
which are common for other fixed interest investments, have the effect of
compounding and thereby raising the effective annual yield earned on
Mortgage-Backed Securities. Because of the variation in the life of the pools
of mortgages which back various Mortgage-Backed Securities, and because it is
impossible to anticipate the rate of interest at which future principal
payments may be reinvested, the actual yield earned from a portfolio of
Mortgage-Backed Securities will differ significantly from the yield estimated
by using an assumption of a certain life for each Mortgage-Backed Security
included in such a portfolio as described above.
U.S. Government Agency Multiclass Pass-Through Securities Unlike CMOs, U.S.
Government Agency Multiclass Pass-Through Securities, which include FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multi-Class Mortgage
Participation Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multiclass pass-through securities.
Multi-Class Residential Mortgage Securities Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi-Class Residential Mortgage Securities is not
guaranteed by the U.S. government or any of its agencies. Accordingly, yields
on Multi-Class Residential Mortgage Securities have been historically higher
than the yields on U.S. government mortgage securities. However, the risk of
loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government or its agencies. Additionally, pools of
such securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on the
underlying mortgage loans must be borne by persons holding subordinated
securities before those holding senior mortgage securities.
Privately-Issued Mortgage-Backed Certificates These are pass-through
certificates issued by non-governmental issuers. Pools of conventional
residential mortgage loans created by such issuers generally offer a higher
rate of interest than government and government-related pools because there
are no direct or indirect government guarantees of payment. Timely payment of
interest and principal of these pools is, however, generally supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance. The insurance and guarantees are issued by
government entities, private insurance or the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will
be considered in determining whether a mortgage-related security meets the
Fund's quality standards. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan
experience and practices of the poolers, the investment manager determines
that the securities meet the Fund's quality standards.
Collateralized Mortgage Obligations (CMOs) CMOs are bonds that are
collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO deal are divided into groups, and each group of
bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay principal to
the CMO bondholders. The bonds issued under a CMO structure are retired
sequentially as opposed to the pro-rata return of principal found in
traditional pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required to pay the stated interest) is
used to retire the bonds. Under the CMO structure, the repayment of principal
among the different tranches is prioritized in accordance with the terms of
the particular CMO issuance. The "fastest-pay" tranche of bonds, as specified
in the prospectus for the issuance, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the prospectus, receive all of the
principal payments until they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash flows of long
maturity, monthly-pay collateral to formulate securities with short,
intermediate and long final maturities and expected average lives.
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In recent years, new types of CMO structures have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds and CMO
residuals. These newer structures affect the amount and timing of principal
and interest received by each tranche from the underlying collateral. Under
certain of these new structures, given classes of CMOs have priority over
others with respect to the receipt of prepayments on the mortgages.
Therefore, depending on the type of CMOs in which the Fund invests, the
investment may be subject to a greater or lesser risk of prepayment than
other types of mortgage-related securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments
on the underlying mortgages serving as collateral. An increase or decrease in
prepayment rates (resulting from a decrease or increase in mortgage interest
rates) will affect the yield, averaging life and price of CMOs. The prices of
certain CMOs, depending on their structure and the rate of prepayments, can
be volatile. Some CMOs may also not be as liquid as other securities.
Stripped Agency Mortgage-Backed Securities Stripped Agency Mortgage-Backed
securities represent interests in a pool of mortgages, the cash flow of which
has been separated into its interest and principal components. "IOs"
(interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion.
Stripped Agency Mortgage-Backed Securities may be issued by U.S. Government
Agencies or by private issuers similar to those described above with respect
to CMOs and privately-issued mortgage-backed certificates. As interest rates
rise and fall, the value of IOs tends to move in the same direction as
interest rates. The value of the other mortgage-backed securities described
herein, like other debt instruments, will tend to move in the opposite
direction compared to interest rates. Under the Internal Revenue Code of
1986, as amended (the "Code"), POs may generate taxable income from the
current accrual of original issue discount, without a corresponding
distribution of cash to the Fund.
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets. For example, a rapid or slow rate of principal payments may
have a material adverse effect on the prices of IOs or POs, respectively. If
the underlying mortgage assets experience greater than anticipated
prepayments of principal, an investor may fail to fully recoup its initial
investment in an IO class of a stripped mortgage-backed security, even if the
IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower
than anticipated prepayments of principal, the price on a PO class will be
affected more severely than would be the case with a traditional
mortgage-backed security.
The staff of the Securities and Exchange Commission has advised the Fund that
it believes the Fund should treat IOs and POs, other than government-issued
IOs or POs backed by fixed rate mortgages, as illiquid securities and,
accordingly, limit its investments in such securities, together with all
other illiquid securities, to 15% of the Fund's net assets. Under the staff's
position, the determination of whether a particular government-issued IO and
PO backed by fixed rate mortgages may be made on a case by case basis under
guidelines and standards established by the Fund's Board of
Directors/Trustees. The Fund's Board of Directors/ Trustees has delegated to
T. Rowe Price the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of collateral,
including age and prepayment characteristics; rate of interest on coupon
relative to current market rates and the effect of the rate on the potential
for prepayments; complexity of the issue's structure, including the number of
trenches; size of the issue and the number of dealers who make a market in
the IO or PO. The Fund will treat non-government-issued IOs and POs not
backed by fixed or adjustable rate mortgages as illiquid unless and until the
Securities and Exchange Commission modifies its position.
Asset-Backed Securities
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or
any other affiliated entities and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security is difficult to predict with precision and actual yield to maturity
may be more or less than the anticipated yield to maturity. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
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Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
See "Types of Credit Support".
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing entities are
unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
Real Estate and REIT Risk
Primarily Real Estate Fund (but also any other Fund investing in REITs)
Investors in the Fund may experience many of the same risks involved with
investing in real estate directly. These risks include: declines in real
estate values, risks related to local or general economic conditions,
particularly lack of demand, overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
heavy cash flow dependency, possible lack of availability of mortgage funds,
obsolescence, losses due to natural disasters, condemnation of properties,
regulatory limitations on rents and fluctuations in rental income, variations
in market rental rates, and possible environmental liabilities. Real Estate
Investment Trusts ("REITs") may own real estate properties (Equity REITs) and
be subject to these risks directly, or may make or purchase mortgages
(Mortgage REITs) and be subject to these risks indirectly through underlying
construction, development, and long-term mortgage loans that may default or
have payment problems.
Equity REITs can be affected by rising interest rates that may cause
investors to demand a high annual yield from future distributions which, in
turn, could decrease the market prices for the REITs. In addition, rising
interest rates also increase the costs of obtaining financing for real estate
projects. Since many real estate projects are dependent upon receiving
financing, this could cause the value of the Equity REITs in which the Fund
invests to decline.
Mortgage REITs may hold mortgages that the mortgagors elect to prepay during
periods of declining interest rates which may diminish the yield on such
REITs. In addition, borrowers may not be able to repay mortgages when due
which could have a negative effect on the Fund.
Some REITs have relatively small market capitalizations which could increase
their volatility. REITs tend to be dependent upon specialized management
skills and have limited diversification so they are subject to risks inherent
in operating and financing a limited number of properties. In addition, when
the Fund invests in REITs, a shareholder will bear his proportionate share of
fund expenses and, indirectly bear similar expenses of the REITs. REITs
depend generally on their ability to generate cash flow to make distributions
to shareholders. In addition, both equity and mortgage REITs are subject to
the risks of failing to qualify for tax-free status of income under the
Internal Revenue Code or failing to maintain exemption from the Investment
Company Act of 1940.
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PORTFOLIO MANAGEMENT PRACTICES
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Lending of Portfolio Securities
Securities loans are made to broker-dealers or 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. 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 on securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risk 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
firms 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.
Other Lending/Borrowing
Subject to approval by the Securities and Exchange Commission and certain
state regulatory agencies, the Fund may make loans to, or borrow funds from,
other mutual funds sponsored or advised by T. Rowe Price or Rowe
Price-Fleming International, Inc. ("Price-Fleming"), (collectively, "Price
Funds"). The Fund has no current intention of engaging in these practices at
this time.
Repurchase Agreements
The Fund may enter into a repurchase agreement 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 that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
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
Services, 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. Repurchase agreements which
do not provide for payment within seven days will be treated as illiquid
securities. The Fund will only enter into repurchase agreements 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 security 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.
Reverse Repurchase Agreements
Although the Fund has no current intention, of engaging in reverse repurchase
agreements, the Fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Fund is the seller
of, rather than the investor in, securities, and agrees to repurchase them at
an agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund, subject to
Investment Restriction (1). (See "Investment Restrictions," page 26).
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Money Market Reserves
It is expected that the Funds will invest their cash reserves primarily in
one or more money market funds established for the exclusive use of the T.
Rowe Price family of mutual funds and other clients of T. Rowe Price and
Price-Fleming. Currently, two such money market funds are in
operation-Reserve Investment Fund ("RIF") and Government Reserve Investment
Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. Additional
series may be created in the future. These funds were created and operate
under an Exemptive Order issued by the Securities and Exchange Commission
(Investment Company Act Release No. IC-22770, July 29, 1997).
Both funds must comply with the requirements of Rule 2a-7 under the
Investment Company Act of 1940 governing money market funds. The RIF invests
at least 95% of its total assets in prime money market instruments receiving
the highest credit rating. The GRF invests primarily in a portfolio of U.S.
government-backed securities, primarily U.S. Treasuries, and repurchase
agreements thereon.
The RIF and GRF provide a very efficient means of managing the cash reserves
of the Funds. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The Funds
will only invest in RIF or GRF to the extent it is consistent with each
Fund's objective and program.
Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.
Options
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
Options are a type of potentially high-risk derivative.
Writing Covered Call Options
The Fund may write (sell) American or European style "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 or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's opinion, are not expected to have any
major price increases or moves 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 or
currency 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 or currency 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 or currency in the case of a call option, a writer is
required to deposit in escrow the underlying security or currency 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 or currency subject to the option or an option to purchase
the same underlying security or currency, 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 or currencies.
Portfolio securities or currencies 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
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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, a Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of
the security or currency decline. Unlike one who owns securities or
currencies not subject to an option, the Fund has no control over when it may
be required to sell the underlying securities or currencies, 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 or
currency 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 or
currency. The Fund does not consider a security or currency 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, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, 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 or currency, 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 or currency 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 or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency 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
or currency. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at favorable prices. If the Fund cannot
enter into such a transaction, it may be required to hold a security or
currency 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 securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies 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 or currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency 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 the underlying
security or currency, 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 or currency owned by the Fund.
The Fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the Fund's net
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assets. 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 or currencies with identical maturity dates.
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 or currency 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 to the
exercise price against delivery of the underlying security or currency. 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 or currency 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 or currency for the
Fund's portfolio at a price lower than the current market price of the
security or currency. 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 or currencies 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 or currency 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 or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.
The Fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the Fund's net assets. 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 or currencies 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 or
currency 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 an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided below.
The Fund may purchase a put option on an underlying security or currency (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 or
currency. 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 or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency 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 or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Fund seeks to benefit
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from a decline in the market price of the underlying security or currency. If
the put option is not sold when it has remaining value, and if the market
price of the underlying security or currency 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 or
currency 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.
The Fund will not commit more than 5% of its assets to premiums when
purchasing put and call 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 or currency 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
or currency 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 or currencies. 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 or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the Fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the Fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency 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.
The Fund will not 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 or currencies 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 (Over-the-Counter) 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)
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or currencies 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 a Fund's ability to sell
portfolio securities or currencies 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
instrument accordingly.
Options
(Equity Index 500, Extended Equity Market Index, and Total Equity Market
Index Funds)
The only option activity the Funds currently may engage in is the purchase of
S&P 500 call options for the Equity Index 500 Fund, or the purchases of call
options on any indices that may be consistent with the investment programs
for the Extended Equity Market Index and Total Equity Market Index Funds.
Such activity is subject to the same risks described above under "Purchasing
Call Options." The Funds reserve the right to engage in other options
activity, however.
Futures Contracts
All Funds
Futures contracts are a type of potentially high-risk derivative.
Transactions in Futures
The Fund may enter into futures contracts including stock index, interest
rate, and currency futures ("futures" or "futures contracts").
The New Era Fund may also enter into futures contracts on commodities related
to the types of companies in which it invests, such as oil and gold futures.
The Equity Index 500, Extended Equity Market Index, and Total Equity Market
Index Funds may only enter into stock index futures which are appropriate for
their investment programs to provide an efficient means of maintaining
liquidity while being invested in the market, to facilitate trading, or to
reduce transaction costs. It will not use futures for hedging purposes.
Otherwise the nature of such futures and the regulatory limitations and risks
to which they are subject are the same as those described below.
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. The Fund may 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.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.
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The Fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures
are traded in London, at the London International Financial Futures Exchange,
in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be
used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's objectives in these
areas.
Regulatory Limitations
The Fund will engage in futures contracts and options thereon only for bona
fide hedging, yield enhancement, and risk management purposes, in each case
in accordance with rules and regulations of the CFTC.
The Fund may not purchase or sell futures contracts or related options if,
with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits and
premium paid on those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized losses on
any such contracts it has entered into; provided, however, that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. For purposes of this
policy, options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Board of Directors/Trustees without a shareholder vote and
does not limit the percentage of the Fund's assets at risk to 5%.
In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S. government
securities or other liquid, high-grade debt obligations, equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be identified in an account with the Fund's custodian to
cover the position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover or held in an identified
account cannot be sold while the position in the corresponding option or
future is open, unless they are replaced with similar assets. As a result,
the commitment of a large portion of a Fund's assets to cover or identified
accounts could impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
units of a 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
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position increases because of favorable price changes in the futures contract
so that the margin deposit exceeds the required margin, the broker will pay
the excess to the Fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Fund expects
to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
For example, the Standard & Poor's 500 Stock Index is made up 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
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 political and economic events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
Margin deposits required on futures trading are low. 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
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Fund would presumably have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying financial instrument and
sold it after 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 short futures positions. The Fund
may close its positions by taking opposite positions which would operate to
terminate the Fund's position in the futures contracts. Final determinations
of variation margin would then be made, additional cash would be required to
be paid by or released to the Fund, and the Fund would realize a loss or a
gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the Fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described below, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Hedging Risk A decision of whether, when, and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior, market or interest rate trends. There
are several risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the futures contracts and movements in the
prices of the underlying instruments which are the subject of the hedge. T.
Rowe Price will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its judgment, will have a significant
correlation with movements in the prices of the Fund's underlying instruments
sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is also
subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures 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 used to hedge the portfolio. It is also possible that if
the Fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the Fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The Fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between
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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 imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.
Options on Futures Contracts
The Fund may purchase and sell options on the same types of futures in which
it may invest.
Options (another type of potentially high-risk derivative) 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. 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 Funds and the other T. Rowe Price Funds in a fair and non-discriminatory
manner.
Special Risks of Transactions in Options on Futures Contracts
The risks described under "Special Risks of Transactions in Futures
Contracts" are substantially the same as the risks of using options on
futures. In addition, where the Fund seeks to close out an option position by
writing or buying an offsetting option covering the same index, underlying
instrument or contract and having the same exercise price and expiration
date, its ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market. Reasons for the
absence of a liquid secondary market on an exchange include the following:
(i) there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options, or
underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
or a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange (or in the class or series of
options) would cease to exist, although outstanding options on the exchange
that had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of
any of the clearing corporations inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
Additional Futures and Options Contracts
Although the Fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.
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Foreign Futures and Options
Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the Fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the Fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time the Fund's order is placed and the time it is liquidated,
offset or exercised.
Foreign Currency Transactions
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
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
has no deposit requirement, and no commissions are charged at any stage for
trades.
The Fund may enter into forward contracts for a variety of purposes in
connection with the management of the foreign securities portion of its
portfolio. The Fund's use of such contracts would include, but not be limited
to, the following:
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 one currency may experience 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. Under normal circumstances, consideration of
the prospect for currency parties will be incorporated into the longer term
investment decisions made with regard to
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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.
The Fund may enter into forward contacts for any other purpose consistent
with the Fund's investment objective and program. However, the Fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the Fund's holdings of liquid, high-grade debt securities, and
currency available for cover of the forward contract(s) or other suitable
cover. In determining the amount to be delivered under a contract, the Fund
may net offsetting positions.
At the maturity of a forward contract, the Fund may sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and either extend the maturity of the forward contract (by "rolling"
that contract forward) or may initiate a new forward contract.
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
generally 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 Fund may enter into certain options, 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 (taxable at a maximum rate of
20%) 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
25
<PAGE>
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 losses, 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. Note that this 30% test will no longer
apply to funds with tax years beginning after August 5, 1997.
As a result of the "Taypayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the Fund.
INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies 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 a Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
Fund's Board of Directors/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund. Calculation of the
Fund's total assets for compliance with any of the following fundamental or
operating policies or any other investment restrictions set forth in the
Funds prospectus or Statement of Additional Information will not include cash
collateral held in connection with securities lending activities.
Fundamental Policies
As a matter of fundamental policy, the Fund may not:
(1) Borrowing Borrow money except that the Fund may (i) borrow for
non-leveraging, temporary or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the Fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law;
26
<PAGE>
(2) Commodities Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;
(3) (a)
Industry Concentration (All Funds, except Health Sciences, Financial
Services, and Real Estate Funds) 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;
(b)
Industry Concentration (Health Sciences, Financial Services, and Real
Estate Funds) 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; provided, however, that (i) the Health Sciences Fund will
invest more than 25% of its total assets in the health sciences industry
as defined in the Fund's prospectus; (ii) the Financial Services Fund
will invest more than 25% of its total assets in the financial services
industry as defined in the Fund's prospectus; (iii) the Real Estate Fund
will invest more than 25% of its total assets in the real estate industry
as defined in the Fund's prospectus.
(4) Loans Make loans, although the Fund may (i) lend portfolio securities and
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the Fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly-distributed or privately-placed
debt securities and purchase debt;
(5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
if, as a result, with respect to 75% of the value of its total assets,
more than 5% of the value of the Fund's total assets would be invested in
the securities of a single issuer, except securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities;
(6) Percent Limit on Share Ownership of Any One Issuer (All Funds, except
Capital Opportunity) Purchase a security if, as a result, with respect to
75% of the value of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by the U.S. government, it
agencies or instrumentalities);
(7) Real Estate Purchase or sell real estate or limited partnership interests
thereon, unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from investing in
securities or other instruments backed by real estate or in securities of
companies engaged in the real estate business);
(8) Senior Securities Issue senior securities except in compliance with the
Investment Company Act of 1940; or
(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of its portfolio securities in the ordinary course of pursuing its
investment program.
NOTES
The following notes should be read in connection with the above-described
fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Fund will not
borrow from or lend to any other Price Fund (defined as any other mutual
fund managed or for which T. Rowe Price acts as adviser) unless each Fund
applies for and receives an exemptive order from the SEC or the SEC
issues rules permitting such transactions. The Fund has no current
intention of engaging in any such activity and there is no assurance the
SEC would grant any order requested by the Fund or promulgate any rules
allowing the transactions.
With respect to investment restriction (2), the Fund does not consider
currency contracts or hybrid investments to be commodities.
27
<PAGE>
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the Fund's semiannual and
annual reports.
For purposes of investment restriction (4), the Fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.
Operating Policies
As a matter of operating policy, the Fund may not:
(1) Borrowing The Fund will not purchase additional securities when money
borrowed exceeds 5% of its total assets;
(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;
(3) Futures Contracts Purchase a futures contract or an option thereon, only
to the extent permitted by the Fund's prospectus and only if, with
respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the Fund's net asset value;
(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% of its net assets would be invested in such securities;
(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the Investment Company
Act of 1940 or (ii) securities of the Reserve Investment and Government
Reserve Investment Funds;
(6) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;
(7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging or hypothecating may not exceed
33/1//\\/3/\\% of the Fund's total assets at the time of borrowing or
investment;
(8) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to, oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the Fund would be invested in such
programs;
(9) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;
(10) Short Sales Effect short sales of securities; or
(11) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the Fund would be invested in warrants.
For Blue Chip Growth, Capital Opportunity, Diversified Small-Cap Growth,
Financial Services, Health Sciences, Media & Telecommunications, Mid-Cap
Value, Real Estate, and Value Funds:
Notwithstanding anything in the above fundamental and operating restrictions
to the contrary, the Fund may invest all of its assets in a single investment
company or a series thereof in connection with a "master-feeder" arrangement.
Such an investment would be made where the Fund (a "Feeder"), and one or more
other Funds with the same investment objective and program as the Fund,
sought to accomplish its investment objective and program by investing all of
its assets in the shares of another investment company (the "Master"). The
Master would, in turn, have the same investment objective and program as the
Fund. The Fund would invest in this manner in an effort to achieve the
economies of scale associated with having a Master fund make investments in
portfolio companies on behalf of a number of Feeder funds.
28
<PAGE>
MANAGEMENT OF FUNDS
-------------------------------------------------------------------------------
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 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.
All Funds
Independent Directors/Trustees
DONALD W. DICK, JR., Principal, EuroCapital Advisors, LLC, an acquisition and
management advisory firm; formerly (5/89-6/95) Principal, Overseas Partners,
Inc., a financial investment firm; (6/65-3/89) Director and Vice President;
Consumer Products Division, McCormick & Company, Inc., international food
processors; Director, Waverly, Inc., Baltimore, Maryland; Address: P.O. Box
491, Chilmark, MA 02535-0491
DAVID K. FAGIN, Chairman and Chief Executive Officer, Western Exploration and
Development, Ltd.; Director Golden Star Resources Ltd. and Miranda Mining
Development Corporation; formerly (1986-7/91) President, Chief Operating
Officer and Director, Homestake Mining Company; Address: 1660 Lincoln Street,
Suite 3000, Denver, Colorado 80264-3001
HANNE M. MERRIMAN, Retail business consultant; formerly President and Chief
Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty store,
Director (1984-1990) and Chairman (1989-90) Federal Reserve Bank of Richmond,
and President and Chief Executive Officer (1988-89), Honeybee, Inc., a
division of Spiegel, Inc.; Director, Central Illinois Public Service Company,
CIPSCO Incorporated, Finlay Enterprises, Inc., The Rouse Company, State Farm
Mutual Automobile Insurance Company and USAir Group, Inc.; Address: 3201 New
Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016
HUBERT D. VOS, President, Stonington Capital Corporation, a private
investment company; Address: 1231 State Street, Suite 247, Santa Barbara,
California 93190-0409
PAUL M. WYTHES, 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 94304-1005
Officers
HENRY H. HOPKINS, Vice President-Vice President, Price-Fleming and T. Rowe
Price Retirement Plan Services, Inc.; Director and 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
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
J. JEFFREY LANG, Assistant Vice President-Assistant Vice President, T. Rowe
Price
INGRID I. VORDEMBERGE, Assistant Vice President-Employee, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.
Balanced Fund
* . JAMES A.C. KENNEDY III, . Vice President and Director . -Managing
Director, T. Rowe Price; Chartered Financial Analyst
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<PAGE>
* . JAMES S. RIEPE, . Chairman of the Board . -Vice Chairman of the Board and
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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
* . M. DAVID TESTA, . Vice President and Director . -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
RICHARD T. WHITNEY, . President . -Managing Director, T. Rowe Price and T.
Rowe Price Trust Company; Chartered Financial Analyst
STEPHEN W. BOESEL, . Vice President . -Managing Director, T. Rowe Price
ANDREW M. BROOKS, . Vice President . -Vice President, T. Rowe Price
EDMUND M. NOTZON, . Vice President . -Managing Director, T. Rowe Price; Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst
DONALD J. PETERS, . Vice President . -Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
PETER VAN DYKE, . Vice President . -Managing Director, T. Rowe Price; Vice
President, Price-Fleming and T. Rowe Price Trust Company
MARK J. VASELKIV, . Vice President . -Vice President, T. Rowe Price
Blue Chip Growth Fund
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
LARRY J. PUGLIA, . President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
THOMAS H. BROADUS, JR., . Executive Vice President . -Managing Director, T.
Rowe Price; Chartered Financial Analyst and Chartered Investment Counselor
BRIAN W.H. BERGHUIS, . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, . Vice President . -Assistant Vice President, T. Rowe
Price
JILL L. HAUSER, . Vice President . -Vice President, T. Rowe Price
THOMAS J. HUBER, . Vice President . -Assistant Vice President, T. Rowe Price
ROBERT W. SMITH, . Vice President . -Vice President, T. Rowe Price
WILLIAM J. STROMBERG, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
Capital Appreciation Fund
* . JAMES A.C. KENNEDY III, . Trustee . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Trustee . -Vice Chairman of the Board
and 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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
* . M. DAVID TESTA, . Chairman of the Board . -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
RICHARD P. HOWARD, . President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
30
<PAGE>
ARTHUR B. CECIL III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES A. MORRIS, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES M. OBER, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
Capital Opportunity Fund
* . JOHN H. LAPORTE, JR., . President and Director . -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
JOHN F. WAKEMAN, . Executive Vice President . -Vice President, T. Rowe Price
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
BRIAN W.H. BERGHUIS, . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, . Vice President . -Assistant Vice President, T. Rowe
Price
LARRY J. PUGLIA, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
BRIAN D. STANSKY, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
Diversified Small-Cap Growth Fund
* . JOHN H. LAPORTE, JR., . Vice President and Director . -Managing Director,
T. Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
RICHARD T. WHITNEY, . President . -Managing Director, T. Rowe Price and T.
Rowe Price Trust Company; Chartered Financial Analyst
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
KRISTEN F. CULP, . Vice President . -Vice President, T. Rowe Price
DONALD J. PETERS, . Vice President . -Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
Dividend Growth Fund
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
31
<PAGE>
WILLIAM J. STROMBERG, . President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
BRIAN C. ROGERS, . Executive Vice President . -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst
ARTHUR B. CECIL III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
STEPHANIE C. CLANCY, . Vice President . -Assistant Vice President, T. Rowe
Price
MICHAEL W. HOLTON, . Vice President . -Assistant Vice President, T. Rowe
Price; formerly Research Analyst at Bowles, Hollowell, Conner and Company;
Chartered Financial Analyst
DONALD J. PETERS, . Vice President . -Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
LARRY J. PUGLIA, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID J. WALLACK, . Vice President . -Vice President, T. Rowe Price
Equity Income Fund
* . JAMES A.C. KENNEDY III, . Trustee . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Trustee . -Vice Chairman of the Board
and 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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
* . M. DAVID TESTA, . Trustee . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, . President . -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
THOMAS H. BROADUS, JR., . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst and Chartered Investment Counselor
ANDREW M. BROOKS, . Vice President . -Vice President, T. Rowe Price
RICHARD P. HOWARD, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
WILLIAM J. STROMBERG, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
MARK J. VASELKIV, . Vice President . -Vice President, T. Rowe Price
Equity Index 500, Extended Equity Market Index, and Total Market Index Funds
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
RICHARD T. WHITNEY, . Vice President . -Managing Director, T. Rowe Price and
T. Rowe Price Trust Company; Chartered Financial Analyst
KRISTEN F. CULP, . Executive Vice President . -Vice President, T. Rowe Price
DONALD J. PETERS, . Vice President . -Vice President, T. Rowe Price; formerly
portfolio manager, Geewax Terker and Company
WENDY R. DIFFENBAUGH, . Assistant Vice President . -Assistant Vice President,
T. Rowe Price
CHRISTINE M. MUNOZ, . Assistant Vice President . -Assistant Vice President,
T. Rowe Price
32
<PAGE>
Financial Services Fund
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Chairman of the Board . -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
LARRY J. PUGLIA, . President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
ROBERT N. GENSLER, . Vice President . -Vice President, T. Rowe Price
ROBERT J. MARCOTTE, . Vice President . -Vice President, T. Rowe Price
ANNA M. DOPKIN, . Assistant Vice President . -Employee, T. Rowe Price
SUSAN J. KLEIN, . Assistant Vice President . -Employee, T. Rowe Price
Growth & Income Fund
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Chairman of the Board . -Vice Chairman of the Board and
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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
STEPHEN W. BOESEL, . President . -Vice President, T. Rowe Price
ANDREW M. BROOKS, . Vice President . -Vice President, T. Rowe Price
ARTHUR B. CECIL III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
DAVID M. LEE, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst; formerly Marketing Representative at IBM
GREGORY A. MCCRICKARD, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
LARRY J. PUGLIA, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
MARK J. VASELKIV, . Vice President . -Vice President, T. Rowe Price
DAVID J. WALLACK, . Vice President . -Vice President, T. Rowe Price
RICHARD T. WHITNEY, . Vice President . -Managing Director, T. Rowe Price and
T. Rowe Price Trust Company; Chartered Financial Analyst
Growth Stock Fund
* . JAMES A.C. KENNEDY III, . Vice President and Director . -Managing
Director, T. Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
ROBERT W. SMITH, . President . -Vice President, T. Rowe Price
33
<PAGE>
BRIAN W.H. BERGHUIS, . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
JOSEPH KLEIN III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES A. MORRIS, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
D. JAMES PREY III, . Vice President . -Vice President, T. Rowe Price
LARRY J. PUGLIA, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
CAROL G. BARTHA, . Assistant Vice President . -Employee, T. Rowe Price
Health Sciences Fund
* . JOHN H. LAPORTE, JR., . President and Director . -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
JOSEPH KLEIN III, . Executive Vice President . -Vice President, T. Rowe
Price; Chartered Financial Analyst
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
CHARLES A. MORRIS, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES G. PEPIN, . Vice President . -Assistant Vice President, T. Rowe Price
D. JAMES PREY III, . Vice President . -Vice President, T. Rowe Price
DARRELL M. RILEY, . Vice President . -Assistant Vice President, T. Rowe Price
MICHAEL F. SOLA, . Vice President . -Assistant Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation
ANDREW K. BHAK, . Assistant Vice President . -Employee, T. Rowe Price;
formerly (1990-1995) Senior Healthcare Analyst, United States General
Accounting Office
Media & Telecommunications Fund
* . JAMES S. RIEPE, . Chairman of the Board . -Vice Chairman of the Board and
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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
JAMES A.C. KENNEDY III, . President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
CHARLES A. MORRIS, . Executive Vice President . -Vice President, T. Rowe
Price; Chartered Financial Analyst
BRIAN D. STANSKY, . Executive Vice President . -Vice President, T. Rowe
Price; Chartered Financial Analyst
ROBERT N. GENSLER, . Vice President . -Vice President, T. Rowe Price
SEEMA R. HINGORANI, . Vice President . -Employee, T. Rowe Price
D. JAMES PREY III, . Vice President . -Vice President, T. Rowe Price
JOHN F. WAKEMAN, . Vice President . -Vice President, T. Rowe Price
34
<PAGE>
Mid-Cap Equity Growth Fund
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Chairman of the Board . -Vice Chairman of the Board and
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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
* . M. DAVID TESTA, . President and Director . -Chairman of the Board,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst
BRIAN W.H. BERGHUIS, . Executive Vice President . -Managing Director, T. Rowe
Price; Chartered Financial Analyst
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
ROBERT N. GENSLER, . Vice President . -Vice President, T. Rowe Price
THOMAS J. HUBER, . Vice President . -Assistant Vice President, T. Rowe Price
JOSEPH KLEIN III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, . Vice President . -Vice President, T. Rowe Price
CHARLES A. MORRIS, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
STEVEN B. ROORDA, . Vice President . -Vice President, T. Rowe Price
JOHN F. WAKEMAN, . Vice President . -Vice President, T. Rowe Price
Mid-Cap Growth Fund
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JOHN H. LAPORTE, JR., . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Chairman of the Board . -Vice Chairman of the Board and
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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
BRIAN W.H. BERGHUIS, . President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
ROBERT N. GENSLER, . Vice President . -Vice President, T. Rowe Price
THOMAS J. HUBER, . Vice President . -Assistant Vice President, T. Rowe Price
JOSEPH KLEIN III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, . Vice President . -Vice President, T. Rowe Price
CHARLES A. MORRIS, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
STEVEN B. ROORDA, . Vice President . -Vice President, T. Rowe Price
JOHN F. WAKEMAN, . Vice President . -Vice President, T. Rowe Price
Mid-Cap Value Fund
* . JAMES A.C. KENNEDY III, . Vice President and Director . -Managing
Director, T. Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
35
<PAGE>
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
GREGORY A. MCCRICKARD, . President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
PRESTON G. ATHEY, . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
HUGH M. EVANS III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
MARCY L. FISHER, . Vice President . -Assistant Vice President, T. Rowe Price
BRIAN C. ROGERS, . Vice President . -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
DAVID J. WALLACK, . Vice President . -Vice President, T. Rowe Price
New America Growth Fund
* . JOHN H. LAPORTE, JR., . President and Trustee . -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Trustee . -Vice Chairman of the Board
and 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; Director, Price-Fleming and Rhone-Poulenc Rorer, Inc.
* . M. DAVID TESTA, . Trustee . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN W.H. BERGHUIS, . Executive Vice President . -Managing Director, T. Rowe
Price; Chartered Financial Analyst
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
ROBERT N. GENSLER, . Vice President . -Vice President, T. Rowe Price
THOMAS J. HUBER, . Vice President . -Assistant Vice President, T. Rowe Price
KARA CHESEBY LANDERS, . Vice President . -Vice President, T. Rowe Price;
formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
CHARLES G. PEPIN, . Vice President . -Assistant Vice President, T. Rowe Price
STEVEN B. ROORDA, . Vice President . -Vice President, T. Rowe Price
BRIAN D. STANSKY, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, . Vice President . -Vice President, T. Rowe Price
New Era Fund
* . JAMES A.C. KENNEDY III, . Vice President and Director . -Managing
Director, T. Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES M. OBER, . President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID J. WALLACK, . Executive Vice President . -Vice President, T. Rowe Price
36
<PAGE>
HUGH M. EVANS III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
RICHARD P. HOWARD, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
DAVID M. LEE, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst; formerly Marketing Representative at IBM
ROBERT J. MARCOTTE, . Vice President . -Vice President, T. Rowe Price
GEORGE A. ROCHE, . Vice President . -President, Chief Executive Officer,
Chairman of the Board, and Managing Director, T. Rowe Price; Vice President
and Director, Price-Fleming
New Horizons Fund
* . JOHN H. LAPORTE, JR., . President and Director . -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
PRESTON G. ATHEY, . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
BRIAN W.H. BERGHUIS, . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
MARCY L. FISHER, . Vice President . -Assistant Vice President, T. Rowe Price
ROBERT N. GENSLER, . Vice President . -Vice President, T. Rowe Price
JILL L. HAUSER, . Vice President . -Vice President, T. Rowe Price
THOMAS J. HUBER, . Vice President . -Assistant Vice President, T. Rowe Price
JOSEPH KLEIN III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES A. MORRIS, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
CHARLES G. PEPIN, . Vice President . -Assistant Vice President, T. Rowe Price
DARRELL M. RILEY, . Vice President . -Assistant Vice President, T. Rowe Price
STEVEN B. ROORDA, . Vice President . -Vice President, T. Rowe Price
BRIAN D. STANSKY, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
JOHN F. WAKEMAN, . Vice President . -Vice President, T. Rowe Price
FRANCIES W. HAWKS, . Assistant Vice President . -Assistant Vice President, T.
Rowe Price
Real Estate Fund
* . JAMES A.C. KENNEDY III, . Vice President and Director . -Managing
Director, T. Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
37
<PAGE>
WILLIAM J. STROMBERG, . President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
DAVID M. LEE, . Executive Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst; formerly Marketing Representative at IBM
STEPHEN W. BOESEL, . Vice President . -Vice President, T. Rowe Price
ANNA M. DOPKIN, . Assistant Vice President . -Employee, T. Rowe Price
CHARLES M. OBER, . Vice President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
BRIAN C. ROGERS, . Vice President . -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
Science & Technology Fund
* . JOHN H. LAPORTE, JR., . Chairman of the Board . -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
CHARLES A. MORRIS, . President . -Vice President, T. Rowe Price; Chartered
Financial Analyst
MARC L. BAYLIN, . Vice President . -Vice President, T. Rowe Price; formerly
financial analyst, Rausher Pierce Refsnes; Chartered Financial Analyst
MARCY L. FISHER, . Vice President . -Assistant Vice President, T. Rowe Price
ROBERT N. GENSLER, . Vice President . -Vice President, T. Rowe Price
JILL L. HAUSER, . Vice President . -Vice President, T. Rowe Price
JOSEPH KLEIN III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
D. JAMES PREY III, . Vice President . -Vice President, T. Rowe Price
GREGORY A. MCCRICKARD, . President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
HUGH M. EVANS III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
MICHAEL F. SOLA, . Vice President . -Assistant Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation
BRIAN D. STANSKY, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
Small-Cap Stock Fund
* . JOHN H. LAPORTE, JR., . Chairman of the Board . -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
GREGORY A. MCCRICKARD, . President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
HUGH M. EVANS III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
38
<PAGE>
MARCY L. FISHER, . Vice President . -Assistant Vice President, T. Rowe Price
JAMES A.C. KENNEDY III, . Vice President . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
BRIAN D. STANSKY, . Vice President . . -Vice President, T. Rowe Price;
Chartered Financial Analyst
RICHARD T. WHITNEY, . Vice President . -Managing Director, T. Rowe Price and
T. Rowe Price Trust Company; Chartered Financial Analyst
Small-Cap Value Fund
* . JOHN H. LAPORTE, JR., . Chairman of the Board . -Managing Director, T.
Rowe Price; Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
PRESTON G. ATHEY, . President . -Managing Director, T. Rowe Price; Chartered
Financial Analyst
HUGH M. EVANS III, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT J. MARCOTTE, . Vice President . -Employee, T. Rowe Price
GREGORY A. MCCRICKARD, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
LAUREN A. ROMEO, . Vice President . -Employee, T. Rowe Price; Chartered
Financial Analyst
FRANCIES W. HAWKS, . Assistant Vice President . -Assistant Vice President, T.
Rowe Price
Value Fund
* . JAMES A.C. KENNEDY III, . Director . -Managing Director, T. Rowe Price;
Chartered Financial Analyst
* . JAMES S. RIEPE, . Vice President and Director . -Vice Chairman of the
Board and 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; Director, Price-Fleming and Rhone-Poulenc Rorer,
Inc.
* . M. DAVID TESTA, . Director . -Chairman of the Board, Price-Fleming; Vice
Chairman of the Board, Chief Investment Officer, and Managing Director, T.
Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
Chartered Financial Analyst
BRIAN C. ROGERS, . President . -Director and Managing Director, T. Rowe
Price; Chartered Financial Analyst
STEPHEN W. BOESEL, . Vice President . -Vice President, T. Rowe Price
STEPHANIE C. CLANCY, . Vice President . -Assistant Vice President, T. Rowe
Price
RICHARD P. HOWARD, . Vice President . -Vice President, T. Rowe Price;
Chartered Financial Analyst
KARA CHESEBY LANDERS, . Vice President . -Vice President, T. Rowe Price;
formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
ROBERT W. SMITH, . Vice President . -Vice President, T. Rowe Price
DAVID J. WALLACK, . Vice President . -Vice President, T. Rowe Price
39
<PAGE>
COMPENSATION TABLE
-------------------------------------------------------------------------------
The Funds do not pay pension or retirement benefits to their officers or
directors/trustees. Also, any director/trustee of a Fund who is an officer or
employee of T. Rowe Price or Price-Fleming does not receive any remuneration
from the Fund.
<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a)
Position -------
--------------------------------------
- ---------------------------------------------------------------------------------
----------------------------------------------
<S> <C> <C>
Balanced Fund
$
Donald W. Dick, Jr., Director 1,572
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Blue Chip Growth Fund
$
Donald W. Dick, Jr., Director 1,639
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Capital Appreciation Fund
$
Donald W. Dick, Jr., Director 1,532
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Capital Opportunity Fund
$
Donald W. Dick, Jr., Director 1,053
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund
$
Donald W. Dick, Jr., Director 227
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Dividend Growth Fund
$
Donald W. Dick, Jr., Director 1,238
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Equity Income Fund
$
Donald W. Dick, Jr., Trustee 6,328
David K. Fagin, Trustee
Hanne M. Merriman, Trustee
Hubert D. Vos, Trustee
Paul M. Wythes, Trustee
--------------------------------------------------------------------------------------
Equity Index 500 Fund
$
Donald W. Dick, Jr., Director 1,678
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Extended Equity Market Index Fund(c)
$
Donald W. Dick, Jr., Director 834
David K. Fagin, Director 1,111
Hanne M. Merriman, Director 1,111
Hubert D. Vos, Director 1,111
Paul M. Wythes, Director 834
--------------------------------------------------------------------------------------
Financial Services Fund
$
Donald W. Dick, Jr., Director 1,014
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Growth & Income Fund
$
Donald W. Dick, Jr., Director 2,555
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Growth Stock Fund
$
Donald W. Dick, Jr., Director 3,003
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Health Sciences Fund
$
Donald W. Dick, Jr., Director 1,008
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Media & Telecommunications Fund
$
Donald W. Dick, Jr., Director 444
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Mid-Cap Equity Growth Fund
$
Donald W. Dick, Jr., Director 1,040
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Mid-Cap Growth Fund
$
Donald W. Dick, Jr., Director 1,700
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Mid-Cap Value Fund
$
Donald W. Dick, Jr., Director 1,010
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
New America Growth Fund
$
Donald W. Dick, Jr., Trustee 1,809
David K. Fagin, Trustee
Hanne M. Merriman, Trustee
Hubert D. Vos, Trustee
Paul M. Wythes, Trustee
--------------------------------------------------------------------------------------
New Era Fund
$
Donald W. Dick, Jr., Director 1,833
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
New Horizons Fund
$
Donald W. Dick, Jr., Director 3,408
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Real Estate Fund
$
Donald W. Dick, Jr., Director 166
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Science & Technology Fund
$
Donald W. Dick, Jr., Director 2,872
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Small-Cap Stock Fund
$
Donald W. Dick, Jr., Director 1,276
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Small-Cap Value Fund
$
Donald W. Dick, Jr., Director 1,870
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
Total Market Equity Index Fund(c)
$
Donald W. Dick, Jr., Director 834
David K. Fagin, Director 1,111
Hanne M. Merriman, Director 1,111
Hubert D. Vos, Director 1,111
Paul M. Wythes, Director 834
--------------------------------------------------------------------------------------
Value Fund
$
Donald W. Dick, Jr., Director 1,023
David K. Fagin, Director
Hanne M. Merriman, Director
Hubert D. Vos, Director
Paul M. Wythes, Director
--------------------------------------------------------------------------------------
<CAPTION>
Total Compensation from Fund and Fund Complex Paid
to Directors/ Trustees(b)
-----------
- -----
--------------------------------------
----------------------------------------------------
<S> <C>
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
$
81,000
----------------------------------------------------
</TABLE>
40
-
<PAGE>
41
<PAGE>
42
<PAGE>
(a) Amounts in this column are based on accrued compensation
for calendar year 1997.
(b) Amounts in this column are based on compensation received from January 1,
1997 to December 31, 1997. The T. Rowe Price complex included 80 funds as of
December 31, 1997.
(c) Estimated future annual compensation from the Fund based on a full calendar
year.
43
<PAGE>
All Funds
The Fund's Executive Committee, consisting of the Fund's interested
directors/trustees, has been authorized by its respective Board of
Directors/Trustees to exercise all powers of the Board to manage the Funds in
the intervals between meetings of the Board, except the powers prohibited by
statute from being delegated.
PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors of the Fund, as
a group, owned less than 1% of the outstanding shares of the Fund.
As of January 1, 1998, the following shareholders beneficially owned more
than 5% of the outstanding shares of:
Growth Stock, New Era, New Horizons, Growth & Income, Blue Chip Growth, and
Mid-Cap Value Funds: Pirateline & Co., FBO Spectrum Growth Fund Acct., Attn.:
Mark White, State Street Bank & Trust Co., 1776 Heritage Drive-4W, North
Quincy, Massachusetts 02171-2197;
Blue Chip Growth Fund: Fidelity Investments Institutional Operations as agent
for Merck & Company, Inc., #83169, 100 Magellan Way, Covington, Kentucky
41015-1999;
Capital Appreciation, Dividend Growth, Media & Telecommunications, Mid-Cap
Growth, New Era, Small-Cap Value and Science & Technology Funds: Charles
Schwab & Co. Inc., Reinvest. Account, Attn.: Mutual Fund Dept., 101
Montgomery Street, San Francisco, California 94104-4122;
Growth & Income Fund: Manulife Financial USA, 200 Bloor St East NT3, Toronto,
Ontario Canada M4WIE5, Attn.: Rosie Chuck, Pension Accounting;
Media & Telecommunications: MLPF&S, Attn.: Karen Gemski, 4800 Deerlake Drive
E, 3rd Floor, Jacksonville, Florida 32246-6484;
Small-Cap Stock Fund: Sigler & Co. of Smithsonian Inst., Wellington Trust
Co., RD7 9866-77, Attn.: Jasmine Felix, 4 New York Plaza, 4th Floor, New
York, New York 10004-2413;
Mid-Cap Equity Growth Fund: Roland & Company, c/o Mercantile Bank of St.
Louis, Attn.: Trust Securities Unit 17-1, P.O. Box 387, St. Louis, Missouri
63166-0387; Atlantic Trust Company NA, Attn.: Nominee Account, 100 Federal
Street, 37th Floor, Boston, Massachusetts 02110-1802; Conref & Company, c/o
Mercantile Bank of St. Louis, Attn.: Trust Securities Unit 17-1, P.O. Box
387, St. Louis, Missouri 63166-0387; Wentworth-Douglass Hospital, Attn.:
Rayna Feldman, 789 Central Avenue, Dover, New Hampshire 03820-2589; Mac &
Company A/C JHFF0800212 Mutual Funds Operations, P.O. Box 3198, Pittsburgh,
Pennsylvania 15230-3198; Boston Harbor Trust Company, NA, Nominee Account,
100 Federal Street, 37th Floor, Boston, Massachusetts 02110-1802.
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 objectives, 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 laws; monitoring the
financial, accounting, and administrative functions of the Fund; maintaining
liaison with the agents employed by the Fund such as the
44
<PAGE>
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.
All Funds, except Equity Index 500, Extended Equity Market Index, Total
Equity Market Index, and Mid-Cap Equity Growth Funds
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
accordance with the following schedule:
<TABLE>
Price Funds' Annual Group Base Fee Rate for Each Level of
Assets
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
------------------------------------------------------------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
------------------------------------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
------------------------------------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
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 the T. Rowe Price Spectrum Funds, and any institutional, index 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 Funds' 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 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 individual fund fees for each Fund are listed in the chart
below:
<TABLE>
<CAPTION>
<S> <C>
Balanced Fund 0.15%
Blue Chip Growth Fund 0.30%
Capital Appreciation Fund 0.30%*
Capital Opportunity Fund 0.45%
Diversified Small-Cap Growth Fund 0.35%
Dividend Growth Fund 0.20%
Equity Income Fund 0.25%
Equity Index 500 Fund 0.20%
Financial Services Fund 0.35%
Growth & Income Fund 0.25%
Growth Stock Fund 0.25%
Health Sciences Fund 0.35%
Media & Telecommunications Fund 0.35%
Mid-Cap Growth Fund 0.35%
Mid-Cap Value Fund 0.35%
New America Growth Fund 0.35%
New Era Fund 0.25%
New Horizons Fund 0.35%
Real Estate Fund
Small-Cap Stock Fund 0.45%
Science & Technology Fund 0.35%
Small-Cap Value Fund 0.35%
Value Fund 0.35%
</TABLE>
45
<PAGE>
*Subject to Performance Adjustment (please see page 58.)
The following chart sets forth the total management fees, if any, paid to T.
Rowe Price by each Fund, during the last three years:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C>
Balanced $3,765,000 $2,778,000 $1,969,227
Blue Chip Growth 1,924,000 534,000 76,000
Capital Appreciation 4,218,000 4,940,000 4,161,612
Capital Opportunity 890,000 134,000 (b)
Dividend Growth 754,000 357,000 107,000
Equity Income 37,762,000 24,358,000 17,847,000
Equity Index 500 925,000 498,000 156,349
Financial Services (b) (a) (a)
Growth & Income 12,048,000 8,195,000 5,984,000
Growth Stock 17,848,000 14,222,000 11,981,872
Health Sciences 750,000 (a) (a)
Media & Telecommunications (c) 3,056,000 2,665,000 2,109,000
Mid-Cap Equity Growth (b) (a) (a)
Mid-Cap Growth 4,390,000 1,234,000 545,000
Mid-Cap Value 22,000 (a) (a)
New America Growth 8,648,000 5,554,000 4,395,000
New Era 7,559,000 6,218,000 5,272,000
New Horizons 25,875,000 15,035,000 11,402,554
Small-Cap Stock 2,619,000 1,897,000 1,534,235
Science & Technology 19,792,000 11,393,000 4,467,208
Small-Cap Value 8,187,000 4,262,000 3,047,508
Value 748,000 19,000 (b)
- --------------------------------------------------------------------------------
</TABLE>
(a) Prior to commencement of operations.
(b) Due to each Fund's expense limitation in effect at that time, no
management fees were paid by the Funds to T. Rowe Price.
(c) Fees listed were paid under this Fund's previous management
agreement, prior to becoming an open-end mutual fund.
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.
46
<PAGE>
For Balanced, Blue Chip Growth, Capital Opportunity, Diversified Small-Cap
Growth, Dividend Growth, Equity Index 500, Financial Services, Health
Sciences, Media & Telecommunications, Mid-Cap Equity Growth, Mid-Cap Growth,
Mid-Cap Value, Real Estate, and Value Funds
The following chart sets forth expense ratio limitations and the periods for
which they are effective. For each, T. Rowe Price has agreed to bear any Fund
expenses which would cause the Fund's ratio of expenses to average net assets
to exceed the indicated percentage limitations. The expenses borne by T. Rowe
Price are subject to reimbursement by the Fund through the indicated
reimbursement date, provided no reimbursement will be made if it would result
in the Fund's expense ratio exceeding its applicable limitation.
<TABLE>
<CAPTION>
Expense
Fund Limitation Period ------- Reimbursement Date
---- ----------------- Ratio ------------------
-----
Limitation
----------
<S> <C> <C> <C> <C>
January 1, 1995 -
Blue Chip Growth(a) December 31, 1996 1.25% December 31, 1998
November 30, 1994 -
Capital Opportunity December 31, 1996 1.35% December 31, 1998
Diversified Small-Cap June 30, 1997 -
Growth December 31, 1998 1.25% December 31, 2000
January 1, 1995 -
Dividend Growth(b) December 31, 1996 1.10% December 31, 1998
January 1, 1998 -
Equity Index 500(c) December 31, 1999 0.40% December 31, 2001
September 30, 1996 -
Financial Services December 31, 1998 1.25% December 31, 2000
December 29, 1995 -
Health Sciences December 31, 1997 1.35% December 31, 1999
Media & July 26, 1997 -
Telecommunications December 31, 1998 1.25% December 31, 2000
July 31, 1996 -
Mid-Cap Equity Growth December 31, 1997 0.85% December 31, 1999
January 1, 1994 -
Mid-Cap Growth December 31, 1995 1.25% December 31, 1997
June 28, 1996 -
Mid-Cap Value December 31, 1997 1.25% December 31, 1999
October 31, 1997 -
Real Estate December 31, 1999 1.00% December 31, 2001
Value September 30, 1994 - 1.10% December 31, 1998
December 31, 1996
-------------------------------------------------------------------------------
</TABLE>
(a) The Blue Chip Growth Fund previously operated under a 1.25% limitation
that expired December 31, 1994. The reimbursement period for this
limitation extends through December 31, 1996.
(b) The Dividend Growth Fund previously operated under a 1.00% limitation
that expired December 31, 1994. The reimbursement period for this
limitation extends through December 31, 1996.
(c) The Equity Index 500 Fund previously operated under a 0.40% limitation
that expired December 31, 1997. The reimbursement period for this
limitation extends through December 31, 1999.
Each of the above-referenced Fund's Management Agreement also provides that
one or more additional expense limitations periods (of the same or different
time periods) may be implemented after the expiration of the current expense
limitation, and that with respect to any such additional limitation period,
the Fund may reimburse T. Rowe Price, provided the reimbursement does not
result in the Fund's aggregate expenses exceeding the additional expense
limitation.
Pursuant to the Blue Chip Growth Fund's current and previous expense
limitation, $214,000 of unaccrued fees and expenses were repaid during the
year ended December 31, 1996.
Pursuant to Capital Opportunity Fund's expense limitation that expired on
December 31, 1996, $1,000 of managements fees were not accrued by the Fund
for the year ended December 31, 1996. Additionally, $156,000 of unaccrued
1994-95 fees and expenses are subject to reimbursement through December 31,
1998.
Pursuant to the Dividend Growth Fund's previous expense limitation, $174,000
of unaccrued 1993-94 fees and expenses were repaid by the Fund for the year
ended December 31, 1996. Additionally, $5,000 of unaccrued management fees
related to the current expense limitation are subject to reimbursement
through December 31, 1998.
Pursuant to the Equity Index 500 Fund's current expenses limitation, $370,000
of management fees were not accrued by the Fund for the year ended December
31, 1996. Additionally, $445,000 of unaccrued
47
<PAGE>
management fees related to a previous expense limitation are subject to
reimbursement through December 31, 1997.
Pursuant to the Financial Services Fund's current expense limitation, $24,000
of management fees were not accrued by the Fund for the year ended December
31, 1996 and $$2,000 of other expenses were borne by the manager.
Pursuant to the Health Sciences Fund's current expense limitation, $101,000
of management fees were not accrued by the Fund for the year ended December
31, 1996.
Pursuant to the Mid-Cap Equity Growth Fund's current expense limitation,
$14,000 of management fees and $34,000 of expenses were not accrued by the
Fund for the year ended December 31, 1996 and are subject to reimbursement
through December 31, 1999.
Pursuant to the Mid-Cap Growth Fund's previous expense limitation, $58,000 of
unaccrued management fees were repaid during the year ended December 31,
1996.
Pursuant to the Mid-Cap Value Fund's current expense limitation, $78,000 of
management fees were not accrued by the Fund for the year ended December 31,
1996 and are subject to reimbursement through December 31, 1999.
Pursuant to the Value Fund's current expense limitation, $35,000 of
management fees were not accrued by the Fund for the year ended December 31,
1996. Additionally, $202,000 of unaccrued 1994-95 fees and expenses are
subject to reimbursement through December 31, 1998.
Capital Appreciation Fund
Management Fee
The Fund pays T. Rowe Price a fee ("Fee") which consists of three components:
a Group Management Fee ("Group Fee"), an Individual Fund Fee ("Fund Fee") and
a performance fee adjustment ("Performance Fee Adjustment") based on the
performance of the Fund relative to the Standard & Poor's 500 Stock Index
(the "Index"). 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 performance adjustment for the year ended December 31, 1996,
decreased management fees by $1,530,000.
The Monthly Group Fee and Monthly Fund Fee are combined (the "Combined Fee")
and are subject to a Performance fee Adjustment until October 31, 1998,
depending on the total return investment performance of the Fund relative to
the total return performance of the Standard & Poor's 500 Stock Composite
Index (the "Index") during the previous thirty-six (36) months. Effective
November 1, 1998, there will no longer be any Performance Fee Adjustment. The
Performance Fee Adjustment is computed as of the end of each month and if any
adjustment results, is subtracted from the Combined Fee. No Performance Fee
Adjustment is made to the Combined Fee unless the investment performance
("Investment Performance") of the Fund (stated as a percent) is exceeded by
the investment record ("Investment Record") of the Index (stated as a
percent) by at least one full point. (The difference between the Investment
Performance and Investment Record will be referred to as the Investment
Performance Differential.) The Performance Fee Adjustment for any month is
calculated by multiplying the rate of the Performance Fee Adjustment
("Performance Fee Adjustment") (as determined below) achieved for the
36-month period, times the average daily net assets of the Fund for such
36-month period and dividing the product by 12. The Performance Fee
Adjustment Rate is calculated by multiplying the Investment Performance
Differential (rounded downward to the nearest full point) times a factor of
.02%. Regardless of the Investment Performance Differential, the Performance
Fee Adjustment Rate shall not exceed (.30)%.
Example
For example, if the Investment Performance Differential was (11.6), it
would be rounded to (11). The Investment Performance Differential of (11)
would be multiplied by .02% to arrive at the Performance Fee Adjustment
Rate of (.22)%.
48
<PAGE>
The (.22)% Performance Fee Adjustment Rate would be multiplied by the
fraction of 1/12 and that product would be multiplied by the Fund's
average daily net assets for the 36-month period to arrive at the
Performance Fee Adjustment.
The computation of the Investment Performance of the Fund and the Investment
Record of the Index will be made in accordance with Rule 205-1 under the
Investment Advisers Act of 1940 or any other applicable rule as, from time to
time, may be adopted or amended. These terms are currently defined as
follows:
The Investment Performance of the Fund is the sum of: (i) the change in the
Fund's net asset value per share during the period; (ii) the value of the
fund's cash distributions per share having an ex-dividend date occurring
within the period; and (iii) the per share amount of any capital gains taxes
paid or accrued during such period by the Fund for undistributed, realized
long-term capital gains.
The Investment Record of the Index is the sum of: (i) the change in the level
of the Index during the period; and (ii) the value, computed consistently
with the Index, of cash distributions having an ex-dividend date occurring
within the period made by companies whose securities comprise the Index.
Management Fee
Equity Index 500 Fund
The Fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.20% of the average daily net asset value of the Fund.
Extended Equity Market Index and Total Equity Market Index Funds
Each Fund pays T. Rowe Price an annual all-inclusive fee in monthly
installments of 0.40% of the average daily net assets of the Fund.
Mid-Cap Equity Growth Fund
The Fund pays T. Rowe Price an annual investment management fee in monthly
installments of 0.60% of the average daily net asset value of the Fund.
Equity Income, Growth & Income, Growth Stock, Mid-Cap Value, New Era, and New
Horizons Funds
T. Rowe Price Spectrum Fund, Inc.
The Funds listed above are a party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum
Fund"), T. Rowe Price, T. Rowe Price Services, Inc. and various other T. Rowe
Price funds which, along with the Fund, are funds in which Spectrum Fund
invests (collectively all such funds "Underlying Price Funds").
The Agreement provide that, if the Board of Directors/Trustees of any
Underlying Price Fund determines that such Underlying Fund's share of the
aggregate expenses of Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the Underlying
Price Fund will bear those expenses in proportion to the average daily value
of its shares owned by Spectrum Fund, provided further than no Underlying
Price Fund will bear such expenses in excess of the estimated savings to it.
Such savings are expected to result primarily from the elimination of
numerous separate shareholder accounts which are or would have been invested
directly in the Underlying Price Funds and the resulting reduction in
shareholder servicing costs. Although such cost savings are not certain, the
estimated savings to the Underlying Price Funds generated by the operation of
Spectrum Fund are expected to be sufficient to offset most, if not all, of
the expenses incurred by Spectrum Fund.
All Funds
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.
49
<PAGE>
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: necessary state
filings; 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 the various states in which Investment Services is qualified
as a broker-dealer. Under the Underwriting Agreement, Investment Services
accepts orders for Fund shares at net asset value. No sales charges are paid
by investors or the Fund.
All Funds
CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company 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 Fund (other than Equity Index 500, Extended Equity Market Index, and
Total Equity Market Index Funds) has entered into a 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 of The Chase Manhattan Bank and such
other custodians, including foreign banks and foreign securities depositories
as are approved by the Fund's Board of Directors/Trustees in accordance with
regulations under the Investment Company Act of 1940. State Street 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.
SHAREHOLDER SERVICES
-------------------------------------------------------------------------------
The Fund from time to time may enter into agreements with outside parties
through which shareholders hold Fund shares. The shares would be held by such
parties in omnibus accounts. The agreements would provide for payments by the
Fund to the outside party for shareholder services provided to shareholders
in the omnibus accounts.
CODE OF ETHICS
-------------------------------------------------------------------------------
The Fund's investment adviser (T. Rowe Price) has a written Code of Ethics
which requires all employees to obtain prior clearance before engaging in
personal securities transactions. In addition, all employees must report
their personal securities transactions within 10 days of their execution.
Employees will not be permitted to effect transactions in a security: If
there are pending client orders in the security; the security has been
purchased or sold by a client within seven calendar days; the security is
being considered for purchase for a client; a change has occurred in T. Rowe
Price's rating of the security within seven calendar days prior to the date
of the proposed transaction; or the security is subject to internal trading
restrictions. In addition, employees are prohibited from profiting from
short-term trading (e.g., purchases and sales involving the same
50
<PAGE>
security within 60 days). Any material violation of the Code of Ethics is
reported to the Board of the Fund. The Board also reviews the administration
of the Code of Ethics on an annual basis.
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.
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a primary
market-maker acting as principal for the securities on a net basis, with no
brokerage commission being paid by the client although the price usually
includes an undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the bid and asked
prices. Securities may also be purchased from underwriters at prices which
include underwriting fees.
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. T. Rowe Price may receive
research services in connection with brokerage transactions, including
designations in a fixed price offerings.
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.
Descriptions 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
51
<PAGE>
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 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 and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price. With regard to the
payment of brokerage commissions, T. Rowe Price has adopted a brokerage
allocation policy embodying the concepts of Section 28(e) of the Securities
Exchange Act of 1934, which permits an investment adviser to cause an account
to pay commission rates in excess of those another broker or dealer would
have charged for effecting the same transaction, if the adviser determines in
good faith that the commission paid is reasonable in relation to the value of
the brokerage and research services provided. The determination may be viewed
in terms of either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over which it
exercises investment discretion. Accordingly, while T. Rowe Price cannot
readily determine the extent to which commission rates or net prices charged
by broker-dealers reflect the value of their research services, T. Rowe Price
would expect to assess the reasonableness of commissions in light of the
total brokerage and research services provided by each particular broker. T.
Rowe Price may receive research, as defined in Section 28(e), in connection
with selling concessions and designations in fixed price offerings in which
the Funds participate.
Internal Allocation Procedures
T. Rowe Price has a policy of not precommitting a specific amount of business
to any broker or dealer over any specific time period. Historically, the
majority of brokerage placement has been determined by the needs of a
specific transaction such as market-making, availability of a buyer or seller
of a particular security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for that portion
of its discretionary client brokerage business where special needs do not
exist, or where the business may be allocated among several brokers or
dealers which are able to meet the needs of the transaction.
Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations but
can, and often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations
52
<PAGE>
described above. In no case is a broker or dealer excluded from receiving
business from T. Rowe Price because it has not been identified as providing
research services.
Miscellaneous
T. Rowe Price's brokerage allocation policy is consistently applied to all
its fully discretionary accounts, which represent a substantial majority of
all assets under management. Research services furnished by brokers or
dealers through which T. Rowe Price effects securities transactions may be
used in servicing all accounts (including non-Fund accounts) managed by T.
Rowe Price. Conversely, research services received from brokers or dealers
which execute transactions for the Fund are not necessarily used by T. Rowe
Price exclusively in connection with the management of the Fund.
From time to time, orders for clients may be placed through a computerized
transaction network.
The Fund does not allocate business to any broker-dealer on the basis of its
sales of the Fund's shares. However, this does not mean that broker-dealers
who purchase Fund shares for their clients will not receive business from the
Fund.
Some of T. Rowe Price's other clients have investment objectives and programs
similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may
increase, and this could have an adverse effect on the price of those
securities. It is T. Rowe Price's policy not to favor one client over another
in making recommendations or in placing orders. T. Rowe Price frequently
follows the practice of grouping orders of various clients for execution
which generally results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of 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.
Trade Allocation Policies
T. Rowe Price has developed written trade allocation guidelines for its
Equity, Municipal, and Taxable Fixed Income Trading Desks. Generally, when
the amount of securities available in a public offering or the secondary
market is insufficient to satisfy the volume or price requirements for the
participating client portfolios, the guidelines require a pro-rata allocation
based upon the amounts initially requested by each portfolio manager. In
allocating trades made on combined basis, the Trading Desks seek to achieve
the same net unit price of the securities for each participating client.
Because a pro-rata allocation may not always adequately accommodate all facts
and circumstances, the guidelines provide for exceptions to allocate trades
on an adjusted, pro-rata basis. Examples of where adjustments may be made
include: (i) reallocations to recognize the efforts of a portfolio manager in
negotiating a transaction or a private placement; (ii) reallocations to
eliminate deminimis positions; (iii) priority for accounts with specialized
investment policies and objectives; and (iv) reallocations in light of a
participating portfolio's characteristics (e.g., industry or issuer
concentration, duration, and credit exposure).
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
Price-Fleming, Price-Fleming 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
53
<PAGE>
allocation of portfolio brokerage and principal business. It is expected that
Price-Fleming will often place orders for the Fund's portfolio transactions
with broker-dealers through the trading desks of certain affiliates of Robert
Fleming Holdings Limited ("Robert Fleming"), an affiliate of Price-Fleming.
Robert Fleming, through Copthall Overseas Limited, a wholly owned subsidiary,
owns 25% of the common stock of Price-Fleming. Fifty percent of the common
stock of Price-Fleming 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 Jardine Fleming Group Limited
("JFG"). JFG is 50% owned by Robert Fleming and 50% owned by Jardine Matheson
Holdings Limited. The affiliates through whose trading desks such orders may
be placed include Fleming Investment Management Limited ("FIM"), and Robert
Fleming & Co. Limited ("RF&Co."). FIM and RF&Co. are wholly owned
subsidiaries of Robert Fleming. These trading desks will operate under strict
instructions from the Fund's portfolio manager with respect to the terms of
such transactions. Neither Robert Fleming, JFG, nor their affiliates will
receive any commission, fee, or other remuneration for the use of their
trading desks, although orders for a Fund's portfolio transactions may be
placed with affiliates of Robert Fleming and JFG who may receive a
commission.
The Board of Directors/Trustees 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.
Other affiliates of Robert Fleming Holding 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/Trustees of the Fund has agreed that the procedures set forth in
Rule 17e-1 under that Act will be followed when using such brokers.
The above-referenced authorization was made in accordance with Section 17(e)
of the Investment Company Act of 1940 (the "1940 Act") and Rule 17e-1
thereunder which require the Fund's independent Directors/Trustees to approve
the procedures under which brokerage allocation to affiliates is to be made
and to monitor such allocations on a continuing basis. Except with respect to
tender offers, it is not expected that any portion of the commissions, fees,
brokerage, or similar payments received by the affiliates of Robert Fleming
in such transactions will be recaptured by the Fund. The Directors/Trustees
have reviewed and from time to time may continue to review whether other
recapture opportunities are legally permissible and available and, if they
appear to be, determine whether it would be advisable for the Fund to seek to
take advantage of them.
Other
For the years 1996, 1995, and 1994, the total brokerage commissions paid by
each Fund, including the discounts received by securities dealers in
connection with underwritings, and the percentage of these commissions paid
to firms which provided research, statistical, or other services to T. Rowe
Price in connection with the management of each Fund, or, in some cases, to
each Fund, was as shown below.
<TABLE>
<CAPTION>
1996 1995 1994
Fund Commissions % Commissions % Commissions- %
---- ----------- - ----------- - ----------- -
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $ 292,325 13.0% 14.8% $258,006 18.1%
Blue Chip Growth 748,661 34.6% 420,931 10.3% 219,539 11.9%
Capital Appreciation 886,009 46.6% 1,922,697 32.4% 828,822 67.4%
Capital Opportunity 764,518 38.7% 528,727 24.6% 7,857 7.2%
Dividend Growth 478,131 28.6% 373,298 9.6% 294,479 15.9%
Equity Income 6,912,071 59.2% 4,193,326 43.2% 4,511,187 48.4%
Growth & Income 1,874,214 42.7% 1,431,194 44.7% 2,550,364 23.7%
Growth Stock 5,630,241 48.7% 4,769,565 42.6% 4,002,616 51.6%
Equity Index 500 37,146 0.0% 98,198 0.1% 21,198 3.3%
Financial Services 60,862 10.5% (a) (a) (a) (a)
Health Sciences 1,488,623 20.4% (a) (a) (a) (a)
Media & Telecommunications 1,659,735 15.0% 1,069,973 22.6% 44.2%
Mid-Cap Equity Growth 24,079 12.0% (a) (a) (a) (a)
Mid-Cap Growth 3,149,050 27.9% 924,702 16.5% 349,991 30.8%
Mid-Cap Value 92,359 17.0% (a) (a) (a) (a)
New America Growth 1,344,080 31.6% 3,605,675 16.1% 1,646,550 23.7%
New Era 2,500,868 45.2% 1,259,196 42.7% 1,863,739 35.8%
New Horizons 15,900,960 6.5% 8,729,848 9.1% 5,246,463 10.0%
Small-Cap Stock 1,044,665 5.5% 873,954 7.5% 584,525 4.6%
Science & Technology 5,713,825 39.1% 4,766,171 18.5% 1,272,479 45.4%
Small-Cap Value 1,289,012 31.8% 1,321,168 14.4% 512,452 26.3%
Value 780,033 57.4% 270,119 32.3% 30,478 14.9%
-------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
(a) Prior to commencement of operations.
On December 31, 1996, the Balanced Fund held common stock of J.P. Morgan,
with a value of $1,953,000. The Fund also held a bond of Lehman Brothers
Holding, with a value of $1,615,000. The Fund also held commercial paper of
Morgan Stanley Group, with a value of $5,006,000. In 1996, J.P. Morgan,
Lehman Brothers Holding, and the Morgan Stanley Group were among the Fund's
regular brokers or dealers as defined in Rule 10b-1 under the Investment
Company Act of 1940.
On December 31, 1996, the Capital Appreciation Fund held commercial paper of
Morgan Stanley Group, with a value of $10,003,000. In 1996, the Morgan
Stanley Group was among the Fund's regular brokers or dealers as defined in
Rule 10b-1 under the Investment Company Act of 1940.
On December 31, 1996, the Dividend Growth Fund held medium-term notes of
Morgan Stanley Group, with a value of $1,000,000. In 1996, the Morgan Stanley
Group was among the Fund's regular brokers or dealers as defined in Rule
10b-1 under the Investment Company Act of 1940.
On December 31, 1996, the Equity Income Fund held common stock of the
following regular brokers or dealers of the Fund: Bankers Trust, Chemical
Bank, and J.P. Morgan, respectively, with a value of $41,331,000, $0, and
$82,981,000, respectively. The Fund also held medium-term notes of GNAM and
the Morgan Stanley Group, with a value of $7,002,000, $19,979,000, and
$31,455,000, respectively. In 1996, Bankers Trust, Chemical Bank, J.P.
Morgan, GMAC, and the Morgan Stanley Group were among the Fund's regular
brokers or dealers as defined in Rule 10b-1 under the Investment Company Act
of 1940.
On December 31, 1996, the Equity Index 500 Fund held common stock of the
following regular brokers or dealers of the Fund: Bankers Trust New York,
Citicorp, Merrill Lynch, J.P. Morgan, Chemical Bank, and Household
International, respectively, with a value of $1,002,000, $6,837,000,
$1,896,000, $2,569,000, and $1,262,000, respectively. In 1996, Bankers Trust
New York, Citicorp, Merrill Lynch, J.P. Morgan, Chemical Bank, and Household
International were among the Fund's regular brokers or dealers as defined in
Rule 10b-1 under the Investment Company Act of 1940.
On December 31, 1996, the Growth & Income Fund held common stock of the
following regular brokers or dealers of the Fund: Bear Stearns and Household
International, respectively, with a value of $16,336,000, and $30,504,000,
respectively. The Fund also held medium-term notes of Morgan Stanley with a
value, of $10,003,000. In 1996, Bear Stearns, Household International, and
Morgan Stanley were among the Fund's regular brokers or dealers as defined in
Rule 10b-1 under the Investment Company Act of 1940.
On December 31, 1996, the Small-Cap Stock Fund held commercial paper of
Morgan Stanley Group, with a value of $2,001,000. In 1996, the Morgan Stanley
Group was among the Fund's regular brokers or dealers as defined in Rule
10b-1 under the Investment Company Act of 1940.
55
<PAGE>
On December 31, 1996, the Small-Cap Value Fund held commercial paper of
Morgan Stanley Group, with a value of $7,002,000. In 1996, the Morgan Stanley
Group was 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 for each Fund for the years ended 1996, 1995, and
1994, was as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C>
Balanced 22.3% 12.6% 33.3%
Blue Chip Growth 26.3% 38.1% 75.0%
Capital Appreciation 44.2% 47.0% 43.6%
Capital Opportunity 107.3% 136.9% 134.5%
Dividend Growth 43.1% 56.1% 71.4%
Equity Income 25.0% 21.4% 36.3%
Equity Index 500 1.3% 1.3% 1.3%
Financial Services 5.6%(a) (b) (b)
Growth & Income 13.5% 26.2% 25.6%
Growth Stock 49.0% 42.5% 54.0%
Health Sciences 133.1% (b) (b)
Media & Telecommunications 102.9% 118.9% 133.9%
Mid-Cap Equity Growth 31.3%(a) (b) (b)
Mid-Cap Growth 38.1% 57.5% 48.7%
Mid-Cap Value 3.9%(a) (b) (b)
New America Growth 36.7% 56.2% 31.0%
New Era 28.6% 22.7% 24.7%
New Horizons 41.4% 55.9% 44.3%
Small-Cap Stock 31.1% 57.8% 41.9%
Science & Technology 125.6% 130.3% 113.3%
Small-Cap Value 15.2% 18.1% 21.4%
Value 68.0% 89.7% 30.8%
- -------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Prior to commencement of operations.
All Funds
PRICING OF SECURITIES
-------------------------------------------------------------------------------
Equity securities listed or regularly traded on a securities exchange are
valued at the last quoted sales price at the time 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. Listed securities not traded on a particular day and securities
regularly traded in the over-the-counter market are valued at the mean of the
latest bid and asked prices. Other equity securities are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors/Trustees, 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 amortized cost in local
currency which, when combined with accrued interest, approximates fair value.
For the purposes of determining the Fund's net asset value per share, the
U.S. dollar value of all assets and liabilities initially expressed in
foreign currencies is determined by using the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by a major bank.
56
<PAGE>
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the officers
of the Fund, as authorized by the Board of Directors/Trustees.
All Funds
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 the Fund's 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 normally
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, Dr. Martin Luther King, Jr. Holiday, President's Day,
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, or in
the case of the Japan Fund, either the NYSE or TSE is closed, (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 AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, the Fund's capital gain distributions, final
quarterly dividend (Balanced, Dividend Growth, Equity Income, Equity Index
500, Growth & Income, Mid-Cap Value, Real Estate, Total Equity Market Index,
and Value Funds) and annual dividend (other funds), if any, will be
reinvested on the reinvestment date using the NAV per share of that date. The
reinvestment date normally precedes the payment date by about 10 days
although the exact timing is subject to change.
TAX STATUS
-------------------------------------------------------------------------------
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 by
December 31 of each year 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 within 12 months 100% of ordinary income and
capital gains as of December 31 to avoid a federal income tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed 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. 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.
57
<PAGE>
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 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.
All Funds except Equity Index 500, Extended Equity Market Index, and Total
Equity Market Index Funds
To the extent the Fund invests in foreign securities, the following would
apply:
Passive Foreign Investment Companies
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 were 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.
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 ordinary income dividend paid by the Fund will be
increased. If the result is a loss, the income dividend paid by the Fund will
be decreased, or to the extent such dividend has already been paid, it may be
classified as a return of capital. Adjustments to reflect these gains and
losses will be made at the end of the Fund's taxable year.
All Funds
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 over any other
period of time will vary from the average.
58
<PAGE>
<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ----------------- Inception Date
Ended Ended Ended 12/31/96 --------------
----- ----- ----- --------
12/31/96 12/31/96 12/31/96
-------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
S & P 500 22.96% 103.05% 314.28%
Dow Jones Industrial Average 28.88 132.65 366.13
CPI 3.65 15.37 43.98
Balanced Fund 14.57 71.09 184.22 28,585.93% 12 /31/39
Blue Chip Growth Fund 27.75 N/A N/A 103.02 06 /30/93
Capital Appreciation Fund 16.82 87.99 251.25 281.11 06 /30/86
Capital Opportunity Fund 16.76 N/A N/A 78.41 11 /30/94
Dividend Growth Fund 25.36 N/A N/A 101.47 12 /31/92
Equity Income Fund 20.40 119.97 286.01 438.33 10 /31/85
Equity Index 500 Fund 22.65 99.32 N/A 158.34 03 /30/90
Growth & Income Fund 25.64 113.97 257.36 544.47 12 /21/82
Growth Stock Fund 21.70 96.96 247.90 16,900.01 04 /11/50
Media & Telecommunications Fund(a) 1.78 N/A N/A 31.71 10 /13/93
Mid-Cap Growth Fund 24.84 N/A N/A 177.44 06 /30/92
New America Growth Fund 20.01 106.90 336.86 492.08 09 /30/85
New Era Fund 24.25 85.78 214.24 1,699.77 01 /20/69
New Horizons Fund 17.03 146.18 352.34 6,628.27 /03/60
Small-Cap Stock Fund 21.05 118.70 219.48 23,328.87 /01/56
Science & Technology Fund 14.23 203.52 N/A 516.07 09 /30/87
Small-Cap Value Fund 24.61 136.78 N/A 220.15 06 /30/88
Value Fund 28.51 N/A N/A 85.29 09 /30/94
Health Sciences Fund 26.75 N/A N/A 26.75 12 /29/95
Financial Services Fund N/A N/A N/A 13.40 09 /30/96
Mid-Cap Value Fund N/A N/A N/A 16.30 06 /28/96
Mid-Cap Equity Growth Fund N/A N/A N/A 16.10 07 /31/96
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Figures based on performance as a closed-end investment company traded on
the New York Stock Exchange.
<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. Ended 10 Yrs. Ended % Since
----- ------------ ------------- ------- Inception Date
Ended 12/31/96 12/31/96 Inception --------------
----- -------- -------- ---------
12/31/96 12/31/96
-------- --------
<S> <C> <C> <C> <C> <C> <C>
S & P 500 22.96% 15.22% 15.27%
Dow Jones Industrial Average 28.88 18.40 16.64
CPI 3.65 2.90 3.71
Balanced Fund 14.57 11.34 11.01 10.44% 12 /31/39
Blue Chip Growth Fund 27.75 N/A N/A 22.41 06 /30/93
Capital Appreciation Fund 16.82 13.46 13.39 13.59 06 /30/86
Capital Opportunity Fund 16.76 N/A N/A 32.01 11 /30/94
Dividend Growth Fund 25.36 N/A N/A 19.14 12 /31/92
Equity Income Fund 20.40 17.08 14.46 16.27 10 /31/85
Equity Index 500 Fund 22.65 14.79 N/A 15.08 03 /30/90
Growth & Income Fund 25.64 16.43 13.58 14.21 12 /21/82
Growth Stock Fund 21.70 14.52 13.28 11.62 04 /11/50
Media & Telecommunications Fund(a) 1.78 N/A N/A 8.94 10 /13/93
Mid-Cap Growth Fund 24.84 N/A N/A 25.44 06 /30/92
New America Growth Fund 20.01 15.65 15.89 17.12 09 /30/85
New Era Fund 24.25 13.19 12.13 10.90 01 /20/69
New Horizons Fund 17.03 19.74 16.29 12.19 /03/60
Small-Cap Stock Fund 21.05 16.94 12.32 14.39 /01/56
Science & Technology Fund 14.23 24.86 N/A 21.72 09 /30/87
Small-Cap Value Fund 24.61 18.81 N/A 4.67 06 /30/88
Value Fund 28.51 N/A N/A 31.52 09 /30/94
Health Sciences Fund 26.75 N/A N/A 26.75 12 /29/95
Financial Services Fund N/A N/A N/A N/A 09 /30/96
Mid-Cap Value Fund N/A N/A N/A N/A 06 /28/96
Mid-Cap Equity Growth Fund N/A N/A N/A N/A 07 /31/96
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
(a) Figures based on performance as a closed-end investment company traded on
the New York Stock Exchange.
Outside Sources of Information
From time to time, in reports and promotional literature: (1) the Fund's
total return performance, ranking, or any other measure of the Fund's
performance may be compared to any one or combination of the following: (i) a
broad based index; (ii) other groups of mutual funds, including T. Rowe Price
Funds, tracked by independent research firms ranking entities, or financial
publications; (iii) indices of stocks comparable to those in which the Fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the Fund or the general economic, business, investment, or
financial environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and other
persons may be used to illustrate aspects of the Fund's performance; (4) the
effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general in both qualified and non-qualified retirement plans or
any other tax advantage product, may be illustrated by graphs, charts, etc.;
and (5) the sectors or industries in which the Find invests may be compared
to relevant indices or surveys in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector.
Other Publications
From time to time, in newsletters and other publications issued by T. Rowe
Price Investment Services, Inc., T. Rowe Price mutual fund portfolio managers
may discuss economic, financial and political developments in the U.S. and
abroad and how these conditions have affected or may affect securities prices
or the Fund; individual securities within the Fund's portfolio; and their
philosophy regarding the selection of individual stocks, including why
specific stocks have been added, removed or excluded from the Fund's
portfolio.
60
<PAGE>
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, which include, but are
not limited to, 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.
No-Load Versus Load and 12b-1 Funds
Unlike the T. Rowe Price funds, may mutual funds charge sales fees to
investors or use fund assets to finance distribution activities. These fees
are in addition to the normal advisory fees and expenses charged by all
mutual funds. There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or "load") can be
charged at the time the fund is purchased (front-end load) or at the time of
redemption (back-end load). Front-end loads are charged on the total amount
invested. Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1 plans allow for
the payment of marketing and sales expenses from fund assets. These expenses
are usually computed daily as a fixed percentage of assets.
The Fund is a no-load fund which imposes no sales charges or 12b-1 fees.
No-load funds are generally sold directly to the public without the use of
commissioned sales representatives. This means that 100% of your purchase is
invested for you.
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 Fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of 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.
Balanced Fund
On August 31, 1992, the T. Rowe Price Balanced Fund acquired substantially
all of the assets of the Axe-Houghton Fund B, a series of Axe-Houghton Funds,
Inc. As a result of this acquisition, the Securities & Exchange Commission
requires that the historical performance information of the Balanced Fund be
based on the performance of Fund B. Therefore, all performance information of
the Balanced Fund prior to September 1, 1992, reflects the performance of
Fund B and investment managers other than T. Rowe Price. Performance
information after August 31, 1992, reflects the combined assets of the
Balanced Fund and Fund B.
Media & Telecommunications Fund
On July 28, 1997, the Fund converted its status from a closed-end fund to an
open-end mutual fund. Prior to the conversion the Fund was known as New Age
Media Fund, Inc.
Small-Cap Stock Fund
Effective May 1, 1997, the Fund's name was changed from the T. Rowe Price OTC
Fund to the T. Rowe Price Small-Cap Stock Fund.
Equity Index 500 Fund
Effective January 30, 1998, the Fund's name was changed from the T. Rowe
Price Equity Index Fund to the T. Rowe Price Equity Index 500 Fund.
61
<PAGE>
All Funds, Except Capital Appreciation, Equity Income and New America Growth
Funds
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
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.
Capital Appreciation, Equity Income, and New America Growth Funds
ORGANIZATION OF THE FUNDS
-------------------------------------------------------------------------------
For tax and business reasons, the Funds were organized as Massachusetts
Business Trusts, and are registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 as diversified, open-end
investment companies, commonly known as "mutual funds."
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of full and fractional shares of a single class. The Declaration of
Trust also provides that the Board of Trustees may issue additional series or
classes of shares. Each share represents an equal proportionate beneficial
interest in the Fund. In the event of the liquidation of the Fund, each share
is entitled to a pro-rata share of the net assets of the Fund.
62
<PAGE>
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 trustees (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 trustees unless and
until such time as less than a majority of the trustees holding office have
been elected by shareholders, at which time the trustees then in office will
call a shareholders' meeting for the election of trustees. Pursuant to
Section 16(c) of the Investment Company Act of 1940, holders of record of not
less than two-thirds of the outstanding shares of the Fund may remove a
trustee by a vote cast in person or by proxy at a meeting called for that
purpose. Except as set forth above, the trustees shall continue to hold
office and may appoint successor trustees. Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in the election of
trustees can, if they choose to do so, elect all the trustees of the Trust,
in which event the holders of the remaining shares will be unable to elect
any person as a trustee. No amendments may be made to the Declaration of
Trust without the affirmative vote of a majority of the outstanding shares of
the Trust.
Shares have no preemptive or conversion rights; the right of redemption and
the privilege of exchange are described in the prospectus. Shares are fully
paid and nonassesable, except as set forth below. The Trust may be terminated
(i) upon the sale of its assets to another diversified, open-end management
investment company, if approved by the vote of the holders of two-thirds of
the outstanding shares of the Trust, or (ii) upon liquidation and
distribution of the assets of the Trust, if approved by the vote of the
holders of a majority of the outstanding shares of the Trust. If not so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations
of the Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Fund or a
Trustee. The Declaration of Trust provides for indemnification from Fund
property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its
obligations, a possibility which T. Rowe Price believes is remote. Upon
payment of any liability incurred by the Fund, the shareholders of the Fund
paying such liability will be entitled to reimbursement from the general
assets of the Fund. The Trustees intend to conduct the operations of the Fund
is such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of such Fund.
All Funds
FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The Fund's shares are registered for sale under the Securities Act of 1933.
Registration of the Fund's shares is not required under any state law, but
the Fund is required to make certain filings with and pay fees to the states
in order to sell its shares in the states.
LEGAL COUNSEL
-------------------------------------------------------------------------------
Shereff, Friedman, Hoffman, & Goodman LLP, whose address is 919 Third Avenue,
New York, New York 10022, is legal counsel to the Fund.
63
<PAGE>
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
Blue Chip Growth, Diversified Small-Cap Growth, Dividend Growth, Equity
Income, Growth & Income, Media & Telecommunications, Mid-Cap Equity Growth,
Mid-Cap Growth, Mid-Cap Value, New America Growth, New Era, and Real Estate
Funds
Price Waterhouse LLP, Gateway International II, 1306 Concourse Street, Suite
100, Linthicum, Maryland 21090-1020, are independent accountants to the Fund.
Balanced, Capital Appreciation, Capital Opportunity, Equity Index 500,
Extended Equity Market Index, Financial Services, Growth Stock, New Horizons,
Science & Technology, Small-Cap Stock, Small-Cap Value, Total Equity Market
Index, and Value Funds
Coopers & Lybrand L.L.P., 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are independent accountants to the Fund.
A Statement of Assets and Liabilities for the Diversified Small-Cap Growth
and Real Estate Funds are attached to the end of this Statement of Additional
Information.
The financial statements of the Funds (except for Diversified Small-Cap
Growth, Real Estate, Extended Market Index, and Total Equity Market Index
Funds) for the year ended December 31, 1996, and the report of independent
accountants are included in the Fund's Annual Report for the year ended
December 31, 1996. A copy of the Annual Report accompanies this Statement of
Additional Information. The financial statements for the period ending June
30, 1997, are included in the Fund's unaudited semiannual report. A copy of
the semiannual 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, 1996, and the
semiannual report for the period ending June 30, 1997, are incorporated into
this Statement of Additional Information by reference:
<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:
CAPITAL EQUITY EQUITY GROWTH &
APPRECIATION INCOME INDEX -
------------ ------ ----- INCOME
------
<S> <C> <C> <C> <C> <C>
Report of Independent
Accountants 25 25 32 23
Statement of Net Assets,
December 31, 1996 12-19 9-18 12-26 9-17
Statement of Operations, year
ended December 31, 1996 20 19 27 18
Statement of Changes in Net
Assets, years ended
and December 31, 1995 21 20 28 19
Notes to Financial Statements,
December 31, 1996 22-24 21-24 29-31 20-22
Financial Highlights 11 8 11 8
</TABLE>
<TABLE>
<CAPTION>
GROWTH NEW SMALL-CAP
STOCK AMERICA NEW ERA STOCK
----- GROWTH ------- -----
------
<S> <C> <C> <C> <C> <C>
Report of Independent
Accountants 25 20 21 25
Statement of Net Assets,
December 31, 1996 11-19 11-14 11-15 10-19
Statement of Operations, year
ended December 31, 1996 20 15 16 20
Statement of Changes in Net
Assets, years ended
and December 31, 1995 21 16 17 21
Notes to Financial Statements,
December 31, 1996 22-24 17-19 18-20 22-24
Financial Highlights 10 10 10 9
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
MEDIA & MID-CAP BLUE CHIP
BALANCED TELECOMMUNIGROWTHS GROWTH
-------- --------- ------
<S> <C> <C> <C> <C> <C>
Report of Independent
Accountants 41 15 21 25
Statement of Net Assets,
December 31, 1996 11-34 8-10 11-15 12-19
Statement of Operations, year
ended December 31, 1996 35 11 16 20
Statement of Changes in Net
Assets, years ended
and December 31, 1995 36 12 17 21
Notes to Financial Statements,
December 31, 1996 37-40 13-14 18-20 22-24
Financial Highlights 10 7 10 11
</TABLE>
<TABLE>
<CAPTION>
DIVIDEND VALUE CAPITAL SCIENCE &
GROWTH ----- OPPORTUNITY TECHNOLOGY
------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Report of Independent
Accountants 24 21 20 21
Statement of Net Assets,
December 31, 1996 10-17 9-15 10-14 12-15
Statement of Operations, year
ended December 31, 1996 18 16 15 16
Statement of Changes in Net
Assets, years ended
and December 31, 1995 19 17 16 17
Notes to Financial
Statements, December 31, 1996 20-23 18-20 17-19 18-20
Financial Highlights 9 8 9 11
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HEALTH MID-CAP MID-CAP
SERVICES SCIENCES VALUE EQUITY
-------- -------- ----- GROWTH
------
<S> <C> <C> <C> <C> <C>
Report of Independent
Accountants
Statement of Net Assets,
December 31, 1996
Statement of Operations, year
ended December 31, 1996
Statement of Changes in Net
Assets, years ended
and December 31, 1995
Notes to Financial Statements,
December 31, 1996
Financial Highlights
</TABLE>
<TABLE>
<CAPTION>
NEW SMALL-CAP
HORIZONS VALUE
-------- -----
<S> <C> <C> <C> <C> <C>
Report of Independent
Accountants 29 27
Portfolio of Investments,
December 31, 1996 11-22 10-20
Statement of Assets and
Liabilities, December 31, 1996 23 21
Statement of Operations, year
ended December 31, 1996 24 22
Statement of Changes in Net
Assets, years ended
and December 31, 1995 25 23
Notes to Financial Statements,
December 31, 1996 26-28 24-26
Financial Highlights 10 9
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL
SERVICES
--------
<S> <C> <C> <C> <C>
Report of Independent Accountants 19
Statement of Net Assets, December 31,
1996 12-13
Statement of Operations, September 30,
1996 (Commencement of Operations) to
December 31, 1996 14
Statement of Changes in Net Assets,
September 30, 1996 (Commencement of
Operations) to December 31, 1996 15
Notes to Financial Statements, December
31, 1996 16-18
Financial Highlights 9
</TABLE>
<TABLE>
<CAPTION>
HEALTH
SCIENCES
--------
<S> <C> <C> <C> <C>
Report of Independent Accountants 25
Statement of Net Assets, December 31, 1996 13-19
Statement of Operations, December 31, 1995
(Commencement of Operations) to December
31, 1996 20
Statement of Changes in Net Assets,
December 31, 1995 (Commencement of
Operations) to December 31, 1996 21
Notes to Financial Statements, December
31, 1996 22-24
Financial Highlights 12
</TABLE>
<TABLE>
<CAPTION>
MID-CAP
VALUE
-----
<S> <C> <C> <C> <C>
Report of Independent Accountants 22
Statement of Net Assets, December 31, 1996 10-16
Statement of Operations, June 28, 1996
(Commencement of Operations) to December
31, 1996 17
Statement of Changes in Net Assets, June
28, 1996 (Commencement of Operations) to
December 31, 1996 18
Notes to Financial Statements, December
31, 1996 19-21
Financial Highlights 9
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
MID-CAP
EQUITY
GROWTH
------
<S> <C> <C> <C> <C>
Report of Independent Accountants 12
Statement of Net Assets, December 31, 1996 5-7
Statement of Operations, July 31, 1996
(Commencement of Operations) to December
31, 1996 8
Statement of Changes in Net Assets, July
31, 1996 (Commencement of Operations) to
December 31, 1996 9
Notes to Financial Statements, December
31, 1996 10-11
Financial Highlights 4
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED SEMIANNUAL REPORT REFERENCES:
CAPITAL EQUITY EQUITY GROWTH &
APPRECIATION INCOME INDEX -
------------ ------ ----- INCOME
------
<S> <C> <C> <C> <C> <C>
Statement of Net Assets, June
30, 1997 10-17 7-16 10-25 8-16
Statement of Operations, 6
months ended
June 30, 1997 19 17 25 17
Statement of Changes in Net
Assets, 6 months ended June 30,
1997, and year ended December
31, 1996 19 18 26 18
Notes to Financial Statements,
June 30, 1997 20-23 19-21 27-29 19-21
Financial Highlights 9 6 9 7
</TABLE>
<TABLE>
<CAPTION>
GROWTH NEW SMALL-CAP
STOCK AMERICA NEW ERA STOCK
----- GROWTH ------- -----
------
<S> <C> <C> <C> <C> <C>
Statement of Net Assets, June
30, 1997 10-18 10-14 10-15 10-19
Statement of Operations, 6
months ended
June 30, 1997 19 15 16 20
Statement of Changes in Net
Assets, 6 months ended June 30,
1997, and year ended December
31, 1996 20 16 17 21
Notes to Financial Statements,
June 30, 1997 21-23 17-19 18-20 22-24
Financial Highlights 9 9 9 9
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
MEDIA & MID-CAP BLUE CHIP
BALANCED TELECOMMUNIGROWTHS GROWTH
-------- --------- ------
<S> <C> <C> <C> <C> <C>
Statement of Net Assets, June
30, 1997 10-37 12-15 9-14 10-18
Statement of Operations, 6
months ended
June 30, 1997 38 16 15 19
Statement of Changes in Net
Assets, 6 months ended June 30,
1997, and year ended December
31, 1996 39 17 16 20
Notes to Financial Statements,
June 30, 1997 40-42 18-20 17-19 21-22
Financial Highlights 9 11 8 9
</TABLE>
<TABLE>
<CAPTION>
DIVIDEND VALUE CAPITAL SCIENCE &
GROWTH ----- OPPORTUNITY TECHNOLOGY
------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Net Assets, June
30, 1997 8-15 8-14 9-13 13-16
Statement of Operations, 6
months ended
June 30, 1997 16 15 14 17
Statement of Changes in Net
Assets, 6 months ended June
30, 1997, and year ended
December
31, 1996 17 16 15 18
Notes to Financial
Statements, June 30, 1997 18-20 17-19 16-18 19-21
Financial Highlights 7 7 8 12
</TABLE>
<TABLE>
<CAPTION>
NEW SMALL-CAP
HORIZONS VALUE
-------- -----
<S> <C> <C> <C> <C> <C>
Portfolio of Investments, June
30, 1997 11-24 8-18
Statement of Assets and
Liabilities, June 30, 1997 25 19
Statement of Operations, 6
months ended
June 30, 1997 26 20
Statement of Changes in Net
Assets, 6 months ended June
30, 1997, and year ended
December 31, 1996 27 21
Notes to Financial Statements,
June 30, 1997 28-30 22-24
Financial Highlights 10 7
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL
SERVICES
--------
<S> <C> <C>
Statement of Net Assets, June 30, 1997 10-13
Statement of Operations, 6 months ended
June 30, 1997 14
Statement of Changes in Net Assets, 6 months
ended June 30, 1997, and September 30,
1996-December 31, 1996 15
Notes to Financial Statements, June 30, 1997 16-18
Financial Highlights 9
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
HEALTH
SCIENCES
--------
<S> <C> <C>
Statement of Net Assets, June 30, 1997 12-19
Statement of Operations, 6 months ended
June 30, 1997 20
Statement of Changes in Net Assets, 6 months
ended June 30, 1997, and December 31,
1995-December 31, 1996 21
Notes to Financial Statements, June 30, 1997 22-24
Financial Highlights 11
</TABLE>
<TABLE>
<CAPTION>
MID-CAP
VALUE
-----
<S> <C> <C>
Statement of Net Assets, June 30, 1997 11-18
Statement of Operations, 6 months ended
June 30, 1997 19
Statement of Changes in Net Assets, 6 months
ended June 30, 1997, and June 28,
1996-December 31, 1996 20
Notes to Financial Statements, June 30, 1997 21-23
Financial Highlights 10
</TABLE>
<TABLE>
<CAPTION>
MID-CAP
EQUITY
GROWTH
------
<S> <C> <C>
Statement of Net Assets, June 30, 1997 5-7
Statement of Operations, 6 months ended
June 30, 1997 8
Statement of Changes in Net Assets, 6 months
ended June 30, 1997, and July 31,
1996-December 31, 1996 9
Notes to Financial Statements, June 30, 1997 10-11
Financial Highlights 4
</TABLE>
69
<PAGE>
T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC. STATEMENT OF ASSETS AND
LIABILITIES JUNE 23, 1997
Assets
Receivable for Fund shares sold $100,000
Deferred organizational expenses 48,745
Total assets 148,745
Liabilities
Amount due Manager 46,395
Accrued expenses 2,350
Total liabilities 48,745
Net Assets-offering and redemption
price of $10.00 per share; 1,000,000,000 shares of $0.0001 par
value capitalstock authorized, 10,000 shares outstanding $100,000
========
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price Diversified Small-Cap Growth Fund, Inc. (the "Corporation") was
organized on April 22, 1997, as a Maryland corporation and is registered
under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Corporation has had no operations other
than those matters related to organization and registration as an investment
company, the registration of shares for sale under the Securities Act of
1933, and the sale of 10,000 shares of the T. Rowe Price Diversified
Small-Cap Growth Fund at $10.00 per share on June 23, 1997, to T. Rowe Price
Associates, Inc., via share exchange from a T. Rowe Price money-market mutual
fund. The exchange was settled in the ordinary course of business on June 24,
1997 with the transfer of $100,000 cash. The Corporation has entered into an
investment management agreement with T. Rowe Price Associates, Inc. (the
"Manager") which is described in the Statement of Additional Information
under the heading "Investment Management Services."
Organizational expenses for the Corporation in the amount of $48,745 have
been accrued at June 23, 1997, and will be amortized on a straight-line basis
over a period not to exceed sixty months. The Manager has agreed to advance
certain organizational expenses incurred by the Corporation and will be
reimbursed for such expenses approximately six months after the commencement
of the Corporation's operations.
The Manager has also agreed that in the event any of its initial shares are
redeemed during the 60-month amortization period of the deferred
organizational expenses, proceeds from a redemption of the shares
representing the initial capital will be reduced by a pro-rata portion of any
unamortized organizational expenses.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of T. Rowe Price Diversified
Small-Cap Growth Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the T. Rowe Price
Diversified Small-Cap Growth Fund, Inc., hereafter referred to as the "Fund",
at June 24, 1997, in accordance with generally accepted accounting
principles. This financial statement is the responsibility of the Fund's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial
statement in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion expressed above.
/s/Price Waterhouse LLP PRICE WATERHOUSE LLP Baltimore, Maryland June 24,
1997
71
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T. ROWE PRICE REAL ESTATE FUND, INC. STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 27, 1997
Assets
Cash $100,000
Deferred organizational expenses 46,920
Total assets 146,920
Liabilities
Amount due Manager 44,620
Accrued expenses 2,300
Total liabilities 46,920
Net Assets-offering and redemption
price of $10.00 per share; 1,000,000,000 shares of $0.0001 par
value capitalstock authorized, 10,000 shares outstanding $100,000
========
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
T. Rowe Price Real Estate Fund, Inc. (the "Corporation") was organized on
September 18, 1997, as a Maryland corporation and is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company. The Corporation has had no operations other than those
matters related to organization and registration as an investment company,
the registration of shares for sale under the Securities Act of 1933, and the
sale of 10,000 shares of the T. Rowe Price Real Estate Fund at $10.00 per
share on October 24, 1997, to T. Rowe Price Associates, Inc., via share
exchange from a T. Rowe Price money market mutual fund. The exchange was
settled in the ordinary course of business on October 27, 1997 with the
transfer of $100,000 cash. The Corporation has entered into an investment
management agreement with T. Rowe Price Associates, Inc. (the "Manager")
which is described in the Statement of Additional Information under the
heading "Investment Management Services."
Organizational expenses for the Corporation in the amount of $46,920 have
been accrued at October 27, 1997, and will be amortized on a straight-line
basis over a period not to exceed sixty months. The Manager has agreed to
advance certain organizational expenses incurred by the Corporation and will
be reimbursed for such expenses approximately six months after the
commencement of the Corporation's operations.
The Manager has also agreed that in the event any of its initial shares are
redeemed during the 60-month amortization period of the deferred
organizational expenses, proceeds from a redemption of the shares
representing the initial capital will be reduced by a pro-rata portion of any
unamortized organizational expenses.
72
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of T. Rowe Price Real Estate Fund,
Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the T. Rowe Price
Real Estate Fund, Inc., hereafter referred to as the "Fund," at October 27,
1997, in accordance with generally accepted accounting principles. This
financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this financial statement in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion expressed above.
/s/Price Waterhouse LLP PRICE WATERHOUSE LLP Baltimore, Maryland October 27,
1997
73
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RATINGS OF CORPORATE DEBT SECURITIES
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Moody's Investors Services, Inc. (Moody's)
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 know as high grade bonds.
A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations.
Baa-Bonds rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C-Bonds rated C represent the lowest-rated, and have extremely poor prospects
of attaining investment standing.
Standard & Poor's Corporation (S&P)
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D-In default.
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Fitch Investors Service, Inc.
AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other
than through changes in the money rate. The prime feature of a "AAA" bond is
the showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.
AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.
A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions ad
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.
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